Earlier this week a federal court held that the Equal Employment Opportunity Commission’s regulation authorizing the use of significant financial incentives for participation in workplace wellness programs was arbitrary and capricious. In AARP v. EEOC, federal district court Judge John Bates concluded that the commission had failed to adequately justify its conclusion that incentives and penalties of up to 30 percent of the cost of an employee’s health insurance coverage does not render plan participation “involuntary,” so the commission will have to go back and try again. This decision is significant because it could limit the incentives employers offer to induce employees to participate in wellness programs.

Bates explained the issues in the case as follows:

This case deals with the incentives—financial or otherwise—that may be offered to employees in connection with employer-sponsored wellness programs, which have become popular in many work places in the last several years as a means of promoting employee health and reducing healthcare costs. The central issue here results from the tension that exists between the laudable goals behind such wellness programs, and the equally important interests promoted by the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA). EEOC is tasked with reconciling these competing concerns, and this case arises out of its most recent attempt to do so. . . .

Because employer-sponsored wellness programs often involve the collection of sensitive medical information from employees, including information about disabilities or genetic information, these programs often implicate the ADA and GINA as well. As both the ADA and GINA are administered by EEOC, this brings wellness programs within EEOC’s purview. The ADA prohibits employers from requiring medical examinations or inquiring whether an individual has a disability unless the inquiry is both job-related and “consistent with business necessity.” 42 U.S.C. § 12112(d)(4)(A). But the ADA makes some allowances for wellness programs: it provides that an employer may conduct medical examinations and collect employee medical history as part of an “employee health program,” as long as the employee’s participation in the program is “voluntary”. Id. § 12112(d)(4)(B). The term “voluntary” is not defined in the statute. Similarly, GINA prohibits employers from requesting, requiring, or purchasing “genetic information” from employees or their family members. Id. § 2000ff-1(b). The definition of genetic information includes an individual’s genetic tests, the genetic tests of family members such as children and spouses, and the manifestation of a disease or disorder of a family member. See id. § 2000ff(4)(A). Like the ADA, GINA contains an exception that permits employers to collect this information as 4 part of a wellness program, as long as the employee’s provision of the information is voluntary. Id. §§ 2000ff-1(b)(2)(A)–(B). Again, the meaning of “voluntary” is not defined in the statute.

Thus, while HIPAA and its implementing regulations expressly permit the use of incentives in wellness programs, uncertainty existed as to whether the “voluntary” provisions of the ADA and GINA permit the use of incentives in those wellness programs that implicate ADA- or GINA protected information. EEOC previously took the position that in order for a wellness program to be “voluntary,” employers could not condition the receipt of incentives on the employee’s disclosure of ADA- or GINA-protected information. . . . However, in 2016 EEOC promulgated new rules reversing this position. Those are the rules at issue in this case. The new ADA rule provides that the use of a penalty or incentive of up to 30% of the cost of self-only coverage will not render “involuntary” a wellness program that seeks the disclosure of ADA-protected information. Likewise, the new GINA rule permits employers to offer incentives of up to 30% of the cost of self-only coverage for disclosure of information, pursuant to a wellness program, about a spouse’s manifestation of disease or disorder, which, as noted above, falls within the definition of the employee’s “genetic information” under GINA. Unlike the 2013 HIPAA regulations, which place caps on incentives only in health-contingent wellness programs, the incentive limits in the new GINA and ADA rules apply both to participatory and health-contingent wellness programs.

Given that the relevant statutes require that program participation is voluntary, the key question for the court was whether the EEOC adopted a reasonable interpretation of that requirement and (as is always the case with agency action) articulated a reasonable basis for its decision. Here is where Bates found the EEOC’s action wanting.

He explained:

EEOC has failed to adequately explain its decision to construe the term “voluntary” in the ADA and GINA to permit the 30% incentive level adopted in both the ADA rule and the GINA rule. Neither the final rules nor the administrative record contain any concrete data, studies, or analysis that would support any particular incentive level as the threshold past which an incentive becomes involuntary in violation of the ADA and GINA. To be clear, this would likely be a different case if the administrative record had contained support for and an explanation of the agency’s decision, given the deference courts must give in this context. But “deference” does not mean that courts act as a rubber stamp for agency policies. . . .  When choosing from a range of possible interpretations of a statutory term, the agency must give a reasoned explanation for its decision. Absent such reasoning or factual support here, the Court “must conclude” that the agency has made its decision arbitrarily.

Despite these failings, Bates decided to remand the EEOC rules without vacating them, on the assumption that the EEOC would be able to address the identified failings in short order. Nicholas Bagley is “flummoxed” by Bates’s decision in this regard, and I share his confusion. It would be one thing to offer a delayed remedy — to “stay” the court’s mandate — so as to allow for an orderly transition, but it is quite another to leave a rule such as this in place indefinitely, particularly because it is a reasonable possibility that the EEOC will be unwilling or unable to justify the 30 percent threshold. What’s more, by leaving the rule in place, Bates’s opinion reduces the incentive for the EEOC to act.

For more on the underlying issues, I recommend some of the papers from this Health Matrix symposium on corporate wellness programs, particularly the papers by Bagley, et al., and Sam Bagenstos. I blogged on some of the additional issues related to corporate wellness programs  here.