Federal judges have sided with employers in three recent cases brought by employees over extra fees

Some relief may be on the way for employers worried about a wave of federal lawsuits over tobacco surcharges they add for people covered by their health plans.

Recent rulings have rejected some key claims employees make when suing over the surcharges, which generally require people to pay extra for coverage until they take a program to quit tobacco.

About 50 lawsuits have popped up around the country in recent years contesting these surcharges, including one case filed in May against Elkhart’s Patrick Industries Inc.

The rulings do not establish a precedent outside the district in which they are made, but they still serve as a positive sign, said De’Andre Robbins, an attorney with the Michigan-based firm of Warner Norcross + Judd who has been following the topic.

“It’s definitely a favorable trend for employers,” he said.

Smokers pay more

Companies have been using the surcharges for more than 30 years to encourage people to stop smoking or quit tobacco. Employers that impose them tend to have self-funded health plans through which the company pays its own medical bills instead of the insurer.

The extra fees also can be found on the Affordable Care Act’s individual insurance marketplaces in most states, according to the nonprofit KFF, which studies health care issues.

For employer-sponsored plans, companies generally add the surcharges as an extra payment for benefits after asking employees if they use tobacco. Then they give the worker a way to eliminate the fee. That often can happen after an employee takes a class or program provided at no charge to help them quit tobacco.

For employers, the main goal of the surcharges is to improve employee health by encouraging them to quit. That can reduce future medical bills companies may have to pay, especially for big health problems like cancer or heart attacks.

“The idea behind these is we’re trying to get people to lead a healthier lifestyle,” said Stacy Small, a senior vice president with Gregory & Appel, an Indianapolis-based risk management & employee benefits firm.

Health care costs are often the second biggest expense for employers, and they have been climbing faster than inflation for years, fueled lately by expensive prescription drugs and rising prices for hospital care. Companies also offer other incentives like paying for gym memberships to encourage healthy behavior.

Many of the federal lawsuits filed over these surcharges allege that companies haven’t properly disclosed reasonable alternatives for employees to avoid the extra fee, Robbins said.

Plaintiffs also want more than what companies offer when it comes to a break on the surcharges. Many companies will stop the extra payments going forward after an employee completes a cessation program. But workers also want refunds for surcharges they have already paid.

The Patrick Industries case

Three employees of Patrick Industries Inc. sued the company in May in the U.S. District Court for the Northern District of Indiana. Patrick Industries makes recreational vehicle equipment and components for manufactured housing,

The complaint says Patrick adds a $16.35 weekly surcharge to the cost of coverage for plan participants who have told the company they use tobacco. That includes employees and spouses.

Representatives of Patrick Industries did not respond to several requests for comment from The Indiana Lawyer.

That extra fee can add up to about $850 per person annually. One longtime tobacco user involved in the lawsuit says she has paid more than $5,000 in total surcharges for herself and her husband.

The complaint alleges that the fees are “discriminatory, health-based surcharges in violation of the law.” The workers say Patrick misled employees on how to avoid the surcharge.

They also note that Patrick told employees who complete a smoking cessation program that they can’t avoid the surcharge unless they actually quit tobacco. The lawsuit says regulators have indicated that benefits plans may require participation in a cessation program to avoid the surcharge but not success as the only route to avoid it.

“That distinction is the difference between a compliant wellness program and an unlawful premium penalty,” the lawsuit states.

The complaint also says the company fails to meet a requirement that it notify workers in all communications about the “availability and scope” of alternatives for avoiding the surcharge without having to quit smoking. That can include an accommodation through a personal doctor.

“This is not a minor technical failure; it is a fundamental violation of ERISA’s (the Employee Retirement Income Security Act’s) core anti-discriminatory purpose: ensuring that participants have a fair and compliant opportunity to be treated the same as non-tobacco users,” the complaint states.

The employees want their case to be turned into a class-action lawsuit that applies to all participants in the Patrick health plan subjected to the surcharges.

They also want Patrick to reimburse all plan participants who paid the surcharge dating back to 2020, and they say the surcharge program should be revised to comply with ERISA.

An attorney representing the employees who are suing declined to comment when contacted by The Indiana Lawyer.

The emerging trend

Federal judges have started to reject some of these arguments in other district courts. They have ruled so far that what companies have done to disclose alternatives has largely met federal requirements, Robbins said.

Judges also have ruled in three separate cases that companies don’t have to refund surcharges already paid for the year once a worker completes a cessation program. They can just remove the extra payments going forward.

Robbins said employers should approach this trend with caution. Many cases are still pending, and those that have been rejected by a judge can be appealed, so legal thought is still being shaped on the issue.

As the cases play out, employers outside districts where judges have already ruled can act to avoid getting sued in the first place, Robbins noted. He said they should consider providing refunds for the surcharges already paid once a worker completes the program.

Not a popular program

Favorable court decisions might not push more employers to tack surcharges on to their benefits plans, according to Small, the Gregory & Appel executive.

About 6% of all firms that offer health benefits charged penalties last year to employees who used tobacco or vaped, according to KFF’s annual employer health benefits survey. That compares with 14% in 2016.

KFF found that the surcharges are more common among the biggest companies, or those with 5,000 or more workers. A total of 38% charged higher premiums or cost-sharing last year based on tobacco or vape usage.

The publicly traded Patrick Industries employs about 10,000 people in the United States, according to the complaint filed against it.

The surcharges or penalties can be more common in blue-collar industries that tend to have higher rates of smokers in their workforces, Small said.

But overall, the surcharges are not very popular with businesses, Small noted. They come with a lot of regulations, and employers also have some doubts about how effective they are in motivating people to quit tobacco.

Plus, it can be hard to tell whether employers and spouses are honest when they fill out a form about tobacco use, Small noted.

“Unless you are testing people, how do you enforce it?” she said. “You can’t follow people home from work. You can’t search their car looking for signs of tobacco.”•