What If Amazon Bought CVS/Aetna?

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“An Amazon/CVS/Aetna combination would bring three very different businesses together in ways that would spur innovation to reduce costs, promote transparency, increase convenience and enhance the consumer and producer experience. It’s time for these three entities to realize and exploit the potential synergies.”

William G. (Bill) Stuart

Director of Strategy and Compliance

January 4, 2018

This is the deal that no one’s talking about – until now.

CVS has made a bid to combine with Aetna in a megamerger (yet to be evaluated by federal antitrust regulators) that would create some fascinating synergies in the delivery and payment of medical care. One reason for the acquisition cited by the two parties’ leaders is to protect their lines of business against Amazon in the event that the Seattle-based online behemoth decides to enter the prescription drug or medical payments business.

These fears aren’t far-fetched. Amazon founder Jeff Bezos has proven during the past two decades that he’s willing to invest in new businesses and markets at the expense of immediate profits. He and his leadership team also have demonstrated a penchant for disrupting markets. Amazon has revolutionized our economy. No longer are we as consumers limited to (1) products offered within our geographic area and (2) pricing information that we can glean only by visiting retail stores. Thanks to Amazon, and other online retailers, though Amazon is the textbook example, we can buy any product that our heart desires, know that we’re paying the most competitive price and expect shipment within two days (or sooner, our choice as the consumer).

Quick true story: As I started writing this blog Dec. 21, my son interrupted me to explain his dilemma. He ordered a Baylor Bears t-shirt for his sister for Christmas. An online company sent a North Dakota State t-shirt with a snorting Bison on it. We logged into my Amazon Prime account and ordered a Baylor shirt that arrived two days later,  the last traditional delivery day before Christmas (though Amazon shatters that standard with Sunday delivery). One of my professional contacts in Fargo subsequently received an unexpected gift from me.

What an amazing breakthrough that my kids (ages 20 to 25) and all future generations won’t ever appreciate because they didn’t live in the old retail-only world, nor did they straddle the two worlds as their older cousins (or younger aunts and uncles) did.

The Current Medical Shopping Experience

Now, let’s look at our consumer experience in medical delivery. My family’s insurance plan covers the first $6,000 of medical and prescription drug services subject to a deductible. Readers know what that means, we’re responsible for paying for the first $6,000 of covered expenses. We have a real incentive to shop aggressively for those services, since we are the immediate beneficiaries of any savings that result from our shopping wisely.

Ah, the shopping experience. We have a handful of prescriptions among the six of us. How do we know that we’re getting the best deal on those drugs? We don’t. We can secure a paper prescription from a doctor (though most physicians prescribe electronically today, making this feat difficult) and trudge to CVS, Rite-Aid, Walgreens and Wal-Mart (all within five miles of our house, but probably a two-hour time commitment) with a paper script and insurance card and ask the pharmacy tech at each location to process the prescription in the computer (without filling it) to determine the price at each location. Not a 21st century shopping experience!

Our insurer has a “transparency tool,” which provides information on discrete services like a physical therapy visit, an MRI of the lower back without dye or an INR blood test. That information is useful, since most consumers believe that these services are commodities with little difference in quality (and even if there were a difference in quality, a more experienced MRI reader for example,  we wouldn’t know how to identify that benefit from the transparency tool).

This tool has several shortcomings, however. First, it works only as long as we haven’t satisfied our deductible. As soon as we meet the deductible, our out-of-pocket responsibility is zero. The tool reflects our responsibility only, so an MRI from a standalone imaging center and at an academic hospital both show no cost. That’s technically true, but it doesn’t help a consumer with a conscience to manage her employer’s (and thus her own) future premium costs when premiums reflect the employer’s claims experience.

Second, the tool isn’t helpful when we try to research costs for a service that involves a number of discrete (unbundled) activities. Think day surgery. There’s the facility charge, the surgeon’s charge, the anesthesiologist charge, perhaps charges for supplies or pathology or radiology as well. Without knowing the codes under which a provider bills the services, it’s impossible to know how much a procedure or more complicated service will cost.

Enter Amazon

Amazon purchased Whole Foods Market last year. The deal didn’t make much sense to many observers at first glance. Sure, Amazon is aggressively building an online grocery business. It’s easy (though not inexpensive) to ship nonperishable items like canned and boxed goods from a warehouse to any home in the US, but an online grocery service can’t serve all of most consumers’ needs if it can’t deliver perishables like meats, produce and fruits and vegetables that arrive fresh. Whole Foods can solve that problem, particularly as Amazon develops its own local transportation fleet. Amazon can drop-ship the rest of the order to a local Whole Foods Market, then add the produce and send the entire order on its way in an Amazon flat-panel delivery van.

Whole Foods Market also gives Amazon about 450 mini-warehouses located nationwide, primarily in more affluent areas. These locations give the company additional flexibility; for example, stocking high-volume items and promising two-hour delivery. Even absent these potential benefits that the Seattle folks are undoubtedly planning, Whole Foods consumers appreciate the immediate impact of Amazon on the retail shopping experience: Lower prices on many items. That’s an Amazon trademark that it brings to every venture that it undertakes.

Imagine how an Amazon/CVS/Aetna combination could revolutionize medical delivery and payment. How? Let us count the ways. In no particular order:

Lower-cost prescriptions: CVS owns one of the nation’s Big Three pharmacy benefits managers (PBMs), the middlemen who typically negotiate with insurers, often recommend which drugs are covered by insurers and coordinate supply and demand. The CVS-Aetna deal effectively eliminates CVS as a PBM for other insurers and payers, so it could design programs and pricing that benefit CVS customers and Aetna members without fear that insurance rivals would piggyback on the new pricing. (Note: Antitrust regulators will focus on the loss of independence of a PBM when determining whether to allow the union.)

Absent a merger with CVS/Aetna, Amazon could become a PBM, though partnering with an existing PBM allows it to scale its program faster, focus on true innovation rather than recreating an existing model and benefit on the back end through lower prescription drug costs that keep its insurance subsidiary’s premiums more competitive.

Home delivery of subscription prescriptions: Those of you who have Amazon subscription buttons (we receive 72 K-cups of Green Mountain hazelnut coffee every two months) know the convenience of this auto-ship feature, especially for patients who don’t have access to transportation. The elderly, those who don’t live near a pharmacy and those without a car can all remain compliant with prescription-drug therapy because Amazon delivers prescriptions automatically on a subscription plan.

Amazon can set up this program independent of a CVS/Aetna partnership, but it’s less of a lift to establish the program with a single existing insurer/PBM. It’s also potentially more lucrative, since one entity reaps the medical-cost benefits of more compliant patients and can price its insurance plans more competitively.

Price and quality transparency: Imagine the quantum leap in cost and quality transparency if Amazon deploys a modified version of its information platform for buyers of medical/dental/vision services. The platform could combine clinical quantitative (many of them quantitative measures from Medicare data, Leapfrog, Dartmouth Atlas and other objective sources) and qualitative (patient feedback on professional manner and overall experience) measures. Amazon can build this database without a CVS/Aetna partnership, but it can magnify the financial impact and minimize the cost of launching and maintaining the database by working with one large insurer.

Bundled services: Imagine you need, say, surgery for a torn rotator cuff. Treatment involves a lot of services (operating room, surgeon, surgical staff, supplies, recovery services, nursing, physical therapy) and variables (length of recovery, potential for readmission, response to physical therapy, etc.). Amazon could contract directly with providers in your geographic area (or anywhere else in the US or the world) to provide a single packaged price for the entire course of treatment.

This is no pipe dream. Surgery Center of Oklahoma provides just such pricing (with a guarantee, so that it absorbs the cost of readmissions) and many foreign “medical tourism” facilities (including Health City in the Cayman Islands and facilities in Bangkok and India) offer this pricing model as well.

Rather than picking a surgeon and facility out of a phone book and wondering about the cost and quality, you could look up providers and see quality scores (like number of surgeries performed annually, readmissions, infection rates, mortality rates), customer reviews and professional organization reviews. You research televisions, cars and vacations and purchase airplane tickets, birthday presents and electronics online. Why not medical services? Again, Amazon can enter this space without partnering with CVS/Aetna, but the combined forces don’t require negotiating with myriad insurers and ensures that Amazon/CVS/Aetna achieves a competitive medical-cost advantage.

Dedicated facilities: OK, it may sound far-fetched at first, but consider the benefit of Whole Foods Market’s 450 locations. They’re primarily in strip malls in areas with dense populations and higher-income residents. Imagine Amazon’s opening (either within those locations or in adjoining or nearby storefronts) patient centers to provide high-volume services at near-wholesale prices. It wouldn’t be hard to create high-volume specialized locations that would deliver mammograms, colonoscopies, outpatient therapy, blood work and perhaps behavioral health counseling.

Imagine the advantages to Aetna’s cost structure vis-à-vis its competitors (and the savings that would be generated for patients, employers and employees) if it could offer these services at a price below what other insurers have negotiated. Sure, location is still key, what consumer wants to undergo a colonoscopy in the same store in which she buys fresh meat and vegetables? That problem is solvable.

Without a partnership with CVS/Aetna, Amazon could still use its 450 locations to deliver these services to the broad market, but it would be bogged down in negotiations with other insurers, claims and payment.  And don’t forget that CVS purchased Target’s pharmacy business, thus creating a presence in large retail stores. While it’s difficult to expand medical delivery at stand-alone CVS stores, given their small size, the vast expanse of a typical Target store opens new possibilities to provide select cost-effective services with more flexibility at lower real-estate costs.

Steerage products: Imagine an HMO product with two tiers – the “Amazon/CVS/Aetna” tier for many services and the larger network tier. Patients who stayed within the Amazon/CVS/Aetna tier for services offered through that network would face minimal cost-sharing. Patients who access a broader network of providers would face higher costs. Since Aetna in this model has direct control over its dedicated providers’ costs, it could realize a meaningful financial advantage. And by working with a single insurer, the Amazon/CVS/Aetna program wouldn’t be bogged down with negotiations, billing and payment with other insurers.

Patient transportation: Ever notice all those private ambulances without sirens blaring on highways throughout the day? In many cases, they’re transporting patients from long-term care facilities to appointments with physicians and at imaging or inpatient facilities. It’s an expensive form of transportation because insurers pay rates that reflect life-saving equipment on board for stable patients (imagine treating an inner-ear infection at an ER as an example of overhead inconsistent with the patient’s condition). Amazon is developing its own national transportation structure to reduce its last-mile costs, supplanting FedEx, UPS and USPS with white-panel unmarked vehicles (except perhaps with the subtle Amazon arrow smile) as the final delivery service.

Granted, there is a huge difference between transporting a bunch of packages from one facility to many destinations and transporting humans from many locations into a smaller number of facilities. Then again, that’s precisely the type of challenge that translates into cost advantages for Amazon. Imagine the medical costs that an insurer could save if it could more effectively transport stable patients to receive routine care. Amazon has little incentive to develop this market on its own, but the Amazon/CVS/Aetna combined entity with a captive patient audience may create enough volume to justify the investment.

Aggressive steerage from emergency rooms: CVS operates at 9,600 locations in the US. So far, 1,100 of them have Minute Clinics,  a figure that continues to grow. Imagine offering access to Aetna members (except for HSA-qualified plan enrollees) with no cost-sharing. CVS can’t justify foregoing the copay revenue for patients today, but it can absorb this cost and still generate insurance cost savings when it steers CVS/Aetna members (for whose claims it is responsible) to retail clinics. CVS/Aetna can achieve these savings on its own, but adding the 450 Amazon Whole Foods locations to the mix, predominantly in higher-income areas, where a service advantage would make this destination more attractive to patients in non-emergent situations, makes the concept available and financially viable in far more geographic markets.

Direct primary care: As doctors grow tired of insurer rules, claims submission and slow payment, an increasing number of primary-care physicians are moving into direct primary care. The concept is simple: Patients pay an annual subscription, typically based on age, with perhaps a surcharge for certain medical conditions. They then have access to medical care through the practice. No copays. No claims. Longer visits. Communication via e-mail, text and Facetime. Targeted patient education programs to manage chronic conditions.

Direct primary care is great for doctors, who can practice medicine more effectively by moving from disease transactions to health interaction. It’s great for patients, who pay a fixed price and have more flexible options (less work time lost!) to connect with their medical professionals. As their doctor becomes more familiar with them and their preferences, doctor and patient can sort through multiple treatment options to determine which is best for the patient.

The Amazon platform allows patients to set up regular purchase and shipment of products (recall my family’s K-cup subscription mentioned earlier). Amazon could easily set up direct primary care subscriptions for monthly billing or set up a Prime-like annual subscription fee.

And we’re just scratching the surface here. There are undoubtedly many other cost-saving and service-enhancing opportunities that would emerge when the innovation teams in Woonsocket, Hartford and Seattle (plus the Amazon mystery city) lock themselves into a room with white boards and generate ideas. Medical finance and delivery are starving for positive disruption that will deliver cost savings that we regularly see in nearly every other aspect of our economy. An Amazon/CVS/Aetna combination would bring three very different businesses together in ways that would spur innovation to reduce costs, promote transparency, increase convenience and enhance the consumer and producer experience. It’s time for these three entities to join forces to realize and exploit the potential synergies.

What We’re Reading

What’s happening with Cost-Sharing Reduction (CSR) payments, now that Congress has passed tax reform without addressing funding the program that reimburses insurers for subsidizing the out-of-pocket costs of consumers who purchase a Silver plan through an ACA marketplace? The Heritage Foundation analyzes the issue here.

One important feature of the ACA that states are likely to exercise (and the Trump administration is likely to support) is the Section 1332 waiver program. This program allows states, with federal permission, to create innovative ways to increase coverage and manage medical costs. The Kaiser Family Foundation summarizes the initiatives that have been approved and are pending in this report.








My CDHristmas Wish List

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“It would be great to wake up Christmas morning and see some clarification and accommodation in these areas. Frankincense is nice, but tax-code clarity is a more practical gift in the 21st century.”

William G. (Bill) Stuart

Director of Strategy and Compliance

December 21, 2017

It’s nearly Christmas. I’ve been compiling my list all year. New socks? I can buy them at Kohl’s. Amazon Echo? Already have one. New car? My old one still runs fine.

No, this year, I’m thinking bigger. And I’m casting my eyes northward to the Arctic Circle in the hopes that Santa can deliver gifts for all that members of Congress have been unable to produce during the year.

Here’s my list for a Holly, Jolly, Consumer-Driven Health Christmas this year:

Rename HSA plans. The original legislation, drafted and passed in 2003, referred to “high deductible health plans” at a time when the market offered few plans with deductibles and $1,000 was considered a high individual deductible. Since then, insurers have introduced many medical plans with deductibles of $1,000 or more, and most of those plans aren’t HSA-qualified. So, “high deductible” really isn’t specific enough to describe a plan that allows an enrollee to open and contribute to an HSA.

Besides, the label “high deductible” has negative connotations. These plans could just as easily be called “low premium” or “net-pay maximizing plans.”

It’s time to refer to these plans as simply HSA-qualified plans. This label is non-judgmental and descriptive, two features that “high deductible health plan” lack. I’ve been using this description for about five years, and Sen. Orrin Hatch (R-UT) and Rep. Erik Paulsen (R-MN) have proposed legislation that includes this name change.

I’d love it if Santa left some small name tags stating, “Hello, My name is “HSA-qualified plan” that my insurer could stick on my Schedule of Benefits in 2018.

Increase contribution limits. Early HSA-qualified medical plans had individual deductibles in the $1,000 to $3,000 range, with double that amount for families, and typically little or no cost-sharing after the deductible. The HSA contribution limits were adequate to cover out-of-pocket medical expenses in a worst-case scenario.

Since then, and particularly with the advent of the Affordable Care Act, deductibles have skyrocketed and insurers have increasingly added coinsurance after the deductible. The average Bronze plan on an ACA exchange has a deductible of about $6,000 for self-only and $12,000 for family coverage, figures far higher than the 2018 contribution limits of $3,450 and $6,900.

All Republican reform proposals this year increased the contribution limits to the out-of-pocket maximum ($6,650/$13,300 in 2018). These higher limits would have allowed families with extremely high out-of-pocket costs to at least pay those expenses with pre-tax dollars, thus stretching the buying power of their funds by about 25% to 35%. Facing a $12,000 bill for medical services is daunting for most families. Allowing a tax break for the entire amount would have left those families paying about $2,000 less than they would without the increased contribution limits. Alas, those reform efforts died in the Senate.

I’d gladly leave Santa a much larger mug of hot chocolate Christmas Eve if he’d drain it and leave it behind to hold additional HSA contributions.

Value-Based Insurance Design. VBID is a simple notion that’s gaining attention on Capitol Hill with medical insurance reformers. A deductible is a rather blunt instrument because it doesn’t discriminate between necessary and wasteful care. Many individuals with chronic conditions don’t enroll in an HSA-qualified plan because they know that they’ll satisfy their deducible every year just receiving appropriate care for their chronic condition.

VBID allows insurers to create products that carve out care for a patient’s specific chronic condition and cover those services in full. For example, a diabetic would receive full coverage for eye and foot care, as well as insulin and supplies. All other services , for example, an MRI of a sore shoulder, physical therapy for an aching knee or a gall bladder removal, would be subject to the deductible.

We want to encourage individuals with chronic conditions to enroll in HSA programs so that they manage their medical spending more effectively and accumulate funds to pay for chronic care as well as unexpected services not related to their chronic condition. I’d love to be awakened by a clatter in the wee hours of Christmas morning, tear open the shutters, throw up the sash and see a VBID HSA option illuminated by the moon on a breast of new-fallen snow.

Direct primary care. One of the most interesting emerging trends in medical care is direct primary care. General practitioners charge a single monthly fee, often adjusted for patient age and condition, to provide all necessary primary care. Doctors like the concept because they don’t accept reimbursement from insurers. They can practice medicine as they want, spending additional time with patients discussing health rather than treating disease; communicating by e-mail, telephone, Skype and other modern media that aren’t reimbursed by insurers; and avoiding the rules and paperwork imposed by insurers.

Patients like direct primary care because they receive the care that they want and need. Their doctors can spend more time with them. The office may offer other services that insurers typically don’t reimburse, like a social worker to link the patient with community support services that enhance the patient’s health or an on-site addiction counselor working closely with the physician. And the patient doesn’t worry about high out-of-pocket costs for primary care, since the payment is fixed.

Employers like direct primary care, too, because more care is delivered without the use of specialists, hospitals and imaging centers, which increase costs dramatically. In fact, a growing number of employers are paying all or a large portion of their employees’ (and often their dependents’ as well) costs to access direct primary care.

Current HSA rules don’t allow individuals covered by direct primary care to open or contribute to an HSA. And individuals who have HSA funds can’t use them to reimburse the monthly cost of direct primary care. It’s time to recognize that medical delivery has changed since HSAs were born 14 years ago. The rules need to keep up with these changes.

It’s likely that Santa has an onsite veterinarian to care for the antlered 10 ; Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donder, Blitzen, Rudolph and Olive, the other reindeer who drive his sleigh. Wouldn’t it be great if the rest of us could benefit from the same concept without losing HSA eligibility?

Telemedicine and onsite clinics. Accessing basic medical care by phone, particularly a smart phone with Facetime and photo capabilities, is an inexpensive and effective way of delivering basic care. More and more insurers are incorporating this benefit into their plan designs, and a growing number of employers are offering standalone programs as well. Unfortunately, access to some telemedicine programs may compromise employees’ HSA eligibility. While the IRS hasn’t ruled definitively on this issue, cautious benefits attorneys believe that unless employees are charged a fair-market price for the service (say, $45, vs. a $5 copay or no charge), they’re receiving non-preventive medical care below the medical-plan deductible and therefore lose their HSA eligibility.

Onsite clinics create a similar potential eligibility issue. Minimal care, like distribution of a bandage or ibuprofen, won’t impact HSA-eligibility. Other services might. And that’s too bad. Some employers are investing in onsite clinics to deliver immunizations (allowed under HSA eligibility rules as preventive care) and providing physical therapy, counseling and other regular services (which must be subject to the deductible). For the employer, providing these services onsite increases productivity, since patients (1) are compliant and (2) don’t have to arrive to work late or leave early to travel to offsite care.

It would be great to wake up Christmas morning and see some clarification and accommodation in these areas. Frankincense is nice, but tax-code clarity is a more practical gift in the 21st century.

Medicare and HSA eligibility. For generations, employees who continued to work after age 65 could remain enrolled in their employer’s medical plan and enroll in Medicare Part A, whose premium most employees pay during their working years through the federal payroll tax. Enrolling in Part A (which covers primarily hospitalization) gave employees in companies with 20 or more employees some additional coverage above and beyond what the employer’s plan offered.

Individuals who participate in HSA programs can’t enroll in Medicare without losing their eligibility to continue to contribute to their HSAs. This is a blow to employees who turn age 65 and are collecting Social Security to supplement their paychecks (automatic enrollment into Part A)  or simply don’t understand that they can defer enrollment in Medicare at age 65 to remain on the group plan.

This rule is costly to Medicare (many of these individuals, once enrolled in Medicare, surrender their employer plan which would have paid most of their expenses and instead transfer that financial responsibility to Medicare. It’s also costly to individuals who want to continue to build their HSA balances to cover expenses in retirement.

We’re hoping to see movement on this issue during this session of Congress, which ends next December. If Santa could help it along, he would deliver a season-long gift to taxpayers and Medicare enrollees. If only we could find three wise men in DC to move this concept forward!

Medicare HSA option. Every day, 10,000 Americans turn age 65. Most of them have been enrolled in managed-care plans for decades and appreciate the level of care and the additional benefits that they receive under these programs. Nearly one-third of all Medicare enrollees forego traditional Medicare (Part A hospital and Part B outpatient coverage) in favor of a Medicare Advantage (Part C) plan offered by a private insurer and structured like a managed care plan.

Unfortunately, Medicare Advantage doesn’t offer an HSA-qualified plan for these retirees, many of whom have participated in an HSA program for a decade. They want to continue to accumulate HSA balances to pay future expenses. They’re willing to accept the risk of a deductible. In fact, this is a low risk, with the statutory minimum deductible for a self-only HSA-qualified plan at $1,300 in 2017 and the Part A deductible at $1,316 per benefit period (per hospitalization, so a patient could face multiple $1,316 deductibles in a calendar year).

If Santa, or Congress, could deliver an HSA-qualified Medicare Advantage option, it would create a lower premium Part C option that would empower enrollees to be more prudent consumers of medical care. That’s a win-win for enrollees, insurers and taxpayers, and a more valuable gift than gold.

HSA-qualified plans and Medicare Creditable Coverage (MCC). Individuals who delay enrolling in Medicare, common for those who remain employed and covered on their employers’ medical plans,  face a potential penalty if they later enroll in Part D prescription drug coverage. To avoid penalties, they must remain continuously covered since their 65th birthday on a prescription plan that’s at least as rich as Medicare. That’s what the term Medicare Creditable Coverage means.

If they fail to carry any coverage or have coverage that’s less rich than Medicare once they turn age 64, they’re hit with a permanent premium surcharge if they enroll in Part D later. That surcharge, which is expected to rise each year, is equal today to about 36 cents per month for every month that they delay enrollment. For example, some who delays enrollment for 20 months pays an additional $7.20 premium (on top of the regular premium of $30 to $60 per month) every month for as long as she retains Part D coverage) monthly, a figure that changes with changes in the average Part D premium nationally.

The rationale for the surcharge is straight-forward: CMS doesn’t want individuals to have no coverage or skimpy coverage, then jump onto Part D when they suddenly have high prescription drug costs and are looking for someone to help them pay claims. That’s not insurance.

Many HSA-qualified plans with high deductibles (in excess of $2,000 for self-only coverage) and pharmacy benefits that don’t cover preventive prescriptions outside the deductible fail the MCC test. These individuals, though, do have prescription coverage that’s woven into a medical plan. They’re choosing (or, in some cases, are forced by lack of options offered by their employer) to enroll in an HSA-qualified medical plan. They accept greater financial responsibility when they access care in exchange for lower premiums on the medical plan and opportunities to reduce taxable income and build long-term tax-advantaged balances to pay for future medical expenses.

They should be allowed to enroll in Part D when their employer coverage ends with no penalties associated with lack of coverage that Medicare deems inadequate. As a bonus, the change would benefit the Medicare program financially, since more of the working aged would remain covered on their employer plan with no access to Medicare benefits rather than enrolling in Medicare to avoid a future Part D penalty and shifting responsibility for their claims to Medicare. If Santa delivered this little gift under the trees of millions of seniors working after age 65, they’d appreciate it more than myrrh. So would taxpayers who subsidize the Medicare program.

What We’re Reading

Most Americans don’t negotiate prices with their providers, according to this news report. Too bad. When they’re spending their own money, they benefit directly from any prompt-pay discounts or other terms that they negotiate with hospitals, surgeons and other providers.

A growing number of state legislatures are addressing the issue of protecting residents against extraordinary out-of-network expenses, particularly in urgent and emergent situations. The Commonwealth Fund looks at efforts in each of the 50 states here.


Cadillac Tax Back in the Cross Hairs

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Cadillac 3

” Employers have no control over the amounts (other than to limit them altogether) that individual employees find necessary to meet their medical, dental and vision needs in a given year. Rational employers will terminate Health FSA and HSA programs if they must pay a tax equal to 40% of the total value of contributions into these accounts.”

William G. (Bill) Stuart

Director of Strategy and Compliance

December 7, 2017

It’s time to focus on the Cadillac Tax again.

As a refresher, the Cadillac Tax (that’s a nickname; it’s really the high-cost plan tax) imposes a 40% excise tax on all employer-sponsored medical insurance plans with premiums above a certain threshold. The concept behind this ACA provision is that employers tend to over insure their employees by providing benefit plans that are richer than employees would purchase for themselves in the individual market.

Over insured consumers tend to purchase more services, the argument goes, because their financial responsibility is only a small fraction of the total cost of the service. When patients increase the number of units that they consume, future premiums rise. An excise tax forces most employers to buy a lower-premium product, which includes higher cost-sharing. As employees pay more for services, they consume them more prudently.

That’s the economic theory, at least. There are several practical considerations, however.

First, this levy isn’t really a Cadillac Tax. It’s more like a Hyundai tax, ensnaring employers in high-premium markets who offer rather modest plans. When a policy with a deductible of $3,000 per person and $6,000 per family has a premium high enough to exceed the Cadillac Tax threshold, the mechanism simply isn’t doing a good job of distinguishing between over insurance and high market premiums.

Second, the calculation of the premium threshold above which the tax applies includes not only the medical insurance premium, but also the value of a Health Reimbursement Arrangement (HRA) and employer and employee elections to a Health FSA or cash contributions to an HSA. This is a real sticking point. Employers can control the cost of premiums and the value of HRAs via plan design. They have no control over what individual employees elect to their Health FSAs or contribute to their HSAs.

Imagine an employer whose medical plan premium and HRA equal the threshold for individual coverage, projected to be $10,800 in 2020. The employee then elects $2,000 to her Limited-Purpose Health FSA to cover dental services and $3,000 to her HSA to reimburse eligible medical expenses. Her combined tax rate (federal and state income taxes plus federal payroll taxes) is 31%. Thus she saves $1,550 in taxes on her $5,000 salary reductions. The excise tax on these employee salary reductions is $2,000.

No employer is likely to allow employees to save $1,550 in taxes (plus save $382.50 on the employer portion of payroll taxes) if it costs the employer $2,000 to offer this benefit. And surveys bear this out. A poll conducted last year shows that 19% of employers offering Health FSAs and 12% offering HSAs are reviewing their commitment to these plans with the Cadillac Tax looming.

The Road Not Traveled

This past spring and summer, we in the industry had hoped that the ACA amendment efforts would change the pending imposition of the excise tax on high-cost medical insurance, either by eliminating or delaying this tax. Those dreams died when Senate Republicans couldn’t muster 50 votes to pass a bill.

We then hoped that this fall’s tax-reform effort would provide our clients and customers with some relief, since the Cadillac Tax is, after all, a tax, and thus germane to a tax bill. Alas, those dreams were squashed when Sen. Dean Heller (R-NV) announced that he wanted to keep the tax bill focused on taxes and to handle all health-insurance issues in separate legislation. This approach drew guffaws in the industry, since Heller advocated including the repeal of the individual mandate to purchase insurance in the tax bill.

The justification for this seeming inconsistency is that repealing the mandate and associated penalty actually counts as a revenue raiser in the “scoring” of the tax legislation. By contrast, according to the Congressional Budget Office, which determines the revenue impact of proposed legislation, the Cadillac Tax is a huge revenue generator. Its model assumes that all Health FSA participants and HSA owners contribute to the maximum in their accounts each year, thus mistakenly (by a factor of more than twice reality) magnifying the revenue loss to the federal government.

While the tax bills passed by the House and Senate differ in content, neither addresses the Cadillac Tax directly. Indirectly, though, the Senate bill impacts the tax. The threshold is adjusted annually by the general Consumer Price Index (plus an additional 1% in 2019 and 2020). That figure is well below the rate of medical inflation, so each year more plans are subject to the penalty. The new bills change the adjustment mechanism to chained CPI.

Chained CPI includes a substitution effect (if all you eat is steak and its price doubles, your cost of protein doesn’t double because you substitute hamburger, chicken and kidney beans for some of the steak that you previously consumed). This slower-rising index ensures that the threshold will increase even more slowly than medical inflation, thus accelerating the rate at which plans are subject to the 40% levy.

The Path from Here

In late November, some colleagues from the Employers Council on Flexible Compensation and I visited health and tax aides for a number of members of Congress in both chambers and on both sides of the aisle. Our message was simple:

  1. Repeal the tax. It ensnares too many employers and employees who have plans with high-cost sharing and high premiums due to medical costs in their geographical market or are part of an older work force. Plus, it discourages employers from offering Health FSAs and HRAs, which results in a tax increase on workers with family incomes that average less than $60,000. The ACA offers advance premium tax credits to families making up to 400% of the federal poverty level (more than $1,000 for a family of four) to help offset the rising cost of premiums in the individual market. It doesn’t seem fair for lawmakers to effectively withdraw a tax advantaged program that allows families that, on average, earn less than 300% of the FPL.
  1. Delay the tax. We understand the difficulty that members of Congress face when trying to find an offsetting revenue source to compensate for the revenue loss (however inflated) from repealing the tax. As an alternative, we propose a long delay in implementing the tax. Large employers are already working on 2019 plan designs, and many unions (a key area of concern for Sens. Claire McCaskill of Missouri and Debbie Stabenow of Michigan) are negotiating multi-year contracts. We proposed that the Cadillac Tax delay be included in the rumored legislation to delay implementation of the Health Insurance Tax (HIT) and the medical device tax, two other unpopular ACA levies.
  1. Eliminate employee salary reduction from the equation. We understand (sort of) if the government wants to use the tax to discourage employers from offering rich coverage. And employers choose their medical plan and HRA designs. Employers have no control over employees’ salary reductions into a Health FSA or HSA short of placing severe limits on their contribution levels. Those limits act as a tax increase for families with high expenses.

There is an additional fall-back position advocated by employers who cover employees in regions with high medical costs. Their approach is to apply the tax based on the actuarial value of the medical plan. In other words, to use the lexicon of the ACA marketplaces, the tax might apply to Platinum and Gold plans, which pay on average about 90% and 80% of total claims costs, respectively, but not to Silver (70%) and Bronze (60%) plans. This approach would not penalize employers and employees in high-cost regions or companies with older employees.

New Legislation

US Reps. Joe Courtney, a Democrat from Connecticut, and Mike Kelly, a Republican from Pennsylvania, introduced legislation last week to repeal the Cadillac Tax. They submitted a letter to each party’s leader, signed by 142 colleagues asking that the tax be repealed. You can read the text of the bill here.

I met with both Reps’ staffs in March. Courtney has long been an opponent of the Cadillac Tax who was thwarted by his party leadership from working across the aisle to address this issue during the spring, when House Republicans ultimately passed a bill amending portions of the ACA (an exercise that died in the Senate months later). Kelly, a businessman with decades of experience running auto dealerships, understands better than most members the impact of higher benefits costs on small businesses.

What You Can Do

How can you become a voice in this policy discussion?

First, become educated on the issue. Here are two organizations, one organized by trade groups and the second by large employers and policy advocates, that provide a wealth of information on this topic:

My Money, My Health. This organization is focused on removing employees’ Health FSA elections and employee and employer HSA contributions from the Cadillac Tax calculation. When these contributions are included, employers are less likely to offer either program, which results in a tax increase for middle-class families. My Money, My Health is particularly focused on employee salary deferrals because employers have no control over the amounts (other than to limit them altogether) that individual employees find necessary to meet their medical, dental and vision needs in a given year. Rational employers will terminate Health FSA and HSA programs if they must pay a tax equal to 40% of the total value of contributions into these accounts.

Alliance to Fight the 40. The Alliance advocates eliminating the tax entirely so that neither medical plans nor accounts are subject to the penalties. The Alliance’s central argument is that group medical insurance, which covers 178 million Americans, ensures families’ protection against medical loss. It argues that having employer groups at the center of the purchasing decision increases benefit innovation, creates larger risk pools that help manage premium costs and incents employers to create programs (like general wellness and workplace safety) that reduce claims costs. The Cadillac Tax, the Alliance argues, threatens the very structure that insures most working Americans.

Second, write to your three representatives in Congress. In my visits to both Democrats and Republicans in both the House and Senate, I’ve found no elected official who supports the Cadillac Tax. They generally fall into two categories: Those who want to eliminate the levy altogether and those who favor repeal but want to see a revenue source to offset the loss of projected revenue if the tax is axed. It’s always helpful when you include personal narratives of how these accounts have help you or a family member manage costs associated with a sick child or a spouse with a chronic condition.

“A Date Which Will Live in Infamy”

Today is Dec. 7, which is my parents’ generation’s equivalent of my generation’s Nov. 22, 1963 and my kids’ generation’s Sept. 11, 2001. The bombing of Pearl Harbor has special meaning to my family. My grandmother took a steamship to Honolulu in late November 1941 for a vacation with my grandfather, a US Naval Academy graduate who had been stationed in Guam since March 1940. While they were in Honolulu, my grandfather received his orders to transfer to Washington, DC. My grandparents left Honolulu late Dec. 5 on the SS Lurline, headed for San Francisco. They were in the middle of the Pacific when Japanese pilots bombed and sank most of the US Pacific Fleet moored in Pearl Harbor.

The male passengers on the Lurline, including my grandfather and a young football player named Jack Robinson, who had finished a season playing professional football, were among the men who painted everything on the Lurline above the water line gray to reduce its visibility to potential enemy bombers. The ship arrived in San Francisco safely, despite the peril. Another ship carrying Christmas trees from Oregon to Hawaii was torpedoed and sank in the vicinity of the Lurline.

My grandfather returned to the South Pacific and spent much of the remainder of the war there as a member of the Civil Engineering Corps. Robinson didn’t play much more professional football (though he had been a star running back at UCLA), but instead turned to professional baseball, where he became a trailblazer and Hall of Famer.

What We’re Reading

Did Maine voters make a mistake in voting to expand Medicaid in the Pine Tree State? Sally Pipes, president of the Pacific Research Institute, thinks so. Learn why here.

The House and Senate passed different tax reform bills. The two chambers must now go to conference committee and draft a single bill on which both will vote. The two bills passed have some key differences. The Kaiser Family Foundation outlines some key provisions  that impact health care.

Understanding Medicare and HSAs

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“Ignore the label “penalty.”  When you reposition the penalty in your mind as a “surcharge,” you open yourself to analysis that might show a benefit to delaying Part D enrollment because the financial benefits outweigh the financial risks.”

William G. (Bill) Stuart

Director of Strategy and Compliance

November 21, 2017

Many people find HSAs confusing. Many others find Medicare confusing. When trying to navigate the intersection of HSAs and Medicare, few people have found a GPS capable of helping them arrive at the right destination.

We could write a book about Medicare and HSAs (and, in fact, I’m finishing a draft of a new volume on HSAs, Medicare and retirement planning, which will be published in 2018). Fortunately, we can summarize the rules without, we hope, inducing the same somnambulant effect that the tryptophan in your turkey will create during the Chargers-Cowboys game Thanksgiving afternoon.

Here are the key pieces of general information that you, your clients or your employees need to know to understand when to enroll in Medicare and how to plan a smooth transition from HSA eligibility to Medicare coverage.

What are the rules around Medicare and HSAs? If you enroll in any Part of Medicare, you’re no longer eligible to contribute to an HSA. You can continue to spend your HSA balances tax-free for eligible expenses (including Medicare premiums) for the rest of your life, but you can’t make contributions for any month during which you’re enrolled in Medicare.

What happens with respect to Medicare when I turn age 65? You’re eligible to enroll in Medicare during a seven-month period that begins three months before your 65th birthday, continues during the month of your birthday and continues three months after the month of your 65th birthday. During this time, called the Initial Enrollment Period, you can enroll in Medicare without any potential future penalties or gaps in coverage.

Am I automatically enrolled in Medicare at age 65? If you’re collecting Social Security or Railroad Retirement benefits, you’re automatically enrolled in Medicare Part A (inpatient services) and Part B (outpatient services) at age 65 (or when you start to receive these benefits after age 65).

Otherwise, you’re not enrolled in Medicare. If you’re not collecting these retirement benefits, you must actively enroll in Medicare to begin to receive benefits. This concept is important if you want to remain HSA-eligible and aren’t collecting Social Security or Railroad Retirement benefits, you won’t be enrolled in HSA-disqualifying Medicare coverage.

Can I waive Medicare coverage? If you’re collecting Social Security or Railroad Retirement benefits, you can’t waive Part A coverage. As the Medicare law is written, you must accept Part A coverage. You can disenroll from Part B (for which you pay a premium) to save money, an option that many individuals who remain covered on an employer’s plan choose. If you’re not collecting Social Security or Railroad Retirement benefits, you can delay enrollment in Medicare indefinitely.

How does the size of my employer’s employee population impact my Medicare coverage? If you’re covered on your employer’s insurance and also by Medicare, the two insurers coordinate benefit so that you receive reimbursement up to the limits of the richer plan. If your company has 20 or more employees, the employer’s plan is the primary payer. Your providers submit claims to this insurer first, then seek additional payment from Medicare. If your company has 19 or fewer employees, your provider bills Medicare first, while your employer’s insurance pays any additional amounts up to the richer of the two plans’ coverage levels.

 Can my employer force me to enroll in Medicare? No. If your company has 19 or fewer employees, however, its insurer can require that you enroll in Part A or Parts A and B so that the insurer becomes the secondary payer (thus reducing its financial responsibility, since Medicare pays first). If you don’t enroll in Medicare, your employer’s insurer has the right to pay as though it were the secondary payer, leaving your employer with a financial burden for a hospitalization, course of cancer treatment or surgery.

If I’m enrolled in Medicare and want to disenroll to make contributions to an HSA, can I? Yes, you can disenroll from Medicare. You must complete paperwork and repay any reimbursements that Medicare has made to you and your providers. If you’re healthy or Medicare is the secondary payer, you may not have to repay much money. If Medicare is the primary payer or you’ve had substantial claims, the cost likely is prohibitive.

If you’re receiving Social Security or Railroad Retirement benefits, you must also repay all Social Security benefits that you’ve received to disenroll from Medicare. Individuals who are collecting benefits typically find that it doesn’t make sense financially to disenroll. One benefit in doing so is that disenrollment allows you to re-enroll for benefits later, when your delay increases your monthly benefit.

Am I subject to penalties or gaps in coverage if I delay enrollment in Medicare? Potentially.

If you remain covered by an employer’s plan after age 65 and delay Medicare coverage, you can qualify for a Special Enrollment Period. If you disenroll from your employer’s plan and immediately enroll in Parts A and B, you won’t face a penalty or gap in coverage.

If you’re not covered by your employer’s plan (for example, you have no coverage, you continued the group plan by exercising your COBRA rights or you bought a nongroup plan through an ACA marketplace or directly from an insurer), you’re not entitled to a Special Enrollment Period. You can’t enroll in Parts A or B until the next effective date of coverage (July 1) during the annual General Enrollment Period.

If you don’t pay a premium for Part A (individuals who’ve worked 40 quarters, 10 years, prepay their Part A premium through payroll taxes during their working years), you pay no penalty for delaying enrollment without qualifying employer coverage. If you delay Part B, you pay a penalty in the form of a 10% premium surcharge for every 12-month period that you delayed enrollment without qualifying employer coverage. In other words, if your premium in 2017 is $142 and you had delayed enrollment for one year without qualifying coverage, you’d pay $142 plus $14.20, or $156.20 per month for Part B coverage. As the Part B premium increases in the future, so does the penalty, which is always a percentage of the premium.

Are there penalties for delaying enrollment in Part D? Potentially.

Part D, the prescription drug benefit, has different roles from original Medicare (Parts A and B). You can’t enroll in Part D unless you’re enrolled in Parts A and B. If you delay enrollment in Part D, you must have what’s called Medicare Creditable Coverage (MCC) every month since you turn age 65 to avoid future penalties. MCC simply means that your prescription drug coverage is at least as rich as Part D. Your insurer tests its pharmacy benefits annually and tells you (and Medicare officials) whether your coverage is MCC.

If you remain enrolled in an MCC prescription drug plan every month after age 65, you avoid all future penalties and can enroll in Part D immediately, so long as you’re enrolled in Parts A and B. If your coverage isn’t MCC, you can’t enroll in Part D until the next General Enrollment Period and pay a penalty equal to 1% of the national base plan premium ($35.02 in 2018), or 35 cents. So, if you delayed enrollment for 10 months without MCC, you’d pay a monthly surcharge of $3.50 on top of your monthly Part D premium in 2018. As with the Part B penalty, the surcharge increases as future premiums increase. Learn more about penalties here.

How can I avoid Part D penalties? You avoid all penalties when you remain enrolled in your employer’s coverage (so that you’re entitled to a Special Enrolment Period that allow you to enroll immediately in Parts A and B) and in a prescription drug plan that’s MCC (so that you avoid Part D penalties).

 If I can’t avoid penalties, does it make sense to enroll in Medicare and end my participation in an HSA program? Maybe not. You’ll have to run the numbers (probably with the help of a financial advisor well versed in Medicare and HSAs). Let’s say you have a plan to wind down your employment and that plan projects that you’ll pay a 30% Part D penalty when you enroll. If the national base plan premium that year is $40, you’ll pay an additional $12 premium per month, or about $150 per year. If you live an additional 25 years and the Part D premium rises by 6% annually, your total penalty is about $8,000. In 2018 alone, you’ll put aside an additional $7,900 into your HSA to pay that penalty.

The key point is this: Ignore the label “penalty.” We associate “penalty” with terms like “bad” “criminal” and “to be avoided.” When you reposition the penalty in your mind as a “surcharge,” you open yourself to analysis that might show a benefit to delaying Part D enrollment because the financial benefits outweigh the financial risks.

 At what age does it no longer make sense to delay enrollment in Medicare? For most individuals, it’s age 70. When you delay enrolling in Social Security at your full retirement age, you earn an additional 8% increase in your future monthly benefit for every full year that you delay receiving benefits, up to age 70. At age 70, even if you value the tax advantages of continuing to contribute to an HSA, those tax advantages (reducing taxable income by up to $7,900 in 2018, resulting in tax savings of about $2,400 to $3,000 annually) are dwarfed by an annual Social Security benefit of $18,000 or more.

At that point, it makes sense to enroll in Social Security, which triggers your automatic enrollment in Parts A and B. The automatic enrollment in Medicare precludes you from making further contributions to your HSA. If you remain enrolled in employer coverage and have the option to enroll in different coverage with lower cost-sharing, you might want to switch medical plans during the next open enrollment.

Whether your medical plan is the primary payer (your company has 20 or more employees) or secondary (19 or fewer), your employer plan and Medicare coordinate benefits so that you receive coverage up to the richer plan’s benefit.

Where can I learn more? The Centers for Medicare and Medicaid Services (CMS), part of the US Dept. of Health and Human Services, publishes Medicare and You annually. This guide, though it doesn’t discuss the intersection of HSAs and Medicare, provides excellent information about the Medicare program.

What We’re Reading

One of the many problems with government regulations is that they remain on the books long after societal and technological changes make the product that was regulated obsolete, replaced by a new product that’s typically either less expensive, of higher quality or more convenient (or a combination of two or more of these attributes). Telemedicine is one such example. In this policy analysis, a Cato Institute scholar provides some common-sense approaches to making telemedicine more accessible to save money – and lives.

Interested in benchmarking your (or your client’s) company against other firms offering an HSA program? EBRI, a leading researcher and collector/compiler of HSA and retirement information, provides information here.

What’s the impact of rising health care costs on future retirees, school children and workers? Dave Chase, a remarkable thinker, paints a clear picture for you in this article.

What’s Happening in DC Now?

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“This bill contains a poison pill that ensures that it won’t pass in the Senate. . . This one provision ensures that the proposal is DOA in the upper chamber.”

William G. (Bill) Stuart

Director of Strategy and Compliance

November 9, 2017

If you’ve been following the news during the past two weeks, you’ve seen clip after clip of various politicians proclaiming the revival of the US economy or a declared war on the working class, depending on the speaker. This noise is typical with the introduction of any legislation, as proponents paint a rosy picture of the impact of the proposed law and opponents rhetorically attack the proposal as an assault on certain portions of the population.

Sound familiar?

During the past two weeks, Republicans have advanced two proposals that directly impact medical insurance and a comprehensive approach to amending the tax code. Let’s examine them one-by-one.

Funding the Subsidies

As we’ve explained before, Cost-Sharing Reduction (CSR) subsidies are an important component of the Affordable Care Act (ACA). Families with incomes below 250% of the federal poverty level who purchase Silver plans (which pay, on average, about 70% of all cost of treatment, with the patient’s paying the balance through deductibles, coinsurance and copays) receive subsidies on a sliding scale that cover most of their out-of-pocket costs.

CSR subsidies have been paid since 2014, though their future is in jeopardy because a US district court judge ruled in May 2016 that Congress must appropriate money to fund the program. Congress has never done so. The Obama administration moved money from other federal budget accounts to pay the subsidies. The judge ruled that this unconstitutional reallocation of funds must stop, though she allowed a temporary continuation of the action so as not to disrupt insurance markets. The Trump administration requested an additional extension that remains in force.

President Trump has threatened to end the extension and stop the payments to insurers. He has taken to microphones and Twitter to decry these “subsidies to insurance companies.” That rhetoric resonates with voters who see the payments as another perk that the ACA bestows on insurers (in addition to advance premium tax credits that give Americans with incomes below 400% of the federal poverty level taxpayer subsidies to offset the cost of premiums).

If the CSR subsidy payments stop, individuals who buy Silver plans are not affected directly. They still receive subsidies. What changes if the federal treasury stops paying the subsidies is that insurers absorb the costs, which were about $7 billion in the 2017 federal fiscal year (which ended Sept. 30). Insurers must raise their premiums to cover this additional financial responsibility.


Two separate congressional efforts to fund CSR subsidies were introduced last week. Following the failed Republican attempts to amend the ACA through the reconciliation process, Sens. Lamar Alexander (R-TN) and Patty Murray (D-WA), the chair and ranking minority member on the Senate Health, Energy, Labor & Pensions (HELP) Committee, introduced a bill that would do the following:

  • Fund CSR subsidies through 2019.
  • Restore nearly $106 million in funding to market the state ACA marketplaces during this year’s open enrollment period (which started Nov. 1).
  • Make it easier for states to qualify for Sect. 1332 waivers, a provision in the ACA that permits states to petition federal regulators for relief from certain provisions of the ACA as long as their plans don’t increase medical costs or decrease coverage levels.
  • Permit states to implement reinsurance programs that protect insurers participating in ACA marketplaces from experiencing heavy losses that typically result in their either increasing premiums dramatically or withdrawing from the market.
  • Allow individuals age 30 and older to purchase catastrophic plans with very high deductibles – the so-called “Copper” plans currently available only to young people.
  • Permit insurers to sell insurance across state lines, a proposal that continues to excite Republicans despite practical limitations on its practical effects.

Among the biggest proponents of the legislation is Sen. Chuck Schumer (D-NY), the minority leader. He has indicated that all 46 Democrats and the two independents who vote with Democrats support the bill. He wants a quick vote in the Senate to secure the 60 votes necessary for passage. Senate Majority Leader Mitch McConnell (R-KY) has indicated that he’ll introduce the bill in the upper chamber if President Trump signals his willingness to sign the legislation into law. This requirement is a potential landmine, as the president has a history of praising a bill and then denouncing it the following day and demanding changes.

This bill should pass in the House if it’s introduced. It is expected to enjoy broad Democrat support, since it strengthens the ACA – the Democrats’ signature domestic legislation during President Obama’s two terms, though its passage in 2010 cost the party its majority in the House – without conceding any fundamental pillar of the law.

Republicans will be split on the bill. The House still includes many Republicans who harbor dreams of repealing the ACA – a political impossibility absent 60 votes in the Senate under current rules. They will oppose any bill that stabilizes the CSR reduction program, since not funding the program will cause many remaining insurers to exit the state marketplaces and force Democrats to the bargaining table to repeal the failed ACA and work on new legislation more favorable to Republican goals of more state autonomy.

More pragmatic House members will see the bill as an attempt to reduce federal spending – absent CSR subsidies, premiums will skyrocket, and the federal government will spend more on premium subsidies than it saves on CSR subsidies – and support the measure, particularly because it increases state and consumer flexibility.


Alexander-Murray is now competing with the Healthcare Market Certainty and Mandate Relief Act, introduced by House Ways and Means Committee chair Kevin Brady (R-TX) and Senate Finance Committee Chair Orrin Hatch (R-UT). The identical bills, introduced as HR 4200 in the House and S 2052 in the Senate), are partisan (Republican) approaches to funding SCR subsidies. This legislation does the following:

  • Authorize CSR subsidy payments through the end of 2019 – with an important caveat noted below.
  • Suspend the individual mandate to purchase insurance or face a fine.
  • Suspend the mandate that businesses with 51 or more employees must include medical insurance as part of their compensation package to employees.
  • Increase HSA contributions to the statutory out-of-pocket maximum ($6,650 for self-only contracts and $13,300 for family contracts in 2018), nearly doubling the limits ($3,450 and $6,900) under current law.

The individual mandate disproportionately impacts families with incomes below $75,000, who qualify for some premium subsidies but not enough to pay their share of the premium. This bill wouldn’t punish them further by fining them for not purchasing a product that they can’t afford. Suspending the business mandate is a concession to businesses that operate on lower margins or whose single highest cost is employee compensation.

The increased HSA contributions is Hatch’s passion. He has supported this concept in legislation that he regularly introduces at the beginning of every new session of Congress. While his bill, a grab-bag of proposals designed to increase health-care consumerism by strengthening HSAs, never becomes law, certain provisions regularly make their way into other legislative proposals.

This bill contains a poison pill that ensures that it won’t pass in the Senate. It authorizes CSR subsidies only on plans that prohibit voluntary termination of pregnancy (except in the cases of rape or incest or to save the life of the mother). This one provision ensures that the proposal is DOA in the upper chamber.

What’s Next?

Brady-Hatch is likely to pass in the House on a purely partisan roll-call, with Republicans in favor and Democrats objecting to the abortion language or hoping to defeat this bill so that Alexander-Murray comes to the floor to achieve the funding of the CSR subsidies with minimal impact on the rest of the ACA. Brady-Hatch is unlikely to pass in the Senate, where it likely needs 60 votes. It won’t garner any Democrat support, again, because of the abortion language and the hope that Alexander-Murray is offered as an alternative, with its lesser destruction of the ACA, and likely won’t attract the votes of enough Republicans (50) to pass it through the budget reconciliation process if that were an option.

Alexander-Murray has a clear path to passage in the Senate, where all 48 Democrats are likely to support it and 12 Republicans, including “thorns-in-the-side-of-President-Trump” McCain, Corker and Collins, have co-sponsored it. The primary opposition will come from Republicans who don’t want to lose the leverage of cutting off CSR subsidies as a lever to extract additional concessions from Democrats on amending the ACA. They don’t have the votes to defeat the bill.

Alexander-Murray likely won’t see the light of day in the House, as Speaker Ryan has announced his opposition to bringing it to the floor for a vote.

The December 8 Solution

The federal government’s spending authority expires and the government reaches its borrowing ceiling on the federal debt in early December. Congress, even a dysfunctional body, must act then. It’s likely to roll a lot of activity into a single bill that members must approve to keep the federal government running. It’s likely that the CSR subsidy authorization, without abortion language, will be included in this bill. The outstanding ACA amendment proposals on the GOP wish list are included in that legislation.

A Note on Tax Reform

Republicans also introduced a tax-reform bill last week. It’s too early to read too much into this proposal. Tax-reform bills often take a very different shape as various interest groups mobilize to eliminate or soften language in the draft. Among the controversial proposals in this bill are a reduction in the deduction for state and local taxes (opposed by members of Congress from high-tax states) and the lowering on the mortgage interest deduction to a $500,000 cap. Even increasing the standard deduction (leaving millions of Americans with no tax liability) is opposed by the real-estate industry because its impact is to reduce the value of the mortgage deduction and thus weaken the incentive for individuals to purchase homes rather than rent.

This bill has a long way to go before it can muster 218 votes in the House and 50 in the Senate.

The bill is nearly silent on medical issues. While the industry had hoped that it would include favorable CDH provisions (such as increasing the statutory HSA contribution limit, allowing tax-free distributions from HSAs, Health FSAs and HRAs for over-the-counter drugs and medicine without a prescription and removing the federal cap on Health FSA elections), those topics didn’t make it into the bill. The only one addressed through legislation is the proposed statutory increases in HSA contribution limits in the Brady-Hatch bill. This provision might make its way into a more comprehensive end-of-year bill.

The proposed tax reform package eliminates the deduction for medical expenses.  Nearly nine million taxpayers – most over age 50 and with incomes below $70,000 – deducted $87 billion in 2015. This provision, if enacted, makes HSAs more attractive in the future since taxpayers can reimburse all eligible expenses tax-free. Under the deduction, taxpayer can deduct only expenses that exceed 10% of their adjusted gross income.

Again, the bill that ultimately passes may be far different from what’s proposed.

What We’re Reading

Astute readers of this column already know that the ACA has reduced the number of carriers, number of plans, types of plans and size of networks available to purchasers of nongroup insurance. Here’s more proof.

Grace-Marie Turner, one of the leading experts on the ACA, has looked at how Massachusetts wants to reduce or shift the costs of its expanded Medicaid program. She’s not impressed.

Choosing the Right Health FSA Extender

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“This flexibility is a strong argument in favor of using this approach when employees transition from traditional to HSA-qualified coverage. Employers and participants must be vigilant to ensure that they don’t make a mistake that negates an employee’s HSA eligibility for an entire 12 months.”

William G. (Bill) Stuart

Director of Strategy and Compliance

October 26, 2017

Have you placed the right extender on your Health FSA?

Prior to 2007, Health FSAs were truly “use it or lose it” accounts. Participants forfeited back to their employer any remaining balances at the end of the plan-year claims run-out.  This provision paralyzed many potential participants into not enrolling in a plan, reflecting our general preference that we place a higher value on avoiding pain (losing money that we otherwise could accept as taxable income and spend on other things that we value) rather than achieving a gain (a less visible reduction in our taxable income).

Since then, two important modifications to the tax code allow employers to offer an extender that allows employees to spend their balances beyond the 12-month Health FSA plan year. These provisions help increase participation by reducing the financial risk of forfeiture.

The first modification, the grace period, allows for an unlimited balance carryover for a limited period of time. The second, a carryover, allows for a limited balance carryover for an unlimited period of time.

Let’s look at the general advantages and disadvantages of each option, then discuss their specific application to HSA eligibility.

Grace Period

In the waning days of the 109th Congress, lawmakers approved the Tax Relief and Health Care Act of 2006. The law included a handful of provisions that expanded the attractiveness of HSAs and provided the first statutory relief to the then rigid “use it or lose it” nature of Health FSAs.

The grace-period provision allows employers to elect an additional period of up to 2½ months (it can be shorter, but employers almost universally adopt the maximum extension period) during which participants can continue to incur expenses that can be reimbursed with funds from that prior plan year.

In simple terms, a calendar-year 2017 Health FSA with a grace period allows participants to continue to spend Health FSA funds through March 15, 2018. The grace period doesn’t impact the claims run-out period (the time during which all claims must be submitted to the Health FSA administrator for reimbursement), which for most companies run for 90 days following the end of the 12-month plan year (March 30th in our calendar-year example).

Advantages of the Grace Period

  1. Employee participation increases because of the reduced risk of forfeiting unused balances. Fear of forfeiture is probably the No. 2 reason that employees don’t participate in a Health FSA (trailing only the range of expenses that they’re already incurring that are FSA-eligible).
  1. Many participants increase their tax savings. Employees are notoriously conservative in their elections to reduce the risk of forfeiture. As a result, they often elect far less than what they need and end up spending their entire balances and then purchasing additional eligible goods and services with post-tax dollars. The grace period allows them to be less conservative in their election, knowing that they have an additional 75 days to incur expenses that they can reimburse.
  1. With the ACA’s imposition of an election limit ($2,650 in 2018), the grace period allows participant to have access to two years’ elections at once. This is important when a spouse wants to undergo vision-correction surgery (as mine does) or a child needs to have four wisdom teeth extracted (as one of mine does). The grace period allows a participant to make maximum elections in both 2017 and 2018 and then have access to more than $5,000 to cover either procedure in full. Without a grace period and the ability to double-up, a participant  either pays a portion of the expenses with post-tax dollars or tells his the spouse or child that she can have vision in only one eye corrected each year or must have two wisdom teeth pulled in each of two years.

Disadvantages of the Grace Period

  1. Participants still face a deadline to spend their balances. The grace period gives them some flexibility, but no absolution from an aggressive election. They can still forfeit balances.


Effective with plan years beginning in 2014, the IRS modified Health FSAs further by allowing participants to carry over up to $500 of unused balances into the following Health FSA plan year. This provision applies only to plans that don’t include a grace period. As with the grace period, the employer has discretion on whether or not to offer this feature.

Advantages of the Carryover

  1. Employee participation increases because of the reduced risk of forfeiting unused balances.
  1. Many participants increase their tax savings because they can be more aggressive in their election if they know that they have additional time to spend any balance not used during the plan year.
  1. Employees don’t face a deadline for spending the carryover money. They can use it at any time during the new plan year and then carry over $500 again into the following year.

Disadvantages of the Carryover

  1. The amount that participants are allowed to carry over isn’t much money for participants who dramatically overestimate their expenses. These employees still could forfeit balances if their ending balances exceed the maximum $500 carryover allowance.

HSA Implications

Traditional Health FSAs, which reimburse eligible expenses without participants’ satisfying a Health FSA deductible, are problematic for employees who want to become eligible to open and contribute to an HSA. Traditional Health FSAs disqualify those employees from becoming HSA-eligible for varying periods, depending on the design of the Health FSA extender.

For our discussion, let’s assume that the Health FSA and medical plan both run on the calendar year.

Grace Period and HSA Eligibility

An employee with the grace period who spends her entire election and submits all claims by the end of the 12-month Health FSA plan year can become HSA-eligible as of Jan. 1 (assuming she meets all other HSA eligibility requirements). Participants always have the power to erase the negative consequences of the grace period on HSA eligibility by spending their balances before the beginning of the grace period.

Employees who enter the grace period with any balance, even as little as a penny, don’t become HSA-eligible before the end of the grace period (March 15).  Since HSA eligibility is determined as of the first day of the month, they aren’t eligible to establish an HSA in most cases until April 1. Under federal tax law, they can’t reimburse tax-free any eligible expenses from their HSA prior to April 1, even if applicable state trust law that governs their HSAs allows them to establish their HSAs sooner.

Employers can help these employees by amending their Health FSAs prospectively before the end of the 12-month plan year. They can either eliminate the grace period or turn the grace period into an HSA-compliant Limited-Purpose Health FSA grace period (reimbursing only dental, vision and certain preventive services).

The catch: Any changes to the grace period impact all participants, not just those who want to become HSA-eligible. Employers can’t create a Limited-Purpose grace period for employees enrolling in the HSA program and maintain the full grace period for employees enrolled in non-HSA-qualified coverage who may want to spend their balances on medical, prescription-drug and over-the-counter items that aren’t eligible for reimbursement under a Limited-Purpose grace period. They can’t split these populations because the grace period merely extends the current Health FSA year, and employees can’t change their Health FSA coverage unless they have a qualifying life event (wanting to become HSA-eligible doesn’t qualify) or the employer changes the terms of the plan prospectively.

Carryover and HSA Eligibility

The carryover extender offers more flexibility but increases the potential for additional delays in HSA eligibility.

As with the grace period, an employee can avoid any issues with becoming HSA-eligible Jan. 1 in our example (assuming that she meets all other HSA eligibility requirements) by simply spending her entire balance and applying for reimbursement before the close of the Health FSA plan year.

If she fails to do so and her employer carries over her Health FSA balance into a traditional Health FSA, she can’t become HSA-eligible before the end of that following year’s Health FSA. In other words, in our example, if she carries over, say, $25 from her 2017 to her 2018 Health FSA, she can’t become HSA-eligible before Jan. 1, 2019. She can use the $25 that she carries over to reimburse HSA-eligible expenses, including medical plan cost-sharing that she incurs during 2018, but she can’t reimburse her 2018 eligible expenses tax-free, ever, from an HSA.

That’s a worst-case scenario, and it’s obviously bad for the employee.

On the other hand, because remaining balances carry over into a new Health FSA plan year, employers can place the funds into different types of plans participant-by-participant. Remaining balances for employees who want to participate in the employer’s HSA program can carry over into a Limited-Purpose Health FSA that reimburses dental, vision and preventive services only. That way, the employees can become HSA-eligible Jan. 1, 2018 (assuming they meet all other HSA eligibility requirements).

Employers can carry over balances accrued by employees enrolled on other coverage, including a spouse’s plan, who don’t seek HSA eligibility, into the 2019 traditional Health FSA that reimburses not only dental and vision, but also medical, prescription drug and certain over-the-counter services and items.

This flexibility, employers’ being able to choose employee-by-employee how to handle carryover amounts, is a strong argument in favor of using this approach when employees transition from traditional to HSA-qualified coverage. Employers and participants must be vigilant to ensure that they don’t make a mistake that negates an employee’s HSA eligibility for the entire 12-month Health FSA plan year.

Which Extender Is Better?

Ah, the eternal question. The chicken or the beef entrée? Cake or ice cream? A cabin in the mountains or a cabana on the beach? Different people have different preferences. In fact, some employers have never adopted an extender or tried one and then reverted back to the traditional 12-month plan year with no grace period or carryover.

There is no right or wrong answer. Both the grace period and the carryover decrease the likelihood that a participant actually forfeits unused balances back to the plan administrator (the employer) at the end of the plan year. This key benefit in either approach allows more employees to enroll with confidence and enrolled employees to elect to receive more of their pay in the form of a tax-free Health FSA election with less rick of forfeiture. And as most employers would agree, the more employees give themselves an increase in take-home pay through prudent Health FSA elections, the happier they are financially and emotionally.

What We’re Reading

Confused about what President Trump actually did with his executive orders earlier this month? Forbes columnist Avik Roy gives one perspective. Long-time ACA skeptic Sally Pipes weighs in with her thoughts here.  And in my personal blog, I provide some additional perspective.

For those of you holding your breath waiting for the report from the Massachusetts Senate working group on health care, you can exhale. Here it is. The proposal calls for more transparency in medical and prescription drug pricing, efforts to compress cost variations among Bay State hospitals, increased scope of practice for professional “extenders” – including nurse practitioners and dental therapists – an reforms to MassHealth, the state’s Medicaid program.

This study follows the state attorney general’s report in early 2010 on provider price disparities, a report that has gained no traction in nearly eight years. Expect a political stalemate if Monday’s hearing in the State House is any indication, with community hospitals’ arguing for higher reimbursement rates from private insurers to maintain and create critical programs and hospital receiving the highest reimbursement levels’ arguing that they are, in fact, underpaid relative to national peers and thus shouldn’t be the source to increase reimbursement rates to community hospitals.

The politics of this proposal will be fascinating to watch in the winter and spring of 2018.



Understanding Health FSAs

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“There are three important ways employees benefit from participating in a Limited-Purpose Health FSA that employers should consider when reviewing whether to offer it:  Additional tax savings, preservation of HSA funds and cash-flow advantages.”

 William G. (Bill) Stuart

Director of Strategy and Compliance

October 12, 2017

One of the more difficult concepts for benefits administrators to comprehend is that a Health FSA, which we traditionally think of as a reimbursement account, is actually a group health plan. Its inclusion in this category has important implications for design and compliance.

In this post, we’ll explore:

  1. Why a Health FSA is a group health plan and what it means for compliance.
  2. Health FSA options that keep employees HSA-eligible.
  3. The benefits of limited Health FSAs.
  4. What strategies employers are using around Health FSAs.

A Group Health Plan?

Sometimes, the reasoning behind IRS regulations is confounding. In the case of Health FSAs, the IRS employs sound logic in labeling Health FSAs as self-insured, limited-benefit group health plans.

Think about a Health FSA. It’s a limited benefit plan, as each participant chooses her benefit level, up to a maximum set by the IRS (and expected to increase from $2,600 in 2017 to $2,650 for plans starting in 2018). Unlike standard medical plans with no annual or lifetime limits on essential health benefits, a Health FSA has an annual limit chosen by the participant.

It’s also a self-insured plan, although this concept is a little more difficult to grasp. The key to understanding this aspect of Health FSAs is the concept of “uniform coverage,” or the availability of the entire annual election at any point during the plan year. Simply stated, when a participant makes an election, the employer is funding the plan up to that election. The participant makes uniform payroll deductions throughout the year, which represent a premium paid. The plan sponsor, the employer, makes benefits available at any point during the year, just as a commercial insurer does.

If the participant reimburses a large expense early in the plan year and then leaves employment, she no longer pays premiums deducted from her paycheck. She has “overspent” her account. The plan sponsor – again, her employer – is responsible for the difference between premiums paid and expenses insured, just as a commercial insurer is responsible for paying for a hospitalization early in the plan year for an employee who leaves employment so that employer and employee no longer pay a premium.

If a participant fails to spend the entire election during the plan year and the employer hasn’t attached a grace period or rollover to the plan, the employee has no legal claim to a refund of those unused balances. This is the dreaded “use it or lose it” feature of Health FSAs that paralyzes the risk-averse and leads many eligible participants to elect too little or not participate at all in fear of forfeiting balances. A Health FSA works just like a commercial health plan: When an employee and his covered dependents incur only a small amount of claims, the employer and employee can’t demand a refund from the insurer.

Now does it make sense why the IRS calls a Health FSA a group health plan?


Categorizing a Health FSA as a group health plan has some important compliance implications.

Health FSAs and adult children. Under the ACA, children can remain covered on a parent’s group health plan until the child reaches age 26. The same holds true for a Health FSA. A Health FSA participant can reimburse expenses incurred by an adult child under age 26, whether or not the child is a tax dependent and whether single or married.

This tax treatment is different from Health Savings Accounts. HSA owners can reimburse eligible expenses incurred by tax dependents only, regardless of whether the adult child (or any other family member) is covered on the HSA owner’s medical plan.

In my case, and perhaps yours, this distinction has important implications. My son, age 23, needs to have his wisdom teeth removed. This service isn’t covered on my medical or dental plans, which means that he and I will be responsible for perhaps $3,500 in expenses. I can’t reimburse this expense tax-free through my HSA because he’s no longer my tax dependent. I can, however, reimburse it from my Limited-Purpose (more on this concept below) Health FSA because he’s not yet age 26. And if he had a Health FSA at work, he too could make an election and contribute toward the cost of the service with tax-free dollars.

Health FSAs and HSA eligibility. HSA eligibility rules are clear: When an individual is covered by more than one medical plan, the individual is HSA-eligible only if all plans are HSA-qualified. (Please note that a Dependent Care FSA, which reimburses child and adult day care, preschool, after-school programs and certain summer camps do not compromise HSA eligibility, since they don’t reimburse any medical expenses.)

Are HSAs and Health FSAs mutually exclusive? Not entirely. It’s true that an individual who wants to be eligible to contribute to an HSA can’t be covered by his own or a spouse’s traditional or General-Purpose Health FSA. As we’ve shown already, the Health FSA is a group health plan, and a traditional Health FSA plan reimburses medical expenses on a first-dollar (no Health FSA deductible) basis. Anyone who can access benefits through her own or a spouse’s traditional Health FSA can’t contribute to an HSA for the months that she’s also covered on a traditional Health FSA.

Limited Health FSAs

Fortunately, there are several Health FSA designs that allow individuals to participate while remaining HSA-eligible. Here they are:

Limited-Purpose Health FSA. This plan limits reimbursement to dental and vision services (plus some preventive care that isn’t covered in full by the medical plan). Section 223 of the Internal Revenue Code (which created HSAs) specifically lists dental and vision coverage as not disqualifying individuals from becoming HSA-eligible and provides that select preventive care can be covered outside the deductible. Thus, individuals can participate in these limited Health FSAs and remain HSA-eligible.

Post-Deductible Health FSA. This plan can cover all Section 213(d) expenses, including medical, dental, vision and certain OTC items, but only after imposing a deductible. The Post-Deductible Health FSA can’t begin to reimburse eligible expenses until the participant certifies that he has incurred at least $1,350 (self-only coverage) or $2,700 (family coverage) of eligible expenses that he pays with personal or HSA funds.(These minimum figures apply to all plans that begin in 2018 and represent $50 and $100 increases from 2017 minimum deductibles.)

Hybrid. A third flavor combines the first two limited Health FSA features. Under this plan, typically labeled a Limited-Purpose Health FSA, reimburses dental and vision, then adds medical, prescription drug and certain eligible OTC items once the participant certifies that she has reached the minimum deductible for an HSA-qualified plan. This design provides additional flexibility for participants by expanding the range of expenses eligible for reimbursement.

Are Limited Health FSAs Redundant?

Expenses eligible for reimbursement through both HSAs and Health FSAs are governed by the same section of the Internal Revenue Code: Section 213(d). This section of the tax code doesn’t provide a convenient list of eligible expenses, but it broadly defines as eligible any expense that diagnoses, treats or mitigates an injury, illness or condition. IRS Publication 502, published annually, provides a comprehensive list of items eligible for the medical tax deduction, a list that is nearly identical to the list of services eligible for tax-free distribution from Health FSAs and HSAs.

Since the list of eligible expenses is the same, why would an employee contribute to an HSA and also elect to participate in a Health FSA? HSAs are much more flexible, allowing unlimited rollover, while participants in Health FSAs, whether traditional or limited, risk forfeiting unused balances back to their plan sponsors.

There are three important ways that employees can benefit from participating in a Limited-Purpose Health FSA that employers should consider when reviewing whether to offer it:

Additional tax savings. Employees with access to a limited Health FSA can contribute to the maximum in their HSAs ($3,450 for self-only coverage or $6,900 for family coverage, plus an additional $1,000 if age 55 or older in 2018) and also elect to contribute up to $2,650 in their Health FSAs. Every dollar that they contribute/elect to these plans reduces their taxable income dollar-for-dollar. As a bonus to employers, all Health FSA elections and employee pre-tax payroll contributions to an HSA aren’t subject to the employer’s share of payroll (FICA) taxes. Offering both the HSA and the limited Health FSA option benefits both employees and employers seeking to minimize their tax burdens.

Preservation of HSA funds. A growing number of HSA owners – and their financial advisors – now realize the benefits of HSAs as long-term savings and investment accounts to save for medical, dental and vision expenses and Medicare premiums in retirement. For these owners, a limited Health FSA allows them to reimburse certain expenses from those accounts rather than their HSAs, thus preserving HSA balances for growth and tax-free spending on eligible expenses in retirement.

Cash-flow advantages. HSA owners who don’t contribute to the maximum don’t gain additional tax advantages by making an election to a limited Health FSA and probably don’t have sufficient discretionary income to systematically save for retirement in their HSAs. A limited Health FSA, particularly a Limited-Purpose Health FSA, can help them with cash flow. An employee can make a $2,650 election to a Limited-Purpose Health FSA, incur an expense early in the year and pay the entire bill, perhaps receiving a prompt-pay discount (as your author did when settling an endodontic bill of $2,400 for a prompt-pay discount of $1,900 last January).

When HSA Eligibility Doesn’t Matter

 The discussion around limited Health FSAs is relevant only when employees want to become or remain eligible to open and contribute to an HSA. In some cases, an employer offers an HSA-qualified medical plan and then builds an HRA that reimburses a portion of the medical plan deductible. Most such plans disqualify employees from contributing to an HSA because an HRA, like a Health FSA, is a group health plan. Unless the HRA is a Limited-Purpose or Post-Deductible HRA, employees won’t be HSA-eligible. In this case, employees can participate in a traditional Health FSA, which reimburses all Section 213(d) expenses (less any restrictions the employer imposes).

What Are Other Employers Doing?

Among the two limited Health FSA designs, employers almost universally choose the Limited-Purpose Health FSA. It’s easy to understand and provides immediate (no deductible) benefits. We rarely see a Post-Deductible Health FSA, which employees perceive (correctly) as being riskier because they don’t receive any reimbursement until they’ve satisfied the Health FSA deductible. Few employees want to be so “unlucky” as to avoid high medical bills during the year and thus not be able to access their Health FSA balances.

Employers who offered Health FSAs when they introduced HSAs typically offer employees a Limited-Purpose Health FSA. This is especially true when the employer also offers a non-HSA option so that the company maintains a traditional Health FSA for enrollees in the other plan and benefit-eligible employees who waive coverage.

A growing number of employers are offering and promoting Limited-Purpose Health FSAs and educating employees about the benefits of participation. They tailor their messages, greater tax savings, faster HSA balance growth, and cash-flow advantages based on their employees.

What Should Employers Do?

Employers not offering a Health FSA should reconsider, and employees not participating should rethink their position as well.  Health FSAs generate tax savings for employees, effectively allowing them to grant themselves a raise by shielding a portion of their income from federal income and payroll taxes and, if applicable, state income taxes as well. And employer FICA tax savings offset a good portion, if not all, of the administrative cost.

Employers who offer an HSA program should review the benefits of offering employees a Limited-Purpose Health FSA to deliver the three benefits that we’ve listed several times.

Employers who run their Health FSAs and medical plans on separate plan years should take steps now to align the anniversary dates. We’ve discussed this issue before.  Employees who want to become HSA-eligible and begin to contribute to their HSAs can’t do so before the end of their Health FSA plan year.

What We’re Reading

The federal government currently finances about half of all medical spending through Medicare, Medicaid, the VA system, TRICARE (coverage for active and retired military and their families) and the federal employees’ benefits program. Are you inclined to hand over the other half of the market to the same federal government? The Sanders Institute tells you why it would be a good idea. In my personal blog, I raise serious questions about this approach to reform.

Is your benefit offering keeping up with changing employee needs? MetLife’s annual survey of employees indicates that they’re concerned about their financial security, want access to a wide range of employer-sponsored benefits (even if the employer doesn’t contribute to all), struggle to blend work and life and want to be valued for what they bring to the company. Learn more here.

In another of my recent personal blog posts, I wondered how medical delivery and financing might change if Amazon entered the market and brought its existing model to this segment of our economy. The online giant continues to access the medical market.


Disrupting the Medical System

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“A number of companies . . .  are ignoring the partisan activity in the nation’s capital. They’re rolling up their sleeves and providing meaningful alternatives to companies with the foresight and courage to make meaningful, disruptive changes in their approach to keeping their employees healthy at a cost that doesn’t compromise the company’s core business.”

William G. (Bill) Stuart

Director of Strategy and Compliance

September 28, 2017

There’s a revolution taking place in employee medical benefits. If you’re focused on Capitol Hill, you’re missing it entirely.

A growing number of employers are taking an old concept – self-funding their medical insurance plan – and taking it to a new level. And rather than being satisfied with premium increases in the low to middle single digits, they’re reporting actual year-over-year decreases in their medical spending.

How are they doing it?

The Company’s Medical Business Unit

 Nearly every company, whether it provides consulting services or produces consumer or industrial goods, has a large medical business unit. For most of them, this business unit has the second or third highest budget within the corporation, trailing only cash compensation and usually physical inputs (like steel for a locomotive manufacturer and raw food for a restaurant). Companies’ financial officers scrutinize their budgets to identify overspending in salaries, physical inputs, travel, rent, equipment and every other input.

Don’t think so? Try submitting an expense report showing a $700 nightly hotel bill for a conference in Nashville and see whether you’re not questioned about your stewardship of corporate resources.

In far too many cases, though, companies’ financial officers throw up their hands when it comes to medical premiums. They accept this year’s costs as their reality and work with a benefits advisor to determine how they can minimize the impact of rising premiums, often celebrating when they get down to a single-figure percentage increase. They typically review contribution to premium (how much of the total cost of coverage they share with employees) and cost-sharing (how much actual care is the employees’ financial responsibility before insurance begins to pay claims).

In recent years, employees, particularly at smaller companies, have seen their cost-sharing rise substantially (although employees’ share of total medical costs has remained steady at around 11% for decades). And many have seen their PPO plans either eliminated or priced much higher than plans with narrower networks as employers attempt to steer employees and their dependents to providers contracted with insurers.

Even with these changes, the typical chief financial officer is far more passive on medical costs than she is with other costs, perhaps feeling powerless to actually take charge of medical spending.

The Traditional Benefits of Self-Funding

Employers have self-funded their medical plans for years. More than half of all employees and dependents covered on employer-sponsored insurance are enrolled in self-funded plans, with higher percentages among larger companies. This trend has been driven by some key advantages of traditional self-funding:

Avoid state mandates. Because they are governed by ERISA, self-funded plans aren’t governed by state laws and regulations. Thus, a self-funded plan doesn’t need to comply with state mandates, regulations and guidelines. In states with high-cost mandates (Massachusetts, for example, requires insurers to cover unlimited medically necessary infertility services), the exemption may save 5% or more of premium.

Offer a uniform benefit package. The ERISA exemption also allows employers to offer a uniform benefits package to employees in multiple states. Rather than offering local fully-insured plans that follow state mandates, a national company can develop a single benefit plan that is legal in any state in which it conducts business, easing administrative costs and complexity.

Eliminate any fudge factor. Insurers typically attempt to add a factor to their rates to protect themselves in the case of very high claims. Actuaries can calculate the expected claims experience for small (community-rated) and large (experience-rated) groups. To shield themselves against higher-than-expected claims costs, insurers ideally want to build in a buffer in the premium to cover themselves as a contingency. Adding this additional premium also helps prevent rate spikes in the subsequent year.

Self-funded clients traditionally have sought one or more of these benefits and simply changed the funding arrangement of their existing medical plan with their existing insurer to a self-funded program. To protect themselves, they often purchase reinsurance to offload the extreme risk of a handful of high-cost covered individuals or aggregate high claims in a year to a general insurer.

Two People, Two Different Results

I shared two meals with very different people at a conference last week. I had breakfast with a benefits advisor from a mid-size Midwest city whom I’ll call Steve. We were joined by a gentleman whom we’ll call Serge who’s familiar with the power of modern self-funding.

As the topic turned to self-funding, Steve noted that he has set up a handful of clients on self-funded plans. When Serge asked him which networks he used, he indicated that he usually used Blue Cross networks but recently had moved a client to Aetna, which offered a 2% greater discount. This statement was our early warning signal that he sees self-funding from the traditional perspective.

Serge asked Steve about whether the plan sent patients abroad or to national centers of excellence for care. No, it didn’t. Serge asked Steve whether he was aware of Health City Cayman Islands, which offers package prices with guarantees on many orthopedic procedures (like hip and knee replacements) at a fraction of the cost of the same services in US hospitals with high-quality outcomes. Steve wasn’t aware. We didn’t discuss surgical packages with guarantees at the Surgery Center of Oklahoma or Shouldice Hernia Clinic in Canada, which are other examples of this concept closer to home.

Serge noted that excellent foreign providers can diagnose Hepatitis C patients and send them back home to the US with a three-month supply of treatment for about one-third of the cost of receiving care domestically. Again, Steve wasn’t aware of this option and didn’t see how he could incorporate it into a major insurer’s medical plan, even with self-funding. And he couldn’t envision how to effectively negotiate directly with hospital systems for some high-volume procedures, even though he’s located within a three-hour drive of several much larger cities with multiple large hospital and provider systems.

Steve is introducing his clients to the old, static version of self-funding. Patients receive the same benefits, make the same provider choices and end up with the same (or nearly the same) financial responsibility regardless of the network provider that delivers the service that they did under a fully-insured program. Unless the plan design itself provides meaningful steerage (like a limited-network plan that can be offered on a fully-insured or self-funded basis), the program doesn’t incent employees to choose site of service based on cost and quality.

I then enjoyed lunch with a benefits manager whom we’ll call Kendra. She works for the largest employer in a smaller one-hospital city of about 40,000 residents in the Southeast and describes herself as “the spear” aimed at the local hospital in an effort to secure more favorable pricing.. The hospital has negotiated high reimbursement rates with regional insurers. She knows that prices are way out of whack because another lunch partner from Healthcare Blue Book, a leading national cost-and-quality transparency provider, has shared that information with Kendra.

Kendra is beginning discussions to contract directly with hospitals within a two-hour driving range for orthopedic surgery (saving perhaps $10,000 to $20,000 per joint replacement) and other non-urgent services. She is talking about having a portable mammogram facility available twice a month in the company parking lot to save several hundred dollars per image. By the way, the savings are difficult to calculate precisely because the local hospital has billed a routine mammogram with at least 11 different reimbursement rates during the last year.

We talked about running a monthly bus or luxury van to another city for colonoscopies. Imagine, for the cost of a bus (and, on the way home, a very welcome meal after fasting and cleansing for 18 hours), her company could save between $1,500 and $3,000 per colonoscopy. Multiply that figure by 10 employees in the van! As a bonus, the program would relieve employees of having to find someone to drive them home from the procedure (they shouldn’t drive after anesthesia) because they’d arrive back at the company parking lot long enough after the procedure and could drive themselves home.

Kendra can duplicate her efforts by contracting directly for coronary artery bypass graph (CABG) surgery and cancer treatment at a nearby facility that delivers high quality at a price far lower than her local hospital. Paid time off for travel time, an Uber ride and perhaps tickets to a local sporting event or theatre company would more than compensate employees for any inconvenience (if free access to a quality medical outcome can be considered an inconvenience if it involves three or four hours of paid travel time with someone else’s driving) while still keep costs well below the local option.

Kendra and her CEO aren’t sitting back as victims and complaining about the premium increases that they receive annually. Kendra takes seriously her role as a steward of company resources. She’s working hard to make sure that she creates programs that ensure that her company and her fellow employees get the most bang for their medical buck spent.

Other Creative Approaches

What about other companies? One self-funded third-party administrator (TPA) based in Massachusetts has a high percentage of female employees of child-bearing age. It designed an interesting steerage program. It created a set of preferred maternity hospitals based on cost and outcomes. Employees can deliver at those hospitals or anywhere else in the network. If they deliver at a preferred hospital, the company pays for two years of diapers and wipes. Most employees voluntarily choose a preferred maternity hospital. Readers with young children grasp the value of this simple, cost-effective steerage offer.

Some other companies take a different approach, choosing instead to use the power of reference-based pricing, which we’ve discussed previously. In a reference-based pricing model, an insurer or employer sets the maximum price that it will pay for a procedure – typically at a rate that will cover the cost at several good facilities with excellent outcomes within, say, a two-hour drive. Employees are free to have the procedure done anywhere, but they pay the difference between the reference price and the actual cost.

When the California state employee retirement system implemented this program for joint replacement, hospitals that were charging up to four times the reference price cut their prices to the reference price for this plan’s participants (but not other patients). They could no longer charge exorbitant prices just because they had negotiating power with insurers rather than a discernible quality advantage over other providers.

Eventually, Kendra’s local hospital will have to take the same action. It will have to lower its reimbursement rates – at least for employees and dependents covered on her company’s medical plan – to recover lost patient volume. The hospital will complain (at least privately, to Kendra’s CEO) that the company’s actions threaten the hospital’s long-term financial viability. And Kendra’s CEO probably will ask the hospital’s chief financial officer whether he looks for a new supplier when his food-service provider, contracted cleaning vendor or supplier of surgical supplies charge three or four times the market rate for their services. The CEO’s responsibility is to be a prudent steward of his shareholder’s funds, not to subsidize a hospital that can’t deliver quality outcomes at the same price as competitors.

What’s the Issue?

When we as consumers want to buy a car, a new stereo system or an annuity, we have a wealth of information available to guide us. We can access independent quality information and shop for the best price through a variety of online resources. We can buy a Kia, a Toyota or a Rolls Royce knowing the extent to which the difference in price reflects a difference in quality.

Also, we’re spending our own money, so we know that every dollar that we overspend is a dollar that we can’t spend on something else that we might enjoy. We may choose to limit our investment to a Kia and accept what are likely higher repair costs down the road. If we choose a Toyota, we’re paying more up front to receive greater value and lower maintenance costs in the future.

Medical care is different. First, quality data isn’t readily available. We as patients rely too much on brand-names and peer ratings (such as local and national magazines’ “Best of” or star-based hospital and doctor ratings) rather than actual quality ratings (infection rates, readmissions, mortality, etc.). No hospital is good at everything, any more than a single large restaurant provides the best Mexican, Chinese, French, Greek, Italian, Southern barbeque and Creole dishes in the area. Too often, though, we don’t have information and, rather than seeking it out, we choose a site of service based on brand reputation.

A growing number of innovative, disruptive organizations have conducted and gathered information on hospital outcomes for various conditions, and this information is available to plan administrators. It’s possible to find and incorporate this information into a benefit plan design, as Kendra is doing.

Leaving this responsibility to employees by merely imposing greater cost-sharing doesn’t achieve the anticipated result. A higher plan deductible doesn’t impact employees when the cost of the service exceeds their financial responsibility. Neither does a plan design that places providers on tiers with higher out-of-pocket costs for more expensive facilities, as the difference in patient costs is only a small fraction of the difference in the total cost borne by the employer.

There’s nothing worse than paying Toyota (or Rolls Royce) prices and receiving a Kia. We don’t do that when we buy a car, but patients do it every day in medical markets, since price in no way correlates with quality when buying the results of a lab test, the benefits of surgery or the restoration of functionality through physical therapy.

Second, and we’ve just touched on this, patients pay only a small percentage of total costs. They’re spending someone else’s money when they access care beyond their financial responsibility. Most employers don’t tell the new salesperson to buy a car and send the company the bill. They either provide the car themselves (similar to Kendra’s approach to health care), give them a range of cars that they can purchase (limited-network medical plan) or provide a monthly car allowance so that the employee is responsible for any cost beyond that figure (reference-based pricing).

The Bottom Line

The really interesting activity in medical markets isn’t happening in Washington, DC. Politicians are enamored with coverage and are, at best, paying lip service to medical costs. Many analysts and employers are following the debate on Capitol Hill, wondering how any bill passed – if indeed one passes – will change the status quo.

A number of companies – TPAs, quality metrics providers, network vendors – are ignoring the partisan activity in the nation’s capital. They’re rolling up their sleeves and providing meaningful alternatives to companies with the foresight and courage to make meaningful, disruptive changes in their approach to keeping their employees healthy at a cost that doesn’t compromise the company’s core business.

Will these companies “save” the American healthcare system? No, not by themselves. But maybe when these plan reach a critical mass, we’ll see the players in the system reorganize their business models and approaches to meet the market demand for pricing consistent with quality outcomes.

I’m reminded of the story of the old man and his grandson walking along the beach after a severe storm. You’ve heard the tale. The grandfather picks up starfish lying in the sand and throws them back into the ocean. His grandson asks him what he’s doing, and he says he’s saving starfish. The grandson looks at the beach and tells the old man that he can’t possibly make a difference – there are too many starfish for him to throw them all back into the water. The old man picks up another starfish, throws it into the water and says, “I just made a difference for that one, didn’t I?”

These new-age self-funded clients are making a difference for themselves. And in doing so, they may disrupt the medical-delivery system in ways that make permanent changes in the delivery system. They may or they may not. But they’ll make a difference for their companies and provide additional examples that may motivate other companies to understand that they have more power than they think in addressing their cost of medical care.

What We’re Reading

Want to understand more about the new world of self-funding? Read The CEO’s Guide to Restoring the American Dream or watch the author, Dave Chase, on this TED Talk.

Very few commentators on either side of the Cassidy-Graham proposal have read either the full bill or a summary of its key provisions. The Kaiser Family Foundation provides a side-by-side comparison of the ACA (current law), Cassidy-Graham and the Better Care Reconciliation Act, the GOP effort that failed in the Senate in July.

No Reform? Now What?

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Capitol construction

There was a lot more (and more successful) construction outside the Senate wing of the Capitol than there was inside this summer.

“This approach can attract and retain talent, especially as Millennials become a majority of the work force. These workers have come of age in a connected world, shop online, seek customized products (their grandmothers didn’t give them teddy bears as gifts; they took them to Build-a-Bear to customize their own) and want the flexibility of doing things on their own schedules.”

William G. (Bill) Stuart

Director of Strategy and Compliance

September 14, 2017

Congress is back in session, and the Senate HELP (Health, Education, Labor and Pensions) has been holding hearings in an attempt to find a bipartisan approach to stabilizing individual insurance markets for the 2018 open enrollment period later this fall. They’re working against a tight deadline, as insurers must sign contracts by Sept. 29 to participate in the ACA marketplaces in 2018. And the Senate Parliamentarian ruled recently that Republicans’ authority to amend the ACA under the current reconciliation process (which requires only 50 votes, not 60 as is the case with other legislation) expires at the conclusion of the federal fiscal year at the end of September.

While it appears that every county will have at least one insurer, many probably more than this year’s one-third of the nation’s roughly 3,000 counties, will have only one insurer offering coverage. Some observers consider the marketplaces to be successful because everyone has options. Others equate a one-insurer county with a gas station at a service area on an interstate highway or a concessionaire at a sporting event, able to charge almost any price that it wants because it’s the consumer’s only viable option.

And there’s considerable noise around whether or not President Trump will continue the Cost-Sharing Reduction (CSR) subsidies, the payments that the federal government makes to insurers to cover much of the out-of-pocket costs for individuals and families with incomes at or below 250% of the federal poverty level who enroll in Silver plans. While the president has threatened to withhold these payments, in reality he has little power.

The federal government has made the payments, which are expected to total more than $7 billion in 2017, since the implementation of the Affordable Care Act in 2014. Republicans sued the Obama administration, claiming that Congress never appropriated the funds. Congress won the case in US District Court. In the spring of 2016, Judge Rosemary Collyer issued a temporary stay, allowing the Obama administration to continue the payments while it appealed the decision. President Trump subsequently won the presidency and requested an extension of the temporary authority to continue payments so as not to destabilize the individual markets.

Judge Collyer granted the extension, but it will expire soon. Once it expires, President Trump can’t continue the payments unless the House of Representatives passes a bill and the Senate concurs to fund this program. Absent that appropriation, the funding stops. At that point, insurers are responsible for absorbing the cost of the program. To put it in perspective, many insurers have abandoned the individual marketplaces as the industry as a whole has experienced losses between $1 billion and $2 billion annually since 2014. The CSR program will cost more than $8 billion in 2018.

It’s unlikely that we’ll see broader reform in 2017 or 2018. The Republicans tried and failed to unite around a single plan to amend key parts of the ACA. They aren’t likely to try again. with the Sept. 30 deadline to pass legislation through budget reconciliation with only 50 votes (they control 52 of 100 seats in the Senate, as well as the tie-breaker cast by a Republican president of the Senate).

We may see some of this failed effort appear if Congress and President Trump, as expected, tackle tax reform in the 2018 federal fiscal year, which begins Oct. 1, 2017. Potential changes include increasing statutory HSA contribution limits to the out-of-pocket maximum (or from $3,450 and $6,900 for individual and family coverage respectively in 2018 to $6,650 and $13,300), eliminating of the statutory limit on Health FSA elections and allowing tax-free distribution for over-the-counter drugs and medicine without a prescription from an HSA, Health FSA or HRA.

That’s about it. Employers won’t see relief from ACA reporting requirements. Neither the ACA nor the Republican amendments focused on serious cost reduction in the system, so premiums won’t be going down. New, more costly prescription drugs will continue to drive pharmacy cost increases. Hospitals will continue their consolidation to increase their negotiating power with insurers and purchase more outpatient practices and facilities so that they can bill more services at higher inpatient levels.

Unless you’re a very, very large employer, you don’t have leverage to combat any of these pressures directly.

What Can Employers Do? Plenty!Employers aren’t powerless, however. You can’t change the system by yourselves, but you can move the needle within your company’s benefits strategy and budget. Think of this exercise as akin to paying taxes. You can’t avoid taxes without taking extreme measures and you can’t really impact federal tax policy. What you can do is review your financial and tax situations with a professional and make some changes that ensure that you pay no more than the required minimum in taxes (unless you choose to pay more, as a handful of taxpayers do each year).

In that spirit, here are six ideas worth exploring if you want to regain some control over your benefits budgets in 2018 and beyond:

Redesign your contribution strategy. Most employers are still contributing a percentage of the total cost of each plan that they offer to employees. The problem with this approach is that employees over consume coverage at the employer’s expense. Let’s say you offer two plans with $500 and $700 individual premiums. If you pay 75% of the premium, employees can “buy up” to the richer plan for only $50 of their own money. If they perceive the more expensive plan to be worth only $900 annually to them ($75 per month), they’ll buy up because the value is greater than their cost.

If you adopt a defined-contribution approach, you might give each employee the equivalent of 85% of the lower-cost plan, or $425. Each employee can apply that monthly stipend to the $500 plan ($75 payroll deduction) or the $700 plan ($275 payroll deduction). With this approach, employees make better decisions because they alone bear the full cost, rather than enjoying the full benefit and only part of the cost, of choosing the more expensive plan.

This strategy also allows you to set your benefits budget in advance, since your total contributions aren’t depending on which plans your employees choose. And you can manage you benefits budget better over time because you don’t have to keep your contribution aligned with premium increases (though most employers do).

The right contribution strategy drives employees to right-size their medical coverage. The traditional defined-benefit approach of paying a fixed percentage of each plan encourages them to buy up because they bear so little of the cost of choosing the more expensive plan.

Explore the private exchange option. Private exchanges received a bad name from the get-go, probably because of the disastrous roll-out of the ACA’s public exchanges (now rebranded as public marketplaces in an attempt to rehabilitate the concept). Private exchanges offer a wealth of benefits to employees and employers:

  • More medical options. Private exchanges typically offer between six and 10 plans, so your diverse employee population can find a plan that fits.
  • More ancillary lines and options within poplar lines like dental. Employees have access to more products to help them mitigate personal risk.
  • A decision-support tool that ensures that employees consider all potential financial risks and recommends a basket of products designed to mitigate each employee’s risk most efficiently.
  • An online enrollment experience, providing just-in-time information delivery and the opportunity to engage a spouse through an online, on-demand experience.
  • Positive annual enrollment, so employees must engage in the process annually rather than simply do nothing and default to their in-force coverage.
  • Instant processing of changes and automatic transmission of those changes to all carriers.
  • Consolidated billing for all lines of coverage (or one bill for medical and a second for all other lines).

Liazon, a private exchange pioneer now part of Willis Towers Watson, surveys several hundred thousand employees enrolled on its Bright Choices ® benefits marketplace each year. Those participants give the online shopping experience high marks for product choice, guidance (the decision-support tool) and ease of use. Also, they believe that they receive better value, appreciate benefits more and value their company’s contribution to their benefits more than they did under the traditional benefits distribution model.

A robust private exchange can attract and retain talent, especially as Millennials become a majority of the work force. These workers have come of age in a connected world, shop online, seek customized products (their grandmothers didn’t give them teddy bears as gifts; they took them to Build-a-Bear to customize their own) and want the flexibility of doing things on their own schedules. A private exchange achieves all these goals. When you offer this experience and another company delivers benefits as it did in the 20th century, who’s going to attract or retain good talent?

Replace your current deductible plan with an HSA-qualified plan. According to Kaiser Family Foundation, among employers with fewer than 200 employees, nearly two-thirds of employees were enrolled in single coverage with a deductible of $1,000 or more. Many of those undoubtedly had deductibles of $1,500 or more. If employers who offer non-HSA-qualified plan swap out those plans for HSA-qualified options, both they and their employees would see a reduction in premiums vs. renewal of the incumbent plan. In addition, many employees would be eligible to open and contribute to an HSA, which would help them manage their out-of-pocket costs by using pre-tax funds to pay for medical, dental, vision and certain over-the-counter expenses.

Employers who offer a high-deductible medical plan with an HRA can use an HSA-qualified medical plan to reduce the premium further, freeing funds to increase the value of the HRA or offer other benefits.

Introduce a robust HSA program (or enhance a current HSA program). HSAs offer so many advantages to employees. They appeal to employees who want to reduce taxable income, whose high medical, dental and vision costs are not covered by traditional insurance, who want to build medical equity in a tax-advantaged environment and who want to pass on a legacy.

When properly structured, HSA programs can replace rich coverage, leaving all (or nearly all) employees at least as well as well off financially (and perhaps actually better than) a traditional plan while allowing them to create a powerful financial account. You need to create a program that leaves employees no worse off financially in a worst-case scenario.

You have some levers, the payroll deduction that you set for their enrollment in the medical plan, your contribution to their HSAs, combined with their tax savings from their HSA contributions, can make this program a sure winner. Design, communication and employee education are all key elements to a successful program.

Increase your medical-plan deductible and add a back-end HRA. A growing number of employers are adopting this approach. A savvy broker can often identify a medical plan that’s just not priced correctly relative to a carrier’s other products. When that happens, it makes sense to choose that plan, enjoy the additional savings and help employees manage their out-of-pocket costs (often by leaving the net deductible intact).

When the base medical plan is HSA-qualified, you can design the program to be HSA-eligible as long as the back-end HRA doesn’t begin to reimburse any expenses before the employee is responsible for at least $1,350 or $2,700 (self-only and family coverage figures, respectively, beginning Jan. 1, 2018).

The program might look like this for self-only coverage:

  • Old plan: $2,000 deductible.
  • New plan: $4,000 deductible with a $2,000 back-end HRA.

You can design this program with an HSA-qualified medical plan (lower premiums) and not disqualify employees from opening and contributing to an HSA. The back-end HRA must meet the requirements of a Post-Deductible HRA, which means that it can’t begin to reimburse before the employee is responsible for the first $1,350 (self-only coverage) or $2,700 (family coverage) in 2018.

The example immediately above would qualify. These employees would have the same $2000 net deductible. And this employee would be able to contribute up to $3,450 ($4,450 if age 55 or older) into her HSA to cover the first $2,000 of deductible expenses, as well as any qualified dental, vision or OTC expenses. And she retains any surplus to spend in the future, including during retirement. And she can invest funds to increase her balances (subject to market fluctuation).

Make your deductible options more attractive with voluntary coverage. Voluntary lines like hospital, accident and critical illness insurance can provide peace-of-mind to employees enrolled in high-deductible plans, whether or not they’re HSA-qualified plans. This coverage doesn’t disqualify employees from being HSA-eligible. In the example above, the employee could purchase a hospital policy that paid, say, $1,000 for an inpatient stay. That payment, along with the $2,000 HRA, covers $3,000 of her $4,000 deductible.

Other Considerations

Here’s another idea that may increase initial outlays but will deliver exceptional value that will help retain good team members:

Tune in to new benefits that Millennials value. OK, you’re not looking to add cost, but don’t overlook the morale-building benefits that you might derive from a small additional investment. Here are a couple of examples:

  • Help employees pay student loans. Some employers have a program that matches employees’ loan payments up to a certain contribution level. Doing so relieves them from what may be their biggest financial obligation and source of financial stress. And it can all be done through payroll to make it easier for employees to budget and make payments.
  • Provide employees with financial planning assistance. Student loans. Elderly parents who need some assistance. Saving for a first home. Starting a family. Trying to save early for kid’s college education so that they don’t face the same financial pressures as their parents. It can be overwhelming. Some employers bring in financial planners for complimentary sessions around open enrollment to help employees identify the right benefit mix. Employees then can work with that planner at an employer-subsidized fee to build a financial game plan.

Notice that my list of potential cost-saving approaches didn’t include some traditional and emerging options.

Telemedicine is a good cost-saving benefit, and most insurers are now incorporating it into their standard benefit packages.

Wellness programs are often top-of-mind with employers, but it’s often difficult to quantify a meaningful ROI. Too often, those who are healthy participate (easy money) and those who aren’t healthy don’t (not worth any amount of money). The key to a wellness program’s success is the size and motivation of the employee population between these extremes, those who need a nudge, respond to the incentives and engage in meaningful change.

A robust Employee Assistance Program (EAP) is table steaks these days, generally viewed as a smart investment to manage employee stress (and the accompanying medical bills, absences, presenteeism, etc.) during temporary crises.

What We’re Reading

HSAs have long been viewed as Health FSAs with a longer time horizon and some more flexibility. And they are. They’re also an important element in an employee’s financial portfolio. HSAs are now beginning to be recognized by financial and retirement planners as important complements to qualified retirement plans. Read more here.

Open-enrollment season is fast approaching for many companies. Here are some good tips on how to make your open enrollment more fun, more informative, more engaging and more impactful.

If you’re like me, you sometimes wonder what Amazon will do next. The Whole Foods purchase came out of left field. Here, a professor from one of my former schools assesses the impact of Amazon’s Whole Foods acquisition. What’s the connection to health care? It’s this: Read the story and imagine that Amazon entered the medical delivery or insurance system. How would that single event shift the tectonic plates of the medical-industrial complex? I speculate a little in my personal blog, but don’t let my thoughts limit your imagination.

Prescription for HSA Success

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” . . . Employers who set realistic and appropriate expectations, approach an HSA program strategically and make subtle adjustments in key variables as they receive employee feedback (through actual enrollment decisions or survey results) experience the best outcomes.”

By William G. (Bill) Stuart

Director of Strategy and Compliance

August 31, 2017

Employee satisfaction with HSA programs varies considerably from company to company and from employee to employee. Why? Everyone is offering the same type of medical plan, with slight differences in network among insurers and slight differences in cost-sharing design. And every HSA administrator offers the same basic account, which is regulated at the federal level.

So, why such differences in satisfaction levels?

I’ve been involved with HSA program launches since 2004 and have seen countless hundreds of employers implement HSA programs either as a total replacement or an option. Here are the factors that I think have the greatest impact on employee satisfaction:

Education: Most employees don’t understand differences in coverage. It’s not what they do. They serve customers, implement programs, conduct audits and negotiate in their everyday jobs. They don’t study medical benefits in detail. And they tend not to have favorable views of things in their lives that they don’t understand or that don’t seem to work consistently. In other words, I don’t understand the basics of how my car’s internal-combustion engine works, but I don’t care because it works the same way every time. I don’t understand why my insurer, seemingly arbitrarily to me, but undoubtedly for logical reasons that it understands, won’t approve my son’s prescription dermatology cream.

Choice: Americans like to have choices. When someone, government, employer, parent, limits our options, we tend to be less happy than we are when we have multiple options on the table. Employers who choose one medical plan to offer to 45 employees with very different medical needs, family structures, financial situations and care preferences tend to find that employees are less satisfied than are employers who offer three very different coverage options for the same employee population.

Meaningful differences: When employers offer multiple plans, those plans need to be different. Three HMOs with three different deductible levels probably doesn’t represent much choice. By contrast, an HMO with a $2,000 deductible, an HSA-qualified PPO with a $1,500 deductible and a tiered network plan, all priced to reflect total costs of coverage and care, gives employees an opportunity to match their situations with appropriate coverage.

Translation: Employers whose employees are satisfied gave employees a choice of plans, provided good up-front education well in advance of open enrollment and throughout the year and priced the options so that employees could balance premiums and out-of-pocket responsibility in a meaningful way.

Employers need to think strategically before they launch a consumer-driven health (CDH) or HSA program. This is where a good benefits advisor or third-party administrative partner becomes so important. These trusted advisors have experience in this area. The good ones have learned from their experience and can provide invaluable guidance to employers who want to launch a successful program.

And what measure defines success? That depends on the employer. Some employers introduce an HSA program as an additional offering with the intention of making the program the only coverage offered within a few years. Other employers always want to maintain choice and define success as having higher-income and/or low-utilizing employees disproportionately enrolled in an HSA program. Still others are less concerned with actual enrollment and more focused on the total cost of coverage as a percentage of the compensation budget.

What we’ve learned is that employers who set realistic and appropriate expectations, approach an HSA program strategically and make subtle adjustments in key variables as they receive employee feedback (through actual enrollment decisions or survey results) experience the best outcomes.

Here are the key actions taken by employers who are satisfied with their HSA programs:

They have a plan and create meaningful measurements: Not all employers want their HSA programs to do the same things. Some want to create an attractive option for a slice of the employee population (such as high earners who want to reduce taxes and young, healthy workers who want to enjoy premium savings or build balances that can grow for decades in a tax-free environment), while others want to employ a two- to four-year strategy to move all employees to an HSA program to reduce the portion of benefits costs consumed by medical coverage. If each of these companies has 20% of its employees enrolled in an HSA program after two years, they might react very differently to that level of penetration.

They gain C-suite commitment. These plans work best when senior managers express their support for the program, then back that support by enrolling in the plan. In 2003, when Harvard Pilgrim Health Care launched its first consumer-driven health (CDH) program, only one of more than 1,000 employees enrolled in the HMO with a $2,000 family deductible. That one employee was Charlie Baker, then CEO and now governor of Massachusetts. The following year, with the knowledge that the plan was good enough for the CEO and the introduction of an HRA to reimburse a portion of the deductible, enrollment increased to nearly 25%.

They secure peer leadership. Most organizations have an informal leadership structure (though employers aren’t always willing to acknowledge it, which can be a colossal mistake). Certain employees hold influence independent of their placement within the organizational chart. It may be the marketing assistant who organizes monthly theme days, the woman in IT who coordinates volunteer activities or the senior employee on the production line. Find out who these people are and provide them with comprehensive information on the goals and details of the HSA program. They can become key influencers when initial negative reaction by employees threatens to derail the program.

They plan well in advance. Employers who adopt an HSA program in response to a high renewal increase 45 days before renewal don’t fare well. They tend to slap together a cost-focused program that lacks time for proper employee education (more in a moment) and shifts a large financial burden to employees. Employers who tend to meet their HSA program goals, regardless of their goals, make decisions at least four (and preferably six to eight) months prior to the effective date of coverage.

They conduct a thorough education program: Ideally, an employer decides to implement an HSA program six months in advance. That way, the employer, benefits advisor and HSA administrator can conduct a series of educational programs geared toward understanding the advantages of the account itself. Then, during open enrollment, focus on medical plan education. Employers who try to stuff information about two or three medical plans and the key elements of an HSA in a 60- or 90-minute open-enrollment meeting invite inertia and re-enrollment in employees’ existing coverage.

An ideal educational effort includes live and on-demand opportunities to learn. In-person classroom learning, recorded PowerPoint presentations with voiceover, online white-board presentations and e-mail campaigns that present information in bite-size quantities with links to an online information library are all excellent means of educating employees. The effort needs to be multimedia to meet employees’ different learning styles and on-demand so that they can access it when they can give it their full attention.

They create a meaningful premium differential. Savvy employers understand that they don’t need to price their plans to their employees in the same ratios as insurers do. Take the case of an employer who’s always paid 70% of their employees’ premiums. The insurer delivers individual coverage rates of $500 for the HSA-qualified medical plan and $700 for the renewal of the low-deductible plan. Rather than paying $350 (employee pays $150) or $490 (employee pays $210), employers should consider paying a fixed-dollar amount toward each plan, in this case, perhaps $425.

This way, employees can reduce their payroll deduction (increase take-home pay) by $75 per month ($900 in additional pre-tax cash compensation) if they choose the HSA-qualified plan. If they want to re-enroll in their current plan, they must increase their payroll deduction from $210 to $275 (reducing take-home pay by $65 per month, or $780 annually).

This approach is called defined contribution. It offers several distinct advantages to employers.

First, employees who want to “buy up” to rich coverage pay the full cost of that buy up, which forces them to think about the total cost of coverage.

Second, it ensures that employees aren’t spending their employer’s money to purchase a more expensive product.

Third, it allows employers to set their benefits budgets in advance, since employees’ plan choices don’t impact the employer’s cost of coverage.

Fourth, employers can (but aren’t required to) change their defined contribution annually independent of premium increases.

They focus on total cost of coverage. Employees typically don’t think much about premiums. They usually don’t see the total cost of coverage (employer and employee contributions), and their pre-tax payroll deductions often are invisible in this era of direct deposit of paychecks and separate electronic pay stubs that they never access as long as the net payroll deposit into their personal bank account is correct. Instead, they focus on out-of-pocket costs. When they evaluate a traditional plan and an HSA program, the former typically wins because employees see the difference in out-of-pocket costs but not the difference in payroll deductions.

Employers who want to encourage enrollment in an HSA program need employees to understand simple concepts that employees understand when discussing other forms of insurance: Premiums and out-of-pocket costs are inversely proportional. Reduced premiums are guaranteed, while the accompanying higher out-of-pocket costs are relevant only if policyholders incur claims. The most expensive insurance covers the first dollars of eligible expenses, since nearly everyone incurs some claims.

When employees understand these concepts, they have a foundation to understand the total cost of coverage. They then need a tool to guide them in evaluating their personal situations . . .

They offer a cost calculator. This tool is nothing more than a spreadsheet to help employees consider the total cost (premiums and out-of-pocket expenses) associated with each plan offered. Employers fill in some cells: employee premium, total deductible and employer contribution to an account, for example. Employees then estimate their utilization to calculate the out-of-pocket expenses they’re likely to incur. They then see which plan has the lowest total costs.

Cost calculators can be very illuminating. Employees often are surprised enrolling in an HSA program with a $3,000 deductible can actually cost them less than enrolling in a plan with a $500 deductible. They won’t reach this conclusion or begin to question their assumptions about what constitutes rich coverage without a tool that can quantify these differences.

They seed the account. Employees’ greatest fear in enrolling in an HSA program is that they will incur high expenses early in the plan year. In a worst-case scenario, they can negotiate repayment terms with surgeons and facilities, though pharmacies require payment at the time of purchase. When employers seed employees’ HSAs – particularly with an up-front contribution – employees are better able to manage these fears and are more willing to enroll in an HSA program. Employers contributions also signal a partnership in managing out-of-pocket costs.

They encourage employees to make contributions to their HSAs. Employees who make regular HSA contributions accumulate balances fairly painlessly, allowing many to pay expenses as incurred. By contrast, employees who try to fund their accounts after they incur expenses find the process frustrating, painful and disruptive to their family budgets. Employers can encourage employee contributions by amending their Section 125 documents to allow pre-tax payroll contributions. They then can either invoke negative contributions (automatically directing a percentage of HSA program participants’ paychecks as employee contributions to their HSAs, with participants’ retaining the right to alter the percentage or eliminate the contributions altogether) or making matching employer contributions. Many employers apply one or both of these approaches to helping employees fund qualified retirement plans. The same principles hold true with HSAs.

They provide ongoing education. Education shouldn’t end at the conclusion of open enrollment. HSA program participants will continue to have questions as they begin to navigate a world with insurer Explanations of Benefits, HSA statements and provider bills. Ongoing education should include live sessions about understanding, processing and filing this paperwork and managing care. Representatives from both the insurer and the HSA administrator should provide general tips through classroom education and schedule individual sessions to guide individual employees with specific questions and concerns. The sooner participants become comfortable with the information that they must process, the greater their satisfaction with the program.

What We’re Reading

Speaking of HSAs, Devenir has come out with its semiannual report on the HSA market. Read the 2017 Mid-Year HSA Report.

Wondering what the national trend for medical costs will be in 2018? Healthcare Trends Institute has published a summary of the PwC Health Research Institute’s Medical cost trend; behind the numbers 2018.

Elisabeth Rosenthal is a must-read. The physician-journalist, a longtime New York Times columnist who’s now editor of Kaiser Health News, has written a fascinating and disturbing book about our medical delivery system. I’m totally engrossed in both the audio and print versions of An American Sickness. To get an idea of how she sees the world from the perspective of a physician, patient advocate, journalist and world traveler, read her recent experience in a pharmacy.