“Today, the demographics of Health FSA and HSA owners are nearly identical – including family income. No longer is one account blue collar and one white collar.”
William G. (Bill) Stuart
Director of Strategy and Compliance
June 22, 2017
I recently spent another day on Capitol Hill – my fifth trip this year to meet with legislators and staffs. Invariably, friends and family ask what we discuss in these sessions, who is the audience, how interested are legislators and staffs in hearing what we have to say, etc. I won’t keep you in suspense any longer.
These meetings were each a half hour and were arranged by a DC-based firm that provides local representation to national trade organizations. I hesitate to call these folks lobbyists because of the negative connotation associated with the term lobbyist, though they do certainly facilitate our visiting with elected officials and their staffs to educate policymakers about issues important to a particular industry and its customers. They open the doors to these offices, which allows those of us who work in the industry to tell our stories.
In this case, the trade group is the Employers Council on Flexible Compensation, which advocates for Health and Dependent FSAs, HRAs, HSAs and parking and transit benefits. My group consisted of a representative of the lobbying firm, the executive director of ECFC, the legislative and technical resource at ECFC (who formerly worked at the Dept. of the Treasury when HSAs were adopted and on the Senate Finance Committee when Roth IRAs were introduced), the vice president of compliance for another HSA/FSA/HRA administrator and an executive with Visa, whose debit-card solutions power many FSAs and HSAs.
Congressional offices – particularly on the House of Representatives side, where I spent my entire day this time – are very small. Many consist of the elected representative’s rather modest office, a waiting room, a small conference room and perhaps a larger room out of which a handful of aides operate. It’s not uncommon to meet in the hall outside the office (as I did on a visit with Sen. Elizabeth Warren’s health policy assistant in March) or under a stairwell (as I did with a House Ways and Means Committee member’s staff assistant on this trip). One interesting perk is that these offices are allowed to offer gifts like free food to visitors, but only products made in the district. I’ve been offered ice cream at 9AM at Rep. Erik Paulsen’s (R-MN) office, have munched Craisins® in Sen. Warren’s (D-MA) office and admit that I grabbed a fun-size Milky Way bar in Rep. Peter Roskam’s (R-IL) office.
Staffers are an interesting mix. They vary in age from right out of college to 30-year veterans of the Hill. A member of Congress typically looks for a more seasoned aide in an area of interest. For example, a representative who sits on the House Ways and Means Committee, where all bills funding the federal government must originate typically looks for a more experienced aide who has a background in taxes and finance. These aides have more connections with other members’ offices and deliver disproportionate influence when staffers meet to discuss legislative language and strategies.
Legislative aides sit politely and listen to us discuss our issues. They do so with varying levels of interest. Some listen intently, while others appear to be doing little more than monitoring their breathing. Since they reflect their boss’s level of interest in the topic and our position, it’s easy for us to see whether we’re making headway in a particular office. These exchanges are rarely satisfying.
The best meetings are with engaged aides who see the session as an exchange of ideas, observations and priorities between interested parties who look at an issue through different lenses. Of course, we want to introduce our talking points (more on them below). At the same time, we value feedback as a way of determining which way the political winds are blowing and how we can rethink our priorities or refine our message so that it resonates more.
The ECFC (like the American Bankers Association HSA Council and the National Association of Health Underwriters – two other organizations with whom I visit Capitol Hill) is nonpartisan. We don’t favor one major political party over the other, nor do we typically offer opinions on particular legislation. For example, the organization takes no position on the American Health Care Act (AHCA), the bill that replaces some provisions of the Affordable Care Act (ACA). The AHCH is a complex and controversial piece of legislation, as was the ACA. Both bills extend to issues far from those that interest us as a trade group. Instead of supporting or opposing legislation, we discuss specific provisions of a piece of legislation that impact our customers.
Our message went something like this: “We don’t take a position on the AHCA. We do like the provisions in the bill that provide additional benefits to individuals who enroll in a Health FSA or an HSA. We hope that these provisions become law, either through this version of health care reform or tax reform or on their own.”
We visit both Republican and Democrat offices. We almost always find common ground, regardless of any staffer’s boss’s political affiliation or philosophy. We met with a staff member of a Democrat who voted against the AHCA but also cosponsored a bill to allow Health FSA and HSA participants to reimburse over-the-counter drugs and medicine tax-free from their accounts. Reimbursements for these items require a prescription under current law – a provision dating to the ACA, when Congress restricted reimbursements as a means of raising revenue (by denying the tax break to consumers) to pay for that legislation.
In other Democrat offices, we very often find agreement when discussing the Cadillac Tax, the ACA’s excise tax on high-cost employer-based medical coverage. Most Democrats and nearly all Republicans oppose the measure because of its likely impact on employers (40% excise taxes on total cost of coverage beyond a certain figure, which isn’t adjusted for regional premiums) and consumers (higher out-of-pocket costs and fewer Health FSA and HSA programs to manage those costs).
In Republican offices, we typically ask the aide to pass along our thanks for supporting issues like raising the HSA contribution limits to the statutory out-of-pocket maximum for HSA-qualified medical plans, eliminating the government-imposed cap on Health FSA elections, allowing reimbursement of OTC drugs and medicine without a prescription and parity between transit and parking programs. The last provision is already law, while the others are included in the AHCA.
Here are the points that we emphasized in these meetings:
Repeal the Cadillac Tax. The excise tax on high-cost health plans imposes a 40% surtax on coverage that costs more than a certain amount for single and family coverage. This levy was included in the ACA as a means of raising revenue and discouraging high-premium plans with low cost-sharing, which many economists believe increase utilization and thus lead to higher premiums. The threshold at which the tax kicks in isn’t adjusted for regional difference sin coverage, which means that a company in Massachusetts may face the tax while a company in Texas or Utah offering a plan with identical cost-sharing wouldn’t.
The larger issue with the Cadillac Tax that we addressed on this trip – and have emphasized before – is that the calculation of “total cost” of coverage includes not only the premium, but also voluntary employee payroll deductions for tax-free Health FSA elections or HSA contributions. In other words, the tax treats employee contributions the same as premiums. We believe that’s wrong.
The Obama administration and Congress have “kicked the can” down the road by delaying the implementation of the Cadillac Tax from 2016 to 2018 to 2020 (and, if the AHCA passes in its current form, to 2026). These delays help, as national surveys of employers and discussions that we at Benefit Strategies had with our clients indicated that employers were weighing steps to keep their coverage below the excise tax threshold when the implementation date was 2016 and later 2018.
Most employers’ first step would be to eliminate Health FSAs, since companies with coverage above the threshold would pay a 40% tax on every dollar that employees contributed to a Health FSA or HSA to reduce their taxable income. The result: No Health FSA (and thus a 25% to 40% tax increase on employees for every expense formerly reimbursed by a Health FSA) and no payroll-tax savings on HSA contributions (thus reducing participation and resulting in the same tax increase).
Modify the excise tax. Most trade organizations have advocated either killing the Cadillac Tax altogether (most common) or keeping it in place (primarily economists worried about over utilization with rich medical coverage and those who want to maximize federal tax revenue). ECFC is unusual in that it has a fallback position. While we believe that the tax sets in place a series of events that disadvantages middle- and working-class families with high out-of-pocket costs, we understand the political pressure to maintain the tax.
That political pressure comes from “scoring” of legislation to determine its impact on the federal budget. The Congressional Budget Office scores every piece of legislation that can have an impact on the federal budget to determine whether it will increase or decrease federal spending during a 10-year window. CBO has a very poor track record. For example, it estimated that 24 million Americans would enroll in ACA exchanges in 2017, while the actual figure has held steady at about 10-11 million (depending on whether one measures enrollments or those who actually pay premiums). Nevertheless, its projections are critical to shaping key benefit and cost provisions in bills.
Eliminating the Cadillac Tax means foregoing that potential tax revenue permanently (though, due to faulty assumptions in calculating the tax receipts, the loss of potential tax revenue would be far less than projected). Delaying the tax until 2026 – as House Republicans did in their version of the AHCA – moves the tax to the end of the 10-year window that CBO evaluates. So, it remains on the books for the long-term (even if Congress continues to delay it in the future), which helps the CBO score. Senate Republicans may manipulate the tax in their version of an ACA replacement – perhaps advancing the implementation date to 2025 or 2024 to show more revenue within the 10-year window – even if they once again delay it in the future.
Our “ask” to House Ways and Means members’ staffers in both parties was this: If we can’t accomplish the goal of eliminating the Cadillac Tax, let’s agree that the portion of their salaries that employees commit to their Health FSAs and HSAs not be counted as cost of coverage for purposes of assessing the Cadillac Tax. This approach allows families with high out-of-pocket expenses – often stressed by a family member’s medical condition, the impact of the illness on their ability to work regularly and their concerns about how to pay for the care – to manage the financial costs with less angst. We see little resistance to what we believe is a common-sense modification of the excise tax.
Don’t favor either Health FSAs or HSAs over the other. HSAs have played a key role in every Republican plan to replace the ACA. Democrats have traditionally been more skeptical of HSAs and looked more favorably on Health FSAs, which were considered the working man’s benefit, than on HSAs, which were considered a tool for the rich to avoid taxes.
At one time, those stereotypes were accurate. A decade ago, when HSA plans were one of two or three options offered by an employer, employees with higher incomes, more financial savvy and longer time horizons disproportionately chose to enroll in those programs, while other employees chose more traditional first-dollar or low-deductible coverage. Since then, the world has changed. Today, the demographics of Health FSA and HSA owners are nearly identical – including family income. No longer is one account blue collar and one white collar.
First, more employers offer HSA plans as a total replacement. When employees have only one medical-plan option, the population of their enrolled employees more accurately reflects the general population.
Second, individuals who purchase coverage on public exchanges disproportionately choose plans with higher deductibles – often HSA-qualified medical plans – because they represent guaranteed premium savings. These price-sensitive shoppers more often have incomes in lines with the bottom half of the population.
The points that we emphasized are these:
- For most individuals, it’s not an either/or proposition. Most people have access to, at most, one of these tax-advantaged accounts, not both. Favoring one account over the other disadvantages one group.
- Many individuals can’t enjoy the benefits of an HSA because their employer doesn’t offer a qualified medical plan or they have disqualifying coverage (like an older worker enrolled in Medicare Part A, a veteran who maintains TRICARE as secondary coverage or a wife whose husband participates in a traditional Health FSA at work).
- Many other individuals can’t participate in a Health FSA either because their employer doesn’t offer the program or they don’t have an employer. Remember those 10-11 million people cited earlier who have coverage through public marketplaces? They don’t have employers, so they can’t enjoy 25% to 40% savings on out-of-pocket expenses by participating in a Health FSA.
- Even among those fortunate employees who have access to both programs, one program might be better than the other, depending, for example, on whether they value cash flow (Health FSA) or unlimited rollover of unused balances (HSA) more.
The choice argument resonates with Republicans and Democrats. And pointing out the different audiences and needs that each plan meets helps us form resistance to some reformers’ belief that eliminating Health FSAs, HRAs and HSAs and replacing them with a single super account represents progress. It doesn’t. Sure, it reduces confusion, but in doing so it takes some very effective tools. When I was a kid, one of my friends fixed his bicycle using only a hammer. The rest of us used a screwdriver, wrench, spoke wrench or tire irons, depending on the problem. Our bikes outperformed his.
Don’t introduce Roth HSAs. The Cassidy-Collins reform bill in the Senate (which won’t come to a vote, but lawmakers may look to some of its provisions when writing the Senate reform bill) moves the industry from the current HSA to a Roth HSA. A Roth HSA, like a Roth IRA, would require after-tax contributions and then allow for tax-free withdrawals. Our team member who witnessed the birth of the Roth IRA in the Senate Finance Committee pointed out the obvious difference between a Roth IRA and a potential Roth HSA. In the IRA world, the choice is between receiving the tax brake on contributions (traditional IRA) or distributions (Roth IRA). Either way, the account is taxed at one end (contributions) or the other (distributions). An HSA is a triple-tax-free account. Taxing contributions reduces the value of the account, discourages contributions and leaves too many consumers unprepared to pay growing out-of-pocket expenses.
Feedback That We Received
We always come back from these meetings with a wealth of information. One long-time Democrat wants his party to start exploring alternatives to the ACA, which is failing, and the AHCA, which he doesn’t support. His aide said in passing that House Minority Leader Nancy Pelosi made it clear to her members that she wanted “no freelancers” on the health care issue. In other words, keep health care a partisan issue and let the Republicans sink or swim with their proposed legislation.
House Republican offices’ switchboards were overflowing with constituent calls immediately before and after the chamber’s vote on the AHCA. Most of the calls were negative. Most also were based on misinformation – much of it from robocalls from pro-ACA interest groups that, for example, incorrectly reported that anyone with pre-existing conditions would lose coverage under the Republican alternative. Members and their staffs spent a lot of time trying to explain the legislation to those constituents willing to listen and politely listen to those who wanted to vent.
One Democrat aide was very interested in our opinion about single-payer programs. We didn’t give her the standard “it’s a terrible idea” that most people who work in the industry would deliver. Instead, we discussed basic issues like what form the plan would take, how would it be financed, what cost-management tools were available, how it would impact supply to keep up with increased demand, what leverage employers would have to manage their own costs and what system could exist outside this basic coverage. We gave her some issues to consider, and we’ll watch her boss to see what his research shows and what alliances he might try to build to advance this approach.
Republican and Democrat offices are eager to see what changes the Senate makes to the AHCA. They expect the bill to look very different if Republicans can thread the needle to secure 51 votes for an alternative bill. The political dynamics in the Senate are very different from the House, the margin of error is much smaller than in the House and the Senate Parliamentarian is expected to disallow certain provisions of the House bill that aren’t germane to the federal budget.
The discussions around the corridors of power were interesting as well. Sen. Richard Burr (R-NC) has expressed doubts while we were on the Hill that the Senate will pass any health reform bill. Senate Majority Leader Mitch McConnell (R-KY) believes that he can schedule a vote before the Fourth of July recess. People who understand the math tend to see Burr’s scenario as more likely, given the difficult path to 50 votes. Then again, one insider and former House staffer told me over breakfast, “I’ve won a lot more money than I’ve lost betting on McConnell.”
The case against passage goes like this: Republicans can’t afford more than two defections. They have too many competing agendas to get there. Sen. Paul (KY) isn’t likely to sign on to any legislation that he considers “ObamaCare lite.” Sens. Portman (OH), Capito (WV) and Murkowski (AK) are concerned about the impact of a replacement bill on Medicaid expansion (though delaying the phase-out of the expansion over seven years rather than three, a compromise last week, may bring them into the “yes” column). Sen. Collins (ME) will oppose the replacement bill because of family planning/voluntary abortion language. And Heller (NV) is in for a very tough re-election battle next year and potentially must choose the lesser of two evils.
It will be impossible to satisfy these factions, this argument goes, even if Republicans start with a solid base of 42-45 or so Senators who understand that the party campaigned through four election cycles vowing to replace the ACA if they were able to capture both chambers of Congress and the presidency. And even if they do, the bill will look so different from the House version that the House won’t vote for the Senate bill to send the legislation to President Trump for his signature.
The case for passage goes like this: Republicans must keep their campaign promises to make major changes to the ACA, even if they don’t have the votes for full repeal. The Senate parliamentarian, Elizabeth MacDonough, will provide them with political cover by stripping the politically charged family provisions from the House bill because they’re not germane to the federal budget. The Medicaid expansion issue appears to be resolved to the satisfaction of those Senators who opposed the House bill on that issue. And once the Senate passes a bill by the narrowest of margins (perhaps with the tie-breaking vote cast by the president of the Senate, Vice President Mike Pence), the House will support the Senate bill knowing it’s the only version that can pass the Senate and sets a new foundation on which they can add later.
Who’s going to win this battle? Sorry, we don’t have the answer yet. Whatever your opinion or preference, you can find someone who predicts that outcome. On the other hand, just as you’ve never see a newspaper with the headline “Psychic Wins Lottery,” you won’t find anyone with a perfect record of projecting the outcome of any vote at the intersection of human nature and politics. We’re just going to have to wait this one out. If Sen. McConnell’s time projection holds, we shouldn’t be waiting long.
When You Visit DC . . .
By the way, next time you’re in the nation’s capital, you can visit your congressional representatives’ offices to express an opinion and, if you live in the right area, pick up a snack! Once you pass through security, you can visit any of the three House office buildings (Cannon, Longworth and Rayburn) or any of the three Senate office buildings (Russell, Dirkson and Hart) through underground tunnels – though you have to resurface to go between House and Senate buildings. The House tunnels also take you to a spectacular experience in the Library of Congress, which is a short surface walk to the inside of the Supreme Court. You can then cross the street to visit the Capitol Visitors Center. And admission is free to all venues.