A Capitol Experience

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Capitol 2017_06

“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.

Our Audience

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.

Our Message

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.


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“These companies need to calculate the cost of not attracting potentially valuable candidates or losing employees who add the greatest value to the company. Those costs typically are measured in tens of thousands of dollars. The HRA vs. HSA decision should be made in this larger context.”


William G. (Bill) Stuart

Director of Strategy and Compliance

June 8, 2017

A growing number of employers are asking whether they should offer an HRA or an HSA in one of two contexts. First, should I introduce an HRA or an HSA program to help manage medical insurance costs? Second, should I transition from my current HRA program to an HSA offering?

It’s important to ask the right question and to answer it correctly. The answer could be worth tens or hundreds of thousands of dollars in the benefits budget and even more to the company’s bottom line.

For most employers, the proverbial horse has left the barn. No longer is a “first-dollar” (no deductible) plan a viable medical insurance option. These plans are largely extinct except within certain public employment populations and among employers in which benefits costs represent a small portion of total compensation.

First-dollar plans have two major flaws. First, the first dollars of insurance are the most expensive. In other words, nearly everyone incurs some medical expenses during the year. If insurance covers all expenses after, say, the first $500 or $1,000, the insurer processes no claims and reimburses no expenses for many individuals covered by those policies. By contrast, the administrative and reimbursement costs associated with being involved in every medical transaction dramatically increases costs.

Second, first-dollar plans increase utilization. We are all economists. We purchase goods and services when their value to us exceeds what we pay for them, whether the item is a flat-screen TV, a cup of clam chowder or a ticket to a sporting event. When a physician visit costs us $25 in a first-dollar plan vs. $157 in a deductible plan, we value that visit differently. We may self-medicate, engage a physician through a telephone program (at perhaps a $42 cost), visit a retail clinic (at perhaps an $89 cost) or pay the $157 to see a physician. Regardless of what we ultimately do, we are more engaged when we are responsible for paying the full cost – rather than a fixed copay – for the service.

Advantages of an HRA Program

HRAs remain the primary reimbursement program in New England, despite the dramatic rise of HSA programs nationally. An HRA is a notional account – in effect, an IOU that an employer promises to pay to employees if they incur eligible medical expenses. Employers typically cite the following reasons for choosing to offer an HRA program:

First, employers reimburse claims only as they’re incurred. Many individuals incur no claims, which means that employers don’t pay any reimbursements. In fact, in a typical HRA program, employers reimburse anywhere from 20% to 40% of their total potential liability, depending on their medical and HRA plan designs and general health of their employees and dependents. A program that promises to pay a dollar but actually satisfies its obligations with a payment of perhaps 35 cents is an attractive option for employers. And it’s attractive to employees as well, since it reimburses all the expenses that the plan promises to cover.

Second, employers can design the program. They determine the dollar limit on their reimbursement, which expenses are covered by the HRA, payment order (whether the employee or the HRA pays the first dollars of eligible expenses), whether to allow carryover of unused funds and limits on the amount of carryover. With this degree of flexibility, employers can design a program that meets their financial and employee-satisfaction goals.

Third, HRA programs are easy to understand and implement. They can work with any medical insurance plan (although insurers may impose certain restrictions). Employees don’t need to meet special eligibility requirements to participate, as they do with HSAs. Employees don’t need to manage their accounts to receive reimbursements if the insurer sends eligible claims electronically to the administrator. The program works automatically behind the scenes when the administrator is integrated with the insurer, which makes an HRA program attractive when employees have limited financial savvy or language barriers.

Advantages of an HSA Program

An HSA is a personal financial account owned by individual employees who meet federal eligibility requirements to open and contribute to an account. Employees are responsible for managing the account to ensure that they’re eligible to participate, don’t contribute in excess of statutory limits and understand when an expense is eligible for tax-free distribution. Employers who have introduced an HSA program often cite these reasons:

First, an HSA program shifts responsibility from the employer to the employee. An HSA program isn’t an employer-sponsored plan, so much of the compliance responsibility that an employer assumes for the medical plan and HRA moves to the employee.

Second, an HSA program empowers employees. Employees determine how much they want to reduce their taxable income by contributing to their HSAs. Employees decide how much medical equity to build in their HSAs through a combination of contributions and distributions. Employees saving for retirement choose the right proportion of total contributions into an HSA and qualified retirement account.

Third, the underlying medical plan typically has a lower premium than other coverage with similar deductibles because more services are subject to deductible on an HSA-qualified medical plan. The lower premium gives employers the flexibility to share savings in the form of employer contributions to employees’ HSAs.

Offering Both Options

Some employers choose not to make this decision by offering both programs. In this model, the value of the HRA is generally higher than the employer contribution to an HSA, since the employer often pays less than 40 cents for each dollar of promised reimbursement through an HRA but must pay employer contributions to HSAs in cash (one dollar equals one dollar, not 60 cents or less).

In this model, the employer may offer a medical plan with a $1,500 deductible and an HRA that reimburses the second $750 of that deductible, leaving employees responsible for the first $750 of covered expenses. The HSA plan may have a $2,000 deductible with a $500 employer contribution and $250 in employee premium savings, with employees’ enjoying additional tax savings of between $300 and $800 (depending on their tax rates) with a $2,000 employee contribution to the HSA.

Employees with high medical expenses, poor budgeting skills, limited time and financial skills or a focus on the present gravitate toward the HRA, since it leaves them with a net deductible responsibility of $750. By contrast, employees with low medical expenses, a long-term vision of building medical equity and a desire to actively manage their tax liability gravitate toward the HSA program.

For employees, having two options is ideal. Because each employee has different medical and financial conditions, needs and goals, having choices allows more of them to be satisfied with an employer solution.

Choosing One Approach or the Other

Employers who want to adopt one program or the other, seek to consolidate from two programs to one or are thinking about transitioning from HRA to HSA must ask themselves the following practical questions to arrive at the right decision:

  1. What can the company afford? When asked properly, this question transcends merely the company’s benefit budget. The benefits budget shouldn’t drive the process, especially for companies that rely heavily on human capital (their employees’ knowledge) to achieve results. These companies need to calculate the cost of not attracting potentially valuable candidates or losing employees who add the greatest value to the company. Those costs typically are measured in tens of thousands of dollars. The HRA vs. HSA decision should be made in this larger context.
  1. What do my employees value, and what can they handle? If your work force is younger, smarter, more highly compensated and more financially savvy than the population as a whole, your employees probably can handle managing an HSA and would benefit from realizing immediate tax savings and accumulating long-term medical equity. On the other hand, if machines add more value than workers, your employees have language barriers, they lack financial skills or they’re higher utilizers, an HRA may work best because an HRA program integrated with an insurer works behind the scenes with little or no direct employee involvement.
  1. What behavior do I want to incent? Employees with a $1,500 deductible and a $750 HRA – money that can be applied to only eligible medical expenses – behave as though they have a $750 deductible. And for all practical purposes they do. The same employees with a $1,500 deductible and a $500 employer contribution to an HSA behave like they have a $1,500 deductible and are more prudent spending the first dollars of coverage, which can help reduce future premium increases. Unlike HRA participants, whose reimbursement is an IOU that they can cash only with qualifying expenses that year, HSA owners receive a cash contribution whether they incur expenses or not. Those funds, if unused, roll over for use in the future. Thus, an employee who spends that $500 employer contribution is reducing a personal asset by $500 – and that’s usually enough money to grab employees’ attention.
  1. What’s my long-term strategy?  Where do you want your benefits program to be in five years? The answer is important. An HRA offers financial advantages to an employer (pays a fraction of every dollar promised, can be designed around certain parameters to manage costs), but it’s a fund that must be replenished each year. If an employer’s goal is to wean employees off company reimbursement funds, it’s not the right approach long-term. By contrast, an employer can encourage employees to fund their HSAs through negative elections (automatically making deductions from employees’ paychecks that employees can alter but often don’t) or matching contributions. These steps increase employee contributions, which may allow employers to  gradually reduce or eliminate their contribution entirely.
  1. What level of resources can I commit to the program? An HRA program integrated with an insurer runs itself. The insurer sends eligibility and claims files (typically weekly), and the administrator processes the files and issues reimbursements when appropriate. There’s little for a benefits manager to explain to employees beyond the basic mechanics of the program. By contrast, an HSA program requires HR staff knowledge and work, particularly during the introduction phase. A chronically short-staffed benefits department may be challenged to deliver the training necessary to launch an HSA program.

Some health-care reform proposals have advocated eliminating Health FSAs, HRAs and HSAs and replacing them with a single account that combines features of all three programs. Others have proposed building reform around free-market principles that leverage HSAs for everyone. Still others have floated the idea of a Roth HSA that allows individuals, regardless of their underlying medical plan, to contribute post-tax dollars into an account that grows tax-free and from which owners can make tax-free distributions for eligible expenses.

I sit on the American Bankers Association HSA Council, an educational and advocacy trade group that represents administrators of more than 80% of the 20 million active HSAs. We’ve consistently opposed these efforts. While we understand and appreciate the value of HSAs and advocate on behalf of HSA owners to support legislative and regulatory changes to strengthen HSAs, we also understand that different employers and employees have different needs. Creating a one-size-fits-all approach to tax-advantaged medical reimbursement removes tools that better fit certain employers’ and employees’ needs.

More choice is better than less. In all other aspects of our lives, we make the right choices only when we access the right information and ask the right questions to identify the solution that works best for us. The same holds for HRAs and HSAs. Each has its place. And in some cases, both have their place for a single employer (offering a medical plan with an HRA and another with an HSA program) or within a single medical plan (higher medical deductible with a Post-Deductible HRA and an HSA).

Employers need to review their situations annually, working with their benefits advisors and a trusted administrator like Benefit Strategies, to ensure that their current solution remains the best approach moving forward. As the world and their industries change, so might their optimal combination of medical plan and account.

What We’re Reading

What’s direct primary care you ask? This article explains how the program works and what benefits it offers to patients.

One of the stumbling blocks to Republican efforts to replace parts of the Affordable Care Act is the Medicaid expansion. The most recent polling from Kaiser Family Foundation shows that a majority of Americans support continuing the federal-state program as is, despite increasing pressures on state budgets to keep up with demand for services. Read more here.

Despite failed efforts in Vermont (scrapped after the estimated new taxes were too difficult to swallow) and Colorado (rejected by a 4:1 margin in a state that overwhelmingly elected Democrats in November 2016), the single-payer movement is alive and well. The California legislature is proposing a state-run system that covers all residents with open networks, no premiums and no cost-sharing at a cost between $300 billion and $400 billion. The plan is a step backwards, according to this report. More globally, the CEO of medical insurer Aetna says it’s time to have a discussion about single payer, while others say we’ve had that discussion and it has been rejected consistently.

Introducing the Medical Discount Card

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“The tax savings associated with HSAs can make a meaningful impact on the lives or ordinary Americans. And those impacts simply aren’t reflected in surveys that document average account balances or annual growth in balances.”

 William G. (Bill) Stuart

Director of Strategy and Compliance

May 25, 2017

I recently received one of those coupons that department stores occasionally send to their credit-card customers with a “secret” discount. You go to the store, buy what you want and then present the coupon to the cashier. The cashier scratches the large dot on the coupon to reveal your savings. You eagerly watch each scratch to learn whether you save 15%, 20% or – be still my heart – the rarely seen 30%.

The coupon got me thinking. Various companies sell discount cards for dining and other services. A high-school football player sold me one last year as a team fund-raiser. The coupon, which I clip to my key ring, is worth a free doughnut with a purchase of coffee, 20% off my meal at certain restaurants on certain days and a free 29-point inspection with an oil change. Other companies sell a card that provides an automatic percentage discount on the purchase of prescription drugs at participating pharmacies.

So, I had a great idea. I want to offer an even better program. Here are the key elements to my plan:

  • You pay little or nothing to receive the discount card.
  • It’s good at ANY merchant. There is no network of participating merchants. If the business sells a product covered by the discount card, the discount applies.
  • While the consumer enjoys the discount, the merchant doesn’t suffer a loss of revenue. The merchant receives the full asking price while someone else reimburses the merchant the difference between what the customer pays and the merchant receives. This is a boon for the merchant, who in traditional plans must forego income equal to the discount.
  • The consumer knows the discount in advance. It varies from customer to customer in a range between 22% and 40%. The customer doesn’t make a small purchase only to regret not buying more when the merchant scratches the dot to reveal 35% savings.

Would you buy this product? I’ve run the concept by some friends, and their response was enthusiastic.

As I took my planning to the next step, a realization sobered me. The product already exists. Someone already had this idea. Companies are already selling this product. In fact, there are more than 20 million of these coupons in circulation in the US today, and the number is rising at a rate of 20% to 25% annually.

Do you have one?

The product to which I’m referring is a Health Savings Account.

Sure, you know about HSAs. They’re the triple-tax-advantaged financial accounts that allow you to reduce your taxable income, enjoy tax-free balance growth and make tax-free distributions for a wide range of eligible expenses.

You may have even read some social media posts from organizations attacking HSAs as accounts that benefit only the rich – those with enough disposable income to systematically save to cover out-of-pocket medical, dental and vision expenses.

I want you to look at HSAs in a completely different light.

Let’s start with the name. Health Savings Accounts. The name may connote unrealistic expectations. Yes, individuals can use these accounts to accrue balances that they can spend tax-free not just today, but in the future, for eligible expenses.

What if they were called Health Spending Accounts? Would they come under less criticism that they’re for only “the healthy and the wealthy?” Perhaps. Health Flexible Spending Arrangements offer similar tax savings (though without the opportunity to accrue balances), and no one criticizes Health FSAs as accounts for the rich. They’re seen as a vehicle to help average families cope with increasing out-of-pocket medical, dental and vision expenses.

What if they were called Family Medical Discount Plans? Would anyone object to a program that allowed families burdened with financial responsibility for medical expenses to reduce those obligations by 25% on the spot? I would expect Americans across all income groups, political philosophies and parties to unite behind this concept.

More important than ever

HSAs are more important than ever to people of modest means. Today, 51% of all employees (and 65% of employees working at companies with 50 or fewer employees) are enrolled in medical plans with deductibles $1,000 or more. Among employees enrolled in these plans, the average single deductible is nearly $1,500 across all companies and more than $2,000 for employees in small companies.

Individuals without access to employer-sponsored coverage face even higher costs. The average deductibles for Bronze (lowest actuarial value) plans in the public marketplaces in 2017 was more than $6,000 for self-only and more than $12,000 for family coverage. Move one step up in actuarial value and Silver plans averaged nearly $7,600 and nearly $7,500. Those figures represent a daunting financial responsibility for families, particularly since this potential liability is in addition to the cost of premiums.

Here’s where HSAs provide such an incredible financial benefit. How does a family with income of $75,000 find the money to pay a $6,000 hospital bill? A 2016 survey showed that nearly 30% of respondents didn’t have a dollar of savings and nearly 70% had less than $1,000 saved.

Where Americans find the money to pay medical bills – or other expenses – is beyond the scope of an article about HSAs. What’s relevant here is that individuals that own an HSA can manage this financial liability more easily.

That $6,000 hospital bill? The patient who faces that bill has two responsible choices:

  1. Pay the hospital directly, which requires $6,000 cash either immediately or over time. The total cost to the patient might be reduced if the patient can deduct a portion of it on her personal income tax return. For example, if she earns $40,000, she can claim a federal income tax deduction worth $360 (assuming an 18% marginal federal income tax rate on $2,000). She must pay $5,640 in after-tax dollars to satisfy the obligation.
  1. Rather than pay the hospital directly, deposit the money in an HSA and pay the hospital from the HSA. Under this option, she reduces her net cost by about $1,100 via the HSA tax deduction. She effectively must pay about $4,900 rather than $6,000. And if she’s working and contributes to her HSA through pre-tax payroll, she can save another $450. Thus, she can pay her $6,000 bill with about $4,450 of net income.

The difference – about $1,550 – is attributable solely to the HSA. Now, $1,550 may not mean much to a member of Congress or a corporate vice president. By contrast, that  same amount of money may mean a heated home for a former mine worker who’s now a convenience-store clerk . . . or Christmas for a single-mother nurse with two school-age children. . . or tuition to a summer academic enrichment program at a local college for a smart student from a low-income family living within a mediocre urban school district.

In other words, the tax savings associated with HSAs can make a meaningful impact on the lives or ordinary Americans. And those impact simply aren’t reflected in surveys that document average account balances or annual growth in balances.

HSAs and health care reform

HSAs are a key component in Republican efforts to replace parts of the Affordable Care Act (ACA). Republicans want patients to have more control over their medical costs. They view HSAs as a key component of this strategy because HSAs empower patients to make cost-effective decisions and, in effect, deposit their savings into an HSA for future use.

And the recently-passed American Health Care Act (AHCA) includes provisions that make HSAs friendlier for more people. The two most important changes are:

  • Increasing contribution limits up to statutory out-of-pocket maximums, which nearly doubles total contributions. This provision is especially important for individuals who face out-of-pocket costs greater than today’s contribution limits.
  • Allowing HSA owners to reimburse over-the-counter drugs and medicine tax-free from an HSA. This provision restores the tax treatment to what it was before the ACA imposed a tax increase on middle-class Americans. This provision is important because it provides additional financial incentive for individuals to self-treat and self-medicate for simple conditions (like headaches, seasonal allergies, colds and simple abrasions) rather than seek more expensive medical treatment.

And thus far, the health-care reform debate has centered on issues other than HSAs – topics like Medicaid funding, treatment of pre-existing conditions, Cost-Sharing Reduction subsidies and advance premium tax credits.

The true value of HSAs

When you reflect on the value of HSA, it’s important to see them for what they are.

For those who don’t have the means to save substantial sums for the future, HSAs are a discount card for individuals to whom tax relief on medical bills is meaningful.

HSAs represent an opportunity for individuals to accumulate unused balances to cover next year’s medical costs.

And HSAs create an opportunity for owners to consciously accumulate balances and forego immediate tax savings (not making tax-free distributions for current expenses) to build medical equity.

Different users, different income profiles – different benefits. The common elements: All benefit from HSAs, and surveys typically don’t measure the benefits that some owners receive.

What we’re reading

Employers increasingly are realizing the importance of helping employees with their financial literacy and planning. Finances (student debt, caring for elderly parents, retirement planning, managing personal finances) are a source of considerable stress to employees, and that stress manifests itself in higher medical claims, absenteeism and presenteeism (lower productivity while remaining “on the clock”). You can find a great summary article from Healthcare Trends Institute here,  along with the link to the report it summarizes. (By the way, if you haven’t subscribed to the HTI blog, you’re missing exposure to two or three really good ideas weekly.)

Are you confused by specific provisions of the AHCA and how they compare to current law (ACA)? Here’s a great tool to give you a side-by-side comparison of the two plans. It even gives you the opportunity to line up one of the other reform proposals that has floated around Capitol Hill for additional comparison.

We’ve pointed you many times to commentary by Bob Laszewski, a DC policy insider. See what he has to say about the state of ACA exchanges now, as a dwindling number of participating insurers drive up rates and CEOs are told bluntly by their boards of directors that they won’t tolerate continuing losses in the public marketplaces.

What Hath Congress Wrought?

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“[T]he ACA is collapsing. Congress must do something. ‘Repeal and replace’ the ACA isn’t a political option. The question is whether the Republicans can tinker at the edges of the ACA (as they’ve done with the AHCA) or a bipartisan coalition plays the role of grown-ups and crafts temporary or permanent reform so that markets don’t collapse.”

Late last week, the IRS increased HSA contributions limits and raised the minimum deductible and maximum out-of-pocket on HSA-qualified plans. Read more here

William G. (Bill) Stuart

Director of Strategy and Compliance

May 11, 2017

Now what?

As you know, by the narrowest of margins (they needed 216 of 431 votes), Republicans in the House of Representatives approved the American Health Care Act (AHCA) as amended by a 217-213 vote last Thursday. As was the case with the passage of the Affordable Care Act (ACA)of 2010, not a single member of the minority party (then Republicans, now Democrats) voted for the measure.

Since passage of the ACA, Republicans have made it their mission to repeal and replace the ACA. From that day (March 23, 2010) to today, they haven’t been in the political position to repeal the law. Instead, they have attempted since winning the presidency in November, giving them unified control of the legislative and executive branches of the federal government, to make as substantive changes as possible within the confines of the reconciliation process.

Summarizing the AHCA

It’s not possible to do justice to every aspect of the AHCA in a single column. Here are some of its major provisions:

  • Benefits: Rather than enforce a single national standard of benefits, the AHCA allows states to petition the federal government for waivers that meet certain coverage requirements if they can demonstrate that the changes decrease premiums. In other words, a state might want to offer  to priests or older couples some plan options that exclude mandatory maternity care.
  • Taxes: The AHCA eliminates ACA taxes, including the Health Insurance Tax (estimated to cost the average family about $500), taxes on people who can’t afford coverage, taxes on medical-device companies’ gross income, taxes on certain investors and home-sellers and indoor tanning booth taxes. it also delays the Cadillac Tax, currently set to apply in 2020, to 2026.
  • Premium subsidies: Subsidies are based on age, rather than income. This structure will prove less generous to individuals who receive heavy subsidies now based on low income. On the other hand, the change may make insurance more affordable for the 30 million Americans who remain uninsured in Year 4 of full ACA implementation and the millions who lost coverage as a result of the ACA.
  • Medicaid: Medicaid, the coverage option for mostly poor and elderly Americans, is an open-ended check. The federal government pays more than half the cost of care, with the states’ picking up the balance. The incentive is for states to offer $1 more of coverage, since it costs the state 40 to 45 cents. Under the AHCA, the federal government would put Medicaid on a fixed budget, send block grants to states and allow states to design programs tailored to their populations.
  • Pre-existing conditions: The AHCA would bar insurers from denying coverage to individuals with pre-existing coverage. Those with pre-existing conditions who have a break in coverage could be charged higher premiums (the approach that Medicare takes for anyone who enrolls without continuous coverage) if the state applied for a waiver and demonstrated that the result would be lower premiums for other buyers. States could opt into a behind-the-scenes reinsurance plan  that assumes responsibility for the claims above a certain figure incurred by the sickest individuals covered. This plan is modeled on a program that the State of Maine operated before the ACA made it illegal. As a result of this transfer of risk, premiums in all age groups declined in Maine.

A note on pre-existing conditions: This has been perhaps the most emotional criticism of the AHCA. If you purchase insurance through your employer, you can’t be denied coverage or charged more due to a pre-existing condition. This has been federal law for more than two decades (you’ve heard of HIPAA?) and hasn’t been challenged since. If you’re covered through Medicare, you can’t be denied coverage or charged more due to a pre-existing condition. If you don’t have a gap in coverage, you can purchase insurance on the individual market and the insurer can’t deny coverage or charge you a higher fee.

If, on the other hand, you have a pre-existing condition, don’t have coverage and suddenly apply, insurers can take your pre-existing condition into account. In many cases, individuals in this situation don’t want insurance (which is protection against an unknown risk). Instead, they’ve received a diagnosis or treatment plan and are searching for a third party to assume a known financial responsibility. These are the people who jump on and off ACA coverage, raising the premiums of responsible insurance purchasers.

The current landscape

Your opinion of the AHCA most likely reflects your political identification and philosophy. If you believe that government regulation makes an imperfect market like medical coverage run more smoothly and fairly, or that “we’re all in this together,” you prefer the approach of the ACA.

On the other hand, if you believe that individuals, private companies and states should have more say in how medical coverage markets operate, and that federal bureaucrats should have less, you likely favor the AHCA, although a number of ACA critics have lined up against the AHCA with rationales like this.

Regardless of your position, we need to understand that our choices aren’t a stable current system or a switch to a new approach. The current system is anything but stable. In 2017, residents in about one-third of the nation’s roughly 3,000 counties have a choice of only one insurer in the individual market. If that figure remains somewhat stable in 2018, it’ll be only because the number of counties shrinking from two insurers to one keeps pace with the number that will have zero coverage options.

That’s right. Already, we know that 18 counties in Tennessee will have no insurers participating unless something dramatic happens in the next few months.  By the end of this summer, this situation might be the new normal in many counties across many states as insurers who have lost money for four consecutive years pull back to stop the financial bleeding.

The ACA extended coverage to about 20 million Americans through either private coverage (about five of every six enrollees receives a premium subsidy) or Medicaid, with about an even split between programs. These figures fall far short of the expected 24 million in private insurance alone. With only about 20 million of the 50 million uninsured covered, the market isn’t “stable” (doesn’t represent the population as a whole). When insurance market participation falls below 75% and regulations result in overcharging young people to subsidize older people, as the ACA does, those enrolled tend to be poorer, sicker and older than the population as a whole. Insurers can’t enroll enough young people to pay premiums to offset older enrollees’ claims. And after four years, many will stop trying after 2017.

Individual policies sold under the ACA are far different from those offered prior to 2014. The new plans have smaller networks and higher cost-sharing. Why? Since insurers can’t price for risk, they discourage higher claimants from enrolling by crafting networks without major academic centers and their affiliated physicians, often the targets of sicker patients. And cost-sharing has increased to meet federally prescribed value targets and, again, to discourage sicker patients from enrolling.

To complicate these issues, the ACA as written requires Cost-Sharing Reduction subsidies  for poor enrollees. This program helps those with lower incomes pay their deductibles and co-insurance on certain individual policies. The law doesn’t make this program an entitlement (automatic funding without congressional appropriation), Congress hasn’t funded it and the House of Representatives won a lawsuit (on appeal) against President Obama for paying the subsidies without congressional approval. If President Trump stops payments, insurers become responsible for absorbing those costs (estimated at $7 billion annually), which will hasten their retreat from these markets.

In summary, the ACA is collapsing. Congress must do something. “Repeal and replace” the ACA isn’t a political option. The question is whether the Republicans can tinker at the edges of the ACA (as they’ve done with the AHCA) or a bipartisan coalition plays the role of grown-ups and crafts temporary or permanent reform so that markets don’t collapse.

The broader context of the AHCA

Proponents of the AHCA make an important claim that typically isn’t considered in the ongoing reform discussion. They point to the AHCA as a trillion-dollar tax cut (over 10 years). Indeed, the bill eliminates taxes on insurers (who pass them along to employers in the form of a premium increase of $500 for the average family), medical-device manufacturers, people who can’t afford individual insurance, low-margin companies that can’t afford to pay current wages and offer medical insurance, some investors, some home sellers, tanning-salon customers and others.

A tax cut of this magnitude, they argue, will indirectly increase coverage by unleashing new economic activity, which in turn will increase employment. And since a growing economy increases the demand for employees, more individuals – whether they buy individual insurance, are enrolled in Medicaid or have no coverage – will enroll in group coverage. History will judge this argument if the AHCA becomes the law of the land.

Next legislative steps

Senate Republicans have made it clear that they consider the AHCA a first-draft of healthcare reform legislation. They’re likely to adopt a  different approach.

Let’s do the math. Republicans control 52 seats (plus the senate presidency in case of a tie vote). They can’t afford more than two defectors to pass a reform bill.

Some Republicans are skeptical of a bill that rolls back the Medicaid expansion. That list  starts with Sens. Portman of Ohio, Capito of West Virginia, Murkowski of Alaska and Gardner of Colorado, who’ve put their positions in writing.

Sen. Paul of Kentucky has opposed all reform efforts as “ObamaCare Lite” because they don’t remove the shackles from the system and move delivery of medical care into a consumer-driven market, as cosmetic surgery is. Sens. Cruz of Texas and Lee of Utah are inclined to take the same approach. Locally, Sen. Collins of Maine , who co-sponsored a reform bill offered by Sen. Bill Cassidy, a physician from Louisiana, won’t be an easy sell. And Sen. Tom Cotton of Arkansas came back to Capitol Hill spooked by what he heard during his town meetings this winter as AHCA details began to emerge.

Thus, the reform bill that passes the Senate – if one does – will look different from the House version, though under the reconciliation process, it can’t look too different. And the bill may look different before senators begin to deliberate seriously, as some of the House provisions may not survive the Senate parliamentarian’s Byrd Bath.

If the Senate passes a bill, then what? The leaders of each party in the Senate and House form a small committee to work out the differences and create an identical bill presented to each chamber. If the bill passes, it goes to President Trump for his certain signature. If it doesn’t – and it’s going to be very difficult to find enough common ground to thread the narrow window of a one-vote victory in the House and a Senate in which no more than two Republicans can defect – the ACA remains intact and the law of the land. Republicans may not have another shot at altering the ACA through the reconciliation process in the 115th Congress (or  until January 2019 in the non-DC calendar).


Republicans hope to pass a reform bill before the congressional summer recess. That timetable gives them less than three months to achieve their goal. Best case, the vote will be in late July – well after insurers must file their intentions to continue to offer coverage in individual markets in 2018.

If a reform bill passes, insurers must scramble to adjust their premiums and finalize their 2018 county-by-county participation plans. If the reform bill fails and the ACA remains the law of the land, Congress will have a busy post-recess session devoted to some level of bipartisan reform to attract insurers to state and county individual insurance markets in 2018.

In other words, whether some version of the AHCA passes or fails in Congress, individual insurance markets will look far different in 2018. And those differences are likely to be made on the fly.

Our nonpartisan approach

I spent time this winter speaking with congressional representatives of both parties and many states about reform as a representative of the American Bankers Association HSA Council, the National Association of Health Underwriters and the Employers Council on Flexible Compensation. All three organizations are nonpartisan, and none took a position on the ACA or the AHCA. Instead, we spoke with members of Congress and their staff members about certain principles that we wanted to see upheld and certain changes to the law that we advocated on behalf of consumers. The AHCA as passed by the House reflects our goals (the three organizations had both unique and overlapping goals) in these specific areas:

  • Maintain the employer exclusion that allows employers to offer tax-free benefits to employees. We didn’t want to tinker with the largest medical-insurance market, which is working, to try to stabilize the one that wasn’t (individual).
  • Increases HSA contributions limits to the out-of-pocket maximum to help families with very high medical costs . The current limits (up to about half the statutory out-of-pocket maximum) were adequate in the pre-ACA world, but now individuals are exposed to much higher financial responsibility.
  • Allows for the reimbursement of over-the-counter drugs and medicine without a prescription through HSAs and Health FSAs. This provision saves system costs by giving a tax incentive to self-medicate for common conditions rather than run to the doctor.
  • Permits a spouse who becomes eligible to make a $1,000 HSA catch-up contribution at age 55 to contribute the money into a spouse’s existing HSA rather than opening a second account in the family. This provision saves the family money and encourages additional savings.
  • Gives new HSA owners some flexibility in establishing their HSAs. In many states, the HSA isn’t “established,” and thus expenses aren’t eligible for tax-free reimbursement, until the initial funding of the account. The new provision accommodates administrative delays and payroll cycles by allowing individuals to go back as many as 60 days (or to the date that they become HSA-eligible, whichever is later) to reimburse eligible expenses tax-free.
  • Reduces the additional tax (penalty) from 20% back to 10% for withdrawals from an HSA for noneligible expenses.

What we’re reading

Healthcare expert Grace-Marie Turner is bullish on the AHCA. I expressed my concerns to her in a meeting in Washington, DC, in early March. She remained enthusiastic about this approach to reform. Read her rationale here.

Josh Archambault, health policy analyst at the Pioneer Institute in Boston, discusses the political differences between the House and Senate the substance of the AHCA here.

Avik Roy, the Forbes health policy writer, writes that Republicans will pay a steep political price if the Senate doesn’t make changes to AHCA. He says the GOP got it right on regulatory reform, but not on premium subsidies and Medicaid.


The “Other ACA Subsidies” Take Center Stage

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Capitol 2

Want to learn more about the rules around HSA eligibility, contributions and distributions? Check out the 2017 edition of our popular Health Savings Account GPS booklet. It’s bullet-point format helps you find the information that you’re looking for quickly.

“Because of the wording of the text of the ACA, it’s ambiguous as to whether CSR subsidies are an entitlement or a budget item that requires annual funding. The Obama administration requested funding in budget requests, which signals that the administration believed that the subsidies weren’t an entitlement and had to be a line item in the federal budget approved by Congress.”

By William G. (Bill) Stuart

Director of Strategy and Compliance

April 27, 2017

They remain one of the most misunderstood and confusing aspects of the Affordable Care Act. I’ve heard “experts” (including an attorney speaking to an industry group composed of potential clients) discuss key features of the ACA and completely misrepresent them.

They’re called Cost-Sharing Reduction subsidies, and they represent the “other” subsidies in the ACA. By the time you read this piece, you likely will have heard multiple references to this program, which is at the forefront of the latest GOP attempt to enact health care reform. To President Trump, they are the item that he can hold hostage to bring members of both parties to the bargaining table. To insurers making plans for 2018 participation in the individual markets, a future without them makes the economics of participating in the market even less appealing than three years of documented losses have.

Let’s review. The primary goal of the ACA was to expand affordable medical coverage to more Americans. In drafting the law, Democrats created two important taxpayer-funded subsidies – one well known and the other largely hidden in the shadows until now:

Advance Premium Tax Credits. Often referred to as premium subsidies, these subsidies are available to all Americans with incomes below 400% of the federal poverty level (a figure approaching $100,000 for a family of four). The text of the ACA provides that these individuals can apply these credits only to medical insurance plans that they purchase on public marketplaces (exchanges) established by states. The Obama administration promptly allowed eligible individuals to apply the credits to products purchases on state- or federally-facilitated exchanges. In the case of King v. Burwell, the Supreme Court decided in June 2015 that the credits could be purchased on any public exchange, regardless of whether the state (16 states plus the District of Columbia) or federal (34 states) government operated the exchange.

These credits are an important feature of the law. In 2017, about 83% of all individuals who enroll in coverage through public marketplaces receive some level of premium subsidy. Without these tax credits, few would be able to afford insurance. In that scenario, states’ nongroup markets would collapse overnight and provider systems would be overwhelmed with picking up the cost of uncompensated acute care as patients with no coverage seek services through hospital emergency rooms.

Since the Court’s ruling, no one has challenged the existence or legality of these credits. As the ACA is written, these credits are an entitlement. That status is important because the money is automatically available (like Social Security, traditional Medicare and Medicaid – the nation’s three largest entitlement programs). Because these credits are funded outside the federal budget process, Congress can’t threaten to cut or eliminate the credits as a means of weakening the ACA or forcing members to the bargaining table to repeal or reform the ACA.

Cost-Sharing Reduction subsidies. These subsidies are designed to help individuals with incomes at or below 250% of the federal poverty level who face high out-of-pocket costs on plans that they purchase through a public marketplace. These subsidies cover a portion of deductible and other out-of-pocket costs that patients incur when they access care through plans purchased in the public marketplaces. They are available only on Silver plans.

These subsidies reduce the actuarial value of the medical insurance. Actuarial value (AV) is a term used to describe the percentage of claims that are paid by an insurance plan after patients pay their out-of-pocket expenses. For example, Silver plans have an actuarial value of 70 (the actual range can be between 68 and 72), which means that a Silver plan pays, on average, 70% of the total cost of care in a given year. The patient is responsible for the remaining 30% (average) through out-of-pocket costs like deductibles, coinsurance and copays.

The CSR subsidies reduce the amount of the deductible or out-of-pocket maximum for which the patient is responsible. The amount of reduction is based on income ranges. The net effect of the CSR is that a family choosing a family plan (AV of about 70) may end up with a plan with an actuarial value of 80% to 90%. For the family, the subsidies shift the financial burden from them to someone else (currently taxpayers, but the burden may shift, as you’ll see).

These subsidies are paid directly to insurers who have sold policies to individuals who qualify for the subsidies because they are enrolled in coverage through a public marketplace and their income is less than 250% of the federal poverty level (FPL). IN 2017, the 250% figure includes individuals with incomes below $30,150, two-person families below $40,600 and four-person families below $61,500.

Legal issues

Because of the wording of the text of the ACA, it’s ambiguous as to whether CSR subsidies are an entitlement or a budget item that requires annual funding. The Obama administration requested funding in budget requests, which signals that the administration believed that the subsidies weren’t an entitlement and had to be a line item in the federal budget approved by Congress. When the Republican-led House of Representatives didn’t fund the request, President Obama paid the subsidies anyway using other funds appropriated by Congress for different purposes.

The Republicans sued the president in federal district court and won the case in May 2016. The presiding judge put her decision on hold, which meant that the administration could continue to pay the subsidies pending the outcome of an appeal. The Obama administration immediately appealed to the US Circuit Court of Appeals. The circuit court didn’t hear the case before President Obama left office, leaving the Republican (Trump) administration as the party appealing a decision in favor of a Republican Congress.

And although the president hasn’t committed to a position, his attorney general, the nation’s highest law-enforcement official, offered the opinion last week that the payments are unconstitutional. And Tom Price, MD, the secretary of health and human services, issued a statement supporting the district court decision last year while a member of Congress.

Playing politics

The ACA is the first major legislation in history passed by Congress without a single vote from the minority party. Like the Supreme Court’s 1973 decision legalizing voluntary abortion, it has polarized people of different political parties and philosophies who believe that a partisan solution had been forced on them. As is often the case when the population is nearly evenly divided on an issue, those holding the position that lost turn to the courts or the federal legislative or budget process an in attempt to regain ground or negate the earlier decision. And that’s precisely what’s happened with the ACA.

Now, President Trump threatened to use CSR subsidies as leverage to bring Democrats to the table to replace parts of the ACA through the reconciliation process,though earlier this week he switched gears and offered it as a tit-for-tat to secure a border wall.

Republicans weren’t able to unite their conservative and moderate wings to partially repeal and replace key provisions of the ACA with the American Health Care Act through the budget reconciliation process. Remember, reconciliation  only a majority vote (not the usual 60-vote threshold)  in the Senate. If Republicans can pick up some support for their reform bill – still a political long shot – they stand a better chance of passing the legislation even with some dissent within their ranks.

Here’s why this leverage is so effective: If the CSR subsidy program remains law, the subsidies must be extended to individuals who purchase Silver plans and qualify for CSR subsidies. If the federal government doesn’t pay insurers to reimburse the subsidies, the insurers themselves must absorb the premiums. It’s estimated that insurers received $7 billion in CSR subsidies in 2016. If they had to assume this responsibility, the cost would dwarf the annual losses that they experienced participating in the public marketplaces. And those non-CSR subsidy losses have already driven most large insurers to curtail dramatically their participation in the public marketplaces.

The remaining insurers offering plans in the public marketplaces are likely to end their participation and withdraw their products . . . unless  state insurance regulators approve Silver plan premium increases (by an , according to Kaiser Family Foundation) to cover the cost of the CSRs. Since federal taxpayers subsidize premiums through the advance premium tax credits based on enrollees’ incomes, increasing premiums would raise the cost to the federal treasury of the primary ACA subsidy, the advance premium tax credits. And remember, these subsidies are an open-ended entitlement that Congress can’t change through the annual appropriation process.


It’s important for readers to take away these key points:

  1. The advance premium tax credits (premium subsidies) that are applied to the cost of premiums for individuals who earn 400% or less of the federal poverty limit are not at risk in this court case. Those subsidies continue as long as the ACA is in place because the clear language of the law classifies them as an entitlement outside the reach of the congressional budget process and the Supreme Court has validated that these subsidies are available to individuals enrolled in state- or federally-facilitated public marketplaces. The American Health Care Act also featured such subsidies, though it used a different formula that would change the eligibility criteria from income alone to a combination of age (primary component) and income.
  1. The subsidies that reduce the out-of-pocket financial responsibility for individuals who incur high medical costs are at risk in this case. If the district court decisions stands (either because Congress wins on appeal or the Trump administration doesn’t defend the Obama administration’s position before the federal courts), Congress can (curtail or eliminate those subsidies through the budget process.
  1. Eliminating the Cost-Share Reduction subsidies will have a cascading effect in the public marketplaces. Fewer insurers are likely to assume financial responsibility for the reduced patient cost-sharing and state regulators aren’t willing to grant insurers large premium increases to pay for these subsidies themselves.
  1. More broadly, Congress is finding it incredibly difficult to find a middle ground among those who want a heavily subsidized program with uniform national standards (Democrats), those want a heavily subsidized program with more power to states to meet their specific needs (most Republicans) and those who want to take a radically different approach from the past two or three generations and create a free market for medical insurance (free-market Republicans). The “most Republicans” coalition doesn’t have the votes to pass reform. It must attract some votes from one of the other two groups. And that’s proving to be very, very difficult.

What we’re reading

Another aspect of stabilizing individual insurance markets is to reduce the number of individuals who don’t want to purchase insurance until they are about to incur claims and only then apply for coverage. Officials are supposed to verify eligibility for an individual special enrollment period, but compliance has been lax. The Trump administration recently introduced new rules to tighten enrollment outside the annual open enrollment period.

 It’s not too early to begin to speculate on the individual insurance markets in 2018, as insurers begin to submit proposals and file preliminary rates for participation next year. Don’t read a lot into how many insurers are applying to offer coverage in a particular state or county, as many are covering all bases and will re-evaluate their participation and premiums as they evaluate final 2016 and early 2017 utilization and see how Congress and the administration have altered the dynamic of the market. The actuarial firm Oliver Wyman gives us some early hints of things to come.

Hatching a Better HSA

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Sen. Hatch, left, and Rep. Paulsen

During the past three years, we’ve seen a dramatic change, as a growing number of plans impose coinsurance after the deductible. This change increases members’ potential financial responsibility to as much as $6,550 for self-only coverage and $13,100 for family coverage – figures far above the $3,400 (self-only) and $6,750 (family) HSA contribution limits.

William G. (Bill) Stuart

Director of Strategy and Compliance

April 13, 2017

US Sen. Orrin Hatch (R-UT) has been one of health care consumerism’s greatest friends on Capitol Hill for more than a decade. In February, Hatch introduced a bill, S403, cosponsored by Sen. Marco Rubio (R-FL) to strengthen Health Savings Accounts. US Rep. Erik Paulsen (R-MN) introduced the same legislation, HR1175, in the House of Representatives. Hatch and Paulsen have introduced similar legislation previously.

Some of these provisions were incorporated into the American Health Care Act (AHCA), the ACA-replacement bill that failed to pass in late March. Look for them to to appear again if Republicans can pass that bill or again later this summer when Congress debates tax reform.

Here are the highlights of some provisions in the legislation:

Increase HSA contribution limits to the medical plan’s out-of-pocket maximum. When HSAs were introduced 13 years ago, most plans had a deductible of $2,000 or less for individual coverage and then limited cost-sharing (perhaps copays for prescription drugs and office visits) or in-network services. During the past three years, we’ve seen a dramatic change, as deductibles have soared (up to an average of $3,117 and $6,480 for self-only and family coverage for silver plans and $5,731 and $11,601 on bronze plans on public exchanges) and a growing number of plans impose coinsurance after the deductible. This change increases members’ potential financial responsibility to as much as $6,550 for self-only coverage and $13,100 for family coverage – figures far above the $3,400 (self-only) and $6,750 (family) HSA contribution limits.

The Hatch bill recognizes this dramatic increase in financial responsibility and helps patients manage those costs by allowing individuals to contribute up to the out-of-pocket maximum.

The downside to this provision is that the Congressional Budget Office (CBO) “scores” all legislation by determining the impact on the federal budget. This provision doesn’t score well. In the past, when determining the impact of lost tax revenue due to HSA contributions, CBO has assumed that every HSA owner contributes to the maximum allowed under the law (even though fewer than 5% of account owners actually contribute to the current statutory maximum). Thus, CBO is likely to dramatically overestimate the financial impact of this change.

Clarify preventive prescription drug coverage under HSA-qualified medical plans. A leading obstacle to enrollment in HSA-qualified plans is the requirement that treatment for chronic conditions, particularly prescription drugs, is subject to the deductible. Some insurers have created preventive prescription drug riders, although the IRS has given only informal and nonbinding guidance on what constitutes a preventive prescription drug.

Under this provision, “prescription and over-the-counter drugs and medicines which have the primary purpose of preventing the onset of, further deterioration from, or complications associated with chronic conditions, illnesses or diseases” can be covered outside the deductible (either covered in full or subject to partial cost-sharing, such as copays or coinsurance).

This provision could have a major impact on HSA adoption by codifying a broad definition of preventive prescriptions. It liberates small employers who fear moving to a total replacement strategy with an HSA-qualified plan because of concerns about one employee’s or an employee’s dependent’s chronic condition. It may prompt more employees with chronic conditions to opt to enroll in an HSA-qualified plan. In both cases, we would see greater enrollment in lower-premium plans in which individuals are incented to become more astute consumers of medical services. That sounds like a win-win.

While the overall effect on medical costs probably is positive (patients spending their own money will do so more prudently than they spend their employer’s/insurer’s funds) this provision will score negatively in the CBO calculation because more enrollment in HSA-qualified plans means more reductions in taxable income.

Classify over-the-counter drugs and medicine as eligible expenses without requiring a prescription. This provision, which applies to both HSAs and Health FSAs, returns the law to the pre-ACA and enjoys broad support among politicians, participants and providers. And it makes sense, since self-medication for simple ailments like sore throats, headaches, minor muscle and joint injuries, seasonal allergies and minor gastrointestinal conditions saves billions of dollars annually in physician visits and helps to reduce the impact of primary care shortages in many areas. Sensible self-medication saves money by reducing patients’ accessing care from a medical professional.

It scores negatively with CBO, however, because it encourages additional pre-tax HSA contributions and Health FSA elections to cover these items.

 Allow individuals enrolled in Medicare Part A to remain HSA-eligible. Too many Americans who remain employed at age 65 and covered on their employers’ HSA-qualified group medical insurance don’t understand that enrolling in Medicare Part A makes them ineligible to continue to contribute to an HSA. They see a benefit (additional coverage) with no premium attached (assuming that they’ve worked and paid federal payroll taxes for 40 quarters, or 10 years).

This provision makes sense because the Part A deductible is $1,316 per benefit period (a Medicare enrollee can have multiple benefit periods annually), a figure higher than the statutory minimum annual deductible for an HSA-qualified medical plan ($1,300 in 2017). In other words, if it were a commercial plan, Part A would be considered HSA-qualified coverage. And individuals covered by two or more medical plans are HSA-eligible as long as all plans are HSA-qualified.

This provision would have a positive impact on the federal budget. Today, individuals enrolled in employer-based HSA-qualified medical plans who enrolled in Part A disenrolled from the group plan if/when they realized that they weren’t HSA-eligible. If this provision becomes law, these individuals will remain enrolled on the group plan, which in many cases shifts responsibility for their claims from Medicare back to the group medical plan, thus saving Medicare money.

Allow employers to alter Health FSA plans mid-year to accommodate HSA eligibility. It’s not uncommon for employers to run their Health FSAs on the calendar year and renew their medical plans mid-year. This arrangement harms employees who want to enroll in an HSA-qualified medical plan and become HSA-eligible immediately. Their participation in the Health FSA makes them ineligible to open and contribute to an HSA during the Health FSA plan year (even if they exhaust their Health FSA election). Employers can’t make changes to their Health FSA program mid-year to accommodate just those employees who want to become HSA-eligible; any changes (like terminating the Health FSA altogether or limited eligible expenses) must apply to all participants.

The Hatch-Rubio-Paulsen bill allows employers to create a Limited-Purpose Health FSA (an HSA-compliant design that reimburses only dental and vision expenses) and move only those employees who want to become HSA-eligible into this more limited design. This provision gives employers a tool to deal with one of their knottiest problems transitioning employees into an HSA program.

Allow employees who receive basic care in an employer’s onsite clinic to remain HSA-eligible. Under current law, employees can receive care at a work-based clinic only if the care is minimal. This provision clarifies and expands that definition to include physicals and immunizations, over-the-counter drugs, treatment for work-related injuries, tests for infectious diseases, drug testing and monitoring of chronic conditions.

This provision makes onsite clinics more attractive. Imagine the benefits to an employer if it invests in a full-time clinic or part-time arrangement (a physician or  nurse practitioner once a week) who can administer routine physicals, monitor blood pressure and cholesterol in at-risk employees and test blood sugar and offer guidance to diabetics. Compliance. Convenience. Cost-effectiveness. This provision is a winner for employers and employees, at no cost to the federal treasury.

Extend bankruptcy protection to HSAs. HSAs don’t enjoy the same protection from creditors in bankruptcy proceedings as qualified retirement plans like IRAs. This provision would extend the qualified retirement plan protections to HSAs. It would have no budget impact.

Allow HSA owners to reimburse additional medical premiums tax-free from their HSAs. Under current law, the only non-Medicare premiums that can be reimbursed tax-free from an HSA are premiums for COBRA continuation or when the individual is receiving unemployment benefits. This provision would allow HSA owners to pay their group insurance premiums from an HSA (in cases in which the employer doesn’t provide for pre-tax premium contributions through a POP), pre-retirees to bridge the gap between group coverage (active or COBRA) to Medicare and the long-term unemployed to pay their premiums with pre-tax HSA distributions.

Members of the American Bankers Association HSA Council, on which I sit, oppose this provision. Their concerns:  First, this use of funds doesn’t promote consumerism. Second, this expansion of eligible premiums will exhaust HSA balances more quickly, leaving less for out-of-pocket expenses. Third, the necessary adjustment in contribution maximums to make this option feasible and still allow individuals to accumulate balances for out-of-pocket expenses would result in a large negative CBO score and give HSA critics ammunition to attack HSAs as simply instruments that allow the wealthy to avoid income taxes.

Expand the range of services eligible for tax-free distribution. The law proposes that the list of eligible expenses be expanded to include gym memberships, exercise equipment, health coaching and nutritional and dietary supplements. This provision is popular with those who wonder why the tax code rewards individuals for spending money to return their body to health but not to maintain general health.

The concern with this expansion of eligible expenses is that it increases the negative CBO score, creates additional gray areas in the law and invites confusion and abuse. Further, HSAs were designed to empower patients to make better decisions about treatment options. This provision is a concession to those who criticize the Internal Revenue Code for providing tax benefits for services related to illness but not maintaining general health. Their general argument – that the code discourages prevention relative to treatment – is legitimate, but turning that argument into law becomes problematic.

Will This Bill Become Law?

Ah, that’s the $64,000 question. Similar bills introduced by Sen. Hatch and Rep. Paulsen in the 1114th Congress weren’t enacted. The prospects in 2017 are much brighter due to Republican control of both chamber of Congress and the executive branch.

Here are four ways that this bill, or provisions within it, can become law:

Regular legislation. The bill as written likely would garner majority support in the House of Representatives, though CBO scoring might result in jettisoning some provisions that impact the federal budget in ways that members can’t manage with cuts to other programs or tax increases. The bill may require some adjustments to pass the Senate, where it needs 60 votes and Republicans control only 52 seats.

Many of the provisions enjoy broad support and could attract an additional eight Democrat votes – especially among some of the 10 Democrats up for re-election in states that President Trump won in the presidential election. Sens. Talent of Montana, Heitkamp of North Dakota, MCCaskill of Missouri, Donnelly of Indiana, Casey of Pennsylvania, Nelson of Florida and Manchin of West Virginia are potential supporters. The issue would be the price – what provisions are removed, what spending initiatives are added –that the bill’s proponents would have to pay to secure eight Democrat votes in the Senate.

Budget reconciliation on health care reform. This effort is on life-support, but not yet dead. Congress must pass a budget reconciliation bill by April 28 to extend federal spending authority. That bill, which requires only a majority vote in both chambers (not the 60-vote supermajority in the Senate), can include provisions that impact federal revenues, spending and debt. The House and Senate parliamentarians have final say on whether a provision impacts the budget. Republicans have included some of the Hatch-Rubio-Paulsen provisions into the AHCA, but many others aren’t directly related to the federal budget and thus can become law only through the standard legislative process.

Second budget reconciliation. Congress likely will consider a second budget reconciliation bill later in the summer thatfocuses on tax reform. Since HSAs are tied to federal tax law, many provisions of Hatch-Rubio-Paulsen could end up in that bill, which again requires only a majority vote in both chambers.

Administrative action. Other provisions in the bill may become law through administrative action by the Trump administration. For example, Section 213(d)  of the Internal Revenue Code (IRC), which allows a tax deduction for certain medical expenses, includes this rather vague language: “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. . .” There is no discrete list of eligible expenses contained within the Code. Instead, the IRS applies this broad definition to a variety of items and publishes Publication 502 annually. The IRS could incorporate some additional products and services into the list of HSA-eligible items without congressional approval.

A fifth avenue is a subset of regular legislation. Rep. Charles Boustany (R-LA) introduced a bill in the 114th Congress to allow HRAs to reimburse premiums for insurance purchased in the nongroup market. The bill passed the House in June 2016 but died in the Senate. During the lame-duck session of Congress following the 2016 election, the bill was incorporated into the 21st Century Cures Act that President Obama signed in December.

In a similar vein, if the Hatch-Rubio-Paulsen bill doesn’t become law in the whole, pieces that attract broad bipartisan support of it may be attached to other legislation during the 115th Congress through December 2018.

What we’re reading

What are the major trends in employee benefits in 2017? Here’s a sample, along with a link to listen to an hour-long podcast that provides additional detail.

How does the Affordable Care Act penalize young men and older women? John Graham provides the answer here.

Where does the public stand on the ACA? More divided than ever – with some very predictable patterns. See the latest survey here.


The Insurance Market Landscape Now

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Capitol at nite

Medicaid is on an unsustainable course, but Republicans were unwilling to accept the changes proposed under the AHCA.

By William G. (Bill) Stuart

Director of Strategy and Compliance

March 30, 2017

The equivalent of a major shift in seismic plates occurred last Thursday and Friday in the nation’s capital as the Republican medical insurance and market reform effort ended unexpectedly and abruptly.

What began in January as an opportunity for Republicans to do what they’ve promised to do for seven years – repeal the Affordable Care Act (ACA) – ended with Speaker of the House Paul Ryan’s delaying a vote and then scrapping the effort entirely when he and his leadership team couldn’t secure the support of enough Republicans to send the American Health Care Act (AHCA) to the Senate.

It was a stunning political defeat for the Republicans, who, though they couldn’t repeal the ACA outright, had the control of the House of Representatives, Senate and presidency necessary to make major changes in the government control over medical insurance products and markets.

Why did the AHCA fail?

This topic will be the source of expert analysis for months. For now, we can pinpoint a handful of areas that Republicans couldn’t get past to move the legislation through Congress to the president for signature:

Premium subsidies. The ACA bases premium subsidies on income. The AHCA initially tied subsidies to age because (a) premiums vary by age rather than income and (b) it’s much less complicated to verify age than income. Analysts reported that the shift would harm lower-income individuals, at which point the subsidies were altered to reflect age and income. It still fell short of the ACA subsidies for older lower-income individuals.

Medicaid. The ACA allowed states to expand Medicaid eligibility to include low-income adults who weren’t previously eligible. Thirty-one states expanded Medicaid, including 16 with Republican governors. The AHCA proposed changing the funding formula for Medicaid that could have provided less federal funding in the form of block grants, along with greater state freedom to customize their programs. Some Republicans, particularly senators like Rob Portman of Ohio, Lisa Murkowski of Alaska and Tom Cotton of Arkansas, were vocal in their opposition to a change that might decrease the number of individuals covered. Medicaid is on an unsustainable course, but Republicans were unwilling to accept the changes proposed under the AHCA.

Abortion. A handful of conservative Republicans objected to any direct or indirect funding of voluntary abortion. Not coincidentally, this was the last issue resolved before passage of the ACA. In 2010, a handful of Democrat House members withheld their support for the ACA until President Obama pledged to issue executive orders ensuring that taxpayer funds wouldn’t pay for voluntary abortions. He never did.

Political philosophy. Sen. Rand Paul, the limited-government advocate from Kentucky (and an ophthalmologist), labeled the AHCA “Obamacare Lite” and advocated for repeal with a replacement that shifted responsibility for medical insurance to buyers and sellers through a free economic market. A handful of Republicans in the House concurred and wouldn’t support an alternative to the ACA that codified a permanent entitlement program (premium subsidies) and government control over benefits offered, premiums, eligibility, reimbursement and other aspects of insurance.

Where are we now?

In one-third of the nation’s 3,100 counties (representing 21% of enrollees), only one insurer offers products in public marketplaces (also called public exchanges, though marketplaces is the preferred government term). That number is expected to rise precipitously in 2018. Further, the number of enrollees with a choice of three or more insurers dropped from 85% in 2016 to 57% this year and is expected to decline dramatically again in 2018.

Competition helps to mitigate premium increases and increase the range of products offered. In the marketplaces, in which benefits are highly regulated and plan actuarial values must fall within narrow actuarial value ranges, a key differentiator is size of networks. The more carriers that participate, the more likely it is that consumers have access to plans with broader networks.

And what of premiums? They increased an average of 25% in 2017. In many states, the increases topped 40%. That level of increase is clearly unsustainable. My representative in Congress, Bill Keating (D-MA), told me last month in a Capitol Hill meeting that he believed the 2017 premium increase reflected insurers’ finally understanding how to price products in this market and brought premiums up to a sustainable level. He believes that future increases will track closely to overall premium increases in the group insurance market.

Other observers believe that the public marketplaces have entered the “death spiral” – that phenomenon in which large premium increases deter healthier individuals from purchasing coverage, which leads to a sicker covered population, which leads to large premium increases, which deters healthier remaining individuals in the pool from purchasing insurance, which . . . Well, you get the picture.

The next time period to watch is an extended one – between now and June 21. That day represents the deadline for insurers participating in public marketplaces to submit their proposed premiums for 2018. We likely won’t have to wait that long. Here’s what we’ll be watching:

  • Which national insurers, many of whom curtailed their participation in 2017, will pull out of the market entirely or out of specific states in 2018?
  • How many counties will have no insurers or only one insurer participating in its marketplace? Officials in some states may need to scramble to find an insurer to offer coverage in some counties, while state regulators may be powerless to challenge proposed premium increases in counties served by a single insurer.
  • Which products will the remaining insurers offer? They have been curtailing PPO and full-network products for several years. Will that trend continue or abate in 2018? (Tip: Bet “continue.”)

Insurers’ commitment to the marketplaces

Here’s a quick rundown of the nation’s five largest insurers’ plans for individual marketplace participation in 2018:

Aetna has announced that it won’t be selling policies in the individual marketplace in 2018. The insurer scaled back dramatically in 2017, when its exit from 13 of 17 states marketplaces reduced its coverage in individual markets from 965,000 policies to about 240,000, of which 190,000 were sold through public marketplaces. Aetna has not ruled out participation in the market in the future, pending reform.

Anthem, an early champion of the ACA, has been waiting to see what actions Congress and President Trump would take before assessing its participation on these markets in 2018. Given Republicans’ failure to make any changes to the ACA, Anthem is likely to pull out of many or all markets to protect its shareholders from continuing losses.

Cigna adopted a wait-and-see attitude that it explained in a call with industry analysts in February. The company is confident that it’s honing in on the right product designs and mix to serve the market effectively and manage its financial exposure. At the same time, it has withheld any announcements pending legislative and regulatory changes this winter.

The Obama administration challenged a proposed Anthem-Cigna merger that the two companies said would help them (among other benefits) improve their financial performance in nongroup markets. With that merger on life support, either Anthem or Cigna (or both) can point to that action to scale back participation in or abandon altogether the nongroup market.

Humana announced in February that it would exit all markets. Humana lost a bid to merge with Aetna when the Obama administration challenged the proposed marriage in late 2016. Humana isn’t a major insurer in the public marketplaces with only 150,000 policyholders, all of whom will have to shop for other coverage. Shopping will be a problem for residents of 16 counties in Tennessee for whom Humana was the only option in 2017, including Knoxville, where it sold 40,000 policies. In other counties in Tennessee (including the Nashville and Memphis areas), as well as counties in Georgia and Mississippi, Humana is one of two participating insurers in 2017.

UnitedHealthcare, the nation’s largest private insurer, pulled out of public marketplaces in 31 of 34 states for 2017, operating in only New York, Virginia and Nevada. While the company’s CEO seemed optimistic in a call with industry analysts earlier this year about reform efforts to shore up the market, we now know that the legislative changes won’t be forthcoming and HHS’s administrative action might not be enough to make the marketplaces economically viable.

Specific state markets

In Benefit Strategies’ primary footprint, some states could see changes in 2018:

Massachusetts most likely will continue to feature a robust marketplace, since it doesn’t rely on national insurers. Participating insurers in 2017 – CeltiCare, Blue Cross and Blue Shield of Massachusetts, Boston Medical Center HealthNet, Fallon, Harvard Pilgrim, Health New England, Minuteman, Neighborhood and Tufts – are likely to continue their participation in 2018.

Connecticut lost two insurers for 2017 when UnitedHealthcare exited the market and HealthyCT went out of business. The only two remaining insurers are Anthem and ConnectiCare. ConnectiCare announced in September 2016 that it would not participate in 2017 after the state refused a premium increase, but the company later relented. Still, its status for 2018 must be labeled uncertain at best. It’s possible that neither ConnectiCare nor Anthem chooses to participate in 2018, leaving the state with no insurers.

Rhode Island has only two insurers, Blue Cross and Blue Shield and Neighborhood Health Plan of Rhode Island after UnitedHealthcare withdrew for 2017. The Rhode Island market actually experienced a slight premium decrease in 2017, fueled by Neighborhood. Both insurers are likely to participate again in 2018.

New Hampshire has four participating insurers: CeltiCare, Anthem, Harvard Pilgrim and Minuteman. It looks stable now, but the outlook could change if Anthem withdraws from the market nationally, small insurers CeltiCare and Minuteman aren’t able to continue operations or Harvard Pilgrim finds that it can’t continue to sustain losses in the segment.

Maine has more than 70% of its marketplace membership enrolled in Community Health Options, an ACA coop that has defied the odds to remain in business. As long as it remains viable, it will provide coverage. Anthem and Harvard Pilgrim also participate in 2017, though neither is guaranteed to remain in 2018.

What’s changed

The Republicans’ plan of attack on the ACA included both legislative changes, which failed, and regulatory changes. Regulations are issued by the executive branch (the president and his administration). The ACA was written by the Secretary of Health and Human Services, located within the executive branch, with broad authority to fill in portions of the law in which Congress provided little detail.

The Obama administration took advantage of this authority to issue regulations that supported its goals of providing as rich a benefit package as allowable under the ACA and maximizing coverage, with any impact on costs and insurers’ financial performance in the individual markets a secondary concern.

The Trump HHS, led by Tom Price, a physician and until February a member of Congress, issued proposed regulations that same month to help stabilize the individual market. Among those proposals:

  • Shortening the enrollment period, which lasted from Nov. 1 through Jan. 31 under Obama administration regulations. HHS proposes shortening this period to 45 days, ending Dec. 15, to focus enrollees on a single Jan. 1 enrollment date.
  • Verifying eligibility for all applicants who purchase coverage outside the open-enrollment period through a mid-year special-enrollment period. Critics of the lax enforcement under the Obama administration believe that too many individuals “gamed” the system by not purchasing coverage, then buying a policy when they faced expensive care.
  • Closing a loophole that allowed subscribers to purchase coverage, pay nine months’ of coverage, stop paying for the final three months of the year and then re-enrolling the following year. The proposed regulation ends the “buy nine, get three free” (a 25% discount) by requiring individuals to pay back premiums before enrolling in new coverage for the following year.

Next steps

It’s unlikely that we’ll see another Republican attempt at reform this year – or at all in the 115th Congress (through the end of 2018). That time frame may change if polls show a voter backlash against Republicans for not reforming the ACA. Typically, though, issues have one life per session (two-year period) of Congress. That life has ended for medical-insurance reform. Congress and the president will move to other issues – the 2018 federal budget, tax reform, trade, national security and other topics.

Republicans plan to introduce tax-reform legislation later this year. Tax-reform legislation typically is introduced in early fall. Expect Republicans to push this legislation following the Labor Day recess. Look for this legislation to repeal all ACA-related taxes that the AHCA repealed:

  • Health Insurance Tax  (excise tax expected to raise premiums by about $500 for the average family).
  • Medical Device Tax (a 2.3% excise tax on medical devices passed on to consumers and insurers).
  • Medicare Tax, (a 3.9% levy on capital gains and passive income earned by higher income taxpayers and the 10% tax on tanning facilities).

Look for the bill to repeal or delay the Cadillac Tax (40% excise tax on insurance costs – a figure that includes employee contributions to an HSA and elections to a Health FSA – above a certain level), which the AHCA delayed from 2020 to 2025.

In addition to repealing all the taxes above, which would have been eliminated with the AHCA, Republicans are likely to add additional medical-related tax reform that was included in AHCA, including:

  • Raising HSA contribution limits to the HSA-qualified medical plan statutory out-of-pocket maximum.
  • Allowing individuals to reimburse over-the-counter drugs from an HSA or Health FSA without a prescription.
  • Eliminating the inflation-adjusted ceiling on Health FSA contributions ($2,600 in 2017) and replacing it with either no limit (the pre-ACA law, when employers chose the upper limit) or the statutory out-of-pocket maximum for an ACA-qualified or HSA-qualified medical plan.

What we’re reading

Bob Laszewski, a health-policy expert in DC whose work we include in this section when it’s available, explains why President Trump needs to reach out to Democrats to make reform a reality.

What further steps can the Trump administration take to shape medical insurance markets? The Wall Street Journal explores his options.

With all the instability in the nongroup insurance market, employer-based insurance covers 177 million Americans. And a recent Lockton survey shows that Americans want to keep the employer-based insurance structure in place.

Zero Hour for Health Care Reform

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House Speaker Ryan introducing the American Health Care Act.

Republicans are in a position to line up as a firing squad and take direct aim at the ACA. Unfortunately for opponents of the existing law, the Republicans firing squad appears to be arranged as a circle.

By William G. (Bill) Stuart

Director of Strategy and Compliance

March 16, 2017

I spent much of last week in the nation’s capital during one of the most interesting weeks in American legislative history. We met with members of Congress and their staffs just hours after the House Ways and Means Committee marked up the first serious attempt ever to rein in a major federal entitlement program and replace it with a more workable solution.

Much work remains to be done in the next few weeks. There is much that we don’t know and won’t know immediately. Here’s what we do know:

Unsustainable. The Affordable Care Act, passed seven years ago this month, rearranged the nongroup (individual) and small-group medical insurance markets in ways that are simply unsustainable. Its elaborate carrots and sticks, subsidies flowing from one group of potential policy purchasers to another and overly prescriptive rules that resulted in policies that few want to buy have destroyed the nongroup market.

Residents of one-third of the counties in the country had to choose among policies offered by only one insurer in 2017. Within the next two months, as insurers finalize their plans for 2018, we’ll see more counties with either one or no insurer participating in the nongroup market. Without some reforms to the ACA, these residents will be left without insurance.

A unique entitlement. The ACA creates an entitlement like no other in the United States. Social Security, Medicare, Medicaid, SNAP (formerly Food Stamps), Section 8 (housing subsidies) and myriad other income-transfer programs involve the federal government’s taking income from one group of Americans and sending it to another group. If the amount sent is inadequate, Congress can simply allocate more money.

Under the ACA, by contrast, the federal government takes income from one group and gives it to another so that the recipients can purchase a product sold by private companies. When those private companies sustain collective losses exceeding 1 billion annually, they gradually retreat from the market. Without private insurance products in the nongroup market, the federal subsidies are worthless, and individuals can’t purchase coverage.

Thus, another year of the ACA (in other words ’Congress’ passing no reform bill during the next month) is not an option. There will be few meaningful nongroup geographic markets across the country in 2018.

No turning back. Moving back to a pre-ACA world is not an option. The ACA forever changed the nongroup market. One can wax nostalgic about the pre-ACA nongroup market or criticize its flaws. It’s not coming back. It’s not a fallback option. And there’s no turning back to even the 2016 nongroup market. As many insurers have abandoned unprofitable state markets, even going back two years isn’t an option.

What Republicans are proposing

The Republicans’ proposed solution should come as no surprise. Speaker of the House Paul Ryan and his colleagues laid out a blueprint for reform in June 2016 entitled A Better Way. The GOP proposed reform closely follows that blueprint. Here are the key elements:

Mandates. The individual mandate – the requirement that every American purchase insurance or face a fine – is abolished. This is welcome news for lower-income Americans who can’t afford to purchase insurance, even with taxpayer subsidies, or stretch their limited budgets to finance their portion of the insurance only to have no money remaining to pay hefty up-front out-of-pocket expenses. The proposed legislation also abolishes the ACA requirement that every large employer’s compensation package include group insurance.

 Taxes. It eliminates nearly every tax in the ACA, including the health insurance tax (which is projected to add $500 to the average family contract premium), the medical devices tax, the Medicare tax on investment income and the tax on indoor tanning services. It includes a fourth delay of the excise tax on high-cost health plans, the so-called Cadillac Tax, until 2025. The date of this delay may advance to, say, 2022, as the Congressional Budget Office determines the fiscal impact of the proposed legislation and lawmakers need to show more revenue to pay for the bill. If so, Congress is likely to delay the effective date of the levy again in the future.

Employer exclusion. In an important change that took place just before the bill was introduced in the House Ways and Means committee, the bill calls for a continuation of an uncapped employer exclusion. This provision is critically important for the 175 million Americans covered by insurance offered through an employer. It means that employees won’t be taxed on their employer’s contribution to premium (which often exceeds $20,000 for family coverage). Had the exclusion been capped, middle-class families could have seen their tax bills increase by $1,000 or more, depending on the cap value.

Continuation of subsidies. The Republican plan acknowledges the need for subsidies to help some Americans purchase insurance. The plan bases the subsidies on age (to reflect the fact that premiums are higher for older Americans) rather than income and delivers them in the form of an advanceable, refundable tax credit. Refundable means that individuals who qualify receive a check if the tax credit is greater than their federal income tax liability. Advanceable means that they receive the benefit immediately, as they do under the ACA, rather than paying for a year’s worth of premiums and then receiving a tax break.

This change from need-based to age-based eligibility criteria will impact who receives financial support to pay premiums. It’s not clear whether the change will increase or decrease the number of uninsured Americans who can afford coverage.

It’s important to note the difference between a tax deduction and a tax credit. For a taxpayer with family income of $30,000, a $3,000 tax deduction means that taxable income is reduced to $27,000, resulting in about $450 of tax savings. A tax credit reduces tax liability dollar-for-dollar, so a $3,000 tax credit puts the full $3,000 into the individual’s pocket.

Health care accounts. The HSA contribution limit nearly doubles to the statutory out-of-pocket maximum figure, beginning in 2018. This is great news for families facing the dramatically higher out-of-pocket responsibility that the ACA has brought in the nongroup and small-group markets. Health FSA limits (currently $2,600 per participant per program per year) go away beginning in 2018. And HSA owners and FSA participants can once again purchase over-the-counter drugs and medicine tax-free from an account with a prescription if the bill becomes law.

Premium ratios. Under the ACA, the highest premium charged can’t be more than three times the lowest premium. This provision represents a huge subsidy to older Americans, who, on average, incur five times or more the claims as the young. This provision will increase premiums for older Americans to a level approaching their utilization and reduce premiums for younger people who have shied away from purchasing insurance because the 3:1 ratio led to inflated premiums. This provision will help stabilize the nongroup market, while at the same time creating winners of the ACA losers (young people) and losers of the ACA winners (older people).

Popular ACA features retained. Many of the protests that Republican members of Congress confronted in voter forums in their districts in recent weeks focused on fear of the loss of popular elements of the ACA like coverage for pre-existing conditions and covering young adults until age 26 on a parent’s policy. The GOP bill retains these popular features, even though they are destructive to building a healthy nongroup market.

The Republican plan creates a one-time open enrollment during which any American can purchase coverage, regardless of pre-existing conditions. As long as the individual maintains continuous coverage, she can purchase insurance every year at the market premium. If she doesn’t maintain continuous coverage and applies for insurance again, she pays a 30% additional premium for one year (a solution adopted from Medicare, which has a lower penalty that continues for a lifetime).

Abortion. The GOP bill prohibits individuals from using tax credits to purchase a policy that includes elective abortion coverage. Those individuals can buy coverage for elective abortion through a separate policy that they purchase with personal funds. The bill also targets funding to Planned Parenthood, which is the leading provider of elective abortions in the country, by defining a narrow list of abortion providers – which includes Planned Parenthood, but not public and private hospitals – that perform elective abortions. This proposal is a major concession to political conservatives that is creating a firestorm.

State control. The bill gives states far more authority than the ACA. Metallic tiers, actuarial values and other prescriptive plan designs aren’t part of the Republican replacement proposal. Instead, states are given wide latitude in approving private insurance plans that meet the needs of that state’s population. Individual buyers can apply tax credits to any policy sold in their state under the proposed legislation, whereas ACA subsidies could be applied to only policies sold through public exchanges (which states have the option of keeping or dismantling under the new bill).

Medicaid. Here’s where the bill gets tricky. Medicaid is a program whose design is largely dictated by the federal government and is funded jointly by federal and state governments. The ACA expanded eligibility and provided 100% of the funds to cover enrollees under the expanded eligibility (vs. 50% to 60% federal funding of the rest of the program).

For decades, Republicans have wanted to alter Medicaid by giving states more control over the design of their program to assist children, the poor, the disabled, the elderly, the blind and pregnant women. Their goal is to fund the program via block grants (sending money directly to states rather than paying a percentage of the program) and let each state use the money to craft a program that meets its needs.

The Medicaid expansion was controversial when it was created. (Do you remember the “Cornhusker Kickback” and “Louisiana Purchase” – two controversial proposed bribes, later rescinded, that the Obama administration offered to Democrat members of Congress to approve the ACA in 2010?) As more states have adopted expansion, it becomes difficult to retreat. It’s an especially troubling proposition for Republican senators whose states expanded Medicaid and now face the prospect of voting for changes that bring an uncertain future to that coverage.

Republican strategy

Health care reform has an expiration date. Republicans don’t hold the 60 Senate seats necessary to pass legislation in the upper chamber through the standard legislative process. They must pass reform through the budget reconciliation process, which allows legislation germane to the federal budget (taxes, spending and debt) to pass with 51 Senate votes. The federal government’s spending authority expires April 28, which gives Republicans less than six weeks to attach health care reform to the budget reconciliation bill.

GOP leaders are trying to advance the legislation so that Congress passes the bill before it begins its Easter recess in early April. The standard joke in Washington is that the smell of jet fumes moves members of Congress to bring bills to a floor vote as elected officials succumb to their desire to return home for recess.

It’s especially important to pass this legislation before a recess because members of Congress will hear an earful from their constituents, as they did in February when they returned to their districts. At that time, ACA supporters crowded town halls with voters supporting the ACA and rejecting any attempts to reform the law. Protestors demanding preservation of the very aspects of the ACA that the Republican proposal protects – premium subsidies in some form, coverage for pre-existing conditions and allowing young adults to remain on a parent’s policy – was seemingly irrelevant to media outlets covering the meetings.

Republican leaders know that if their members are subjected to another round of protest, whether the concerns are legitimate or not, members will become more reluctant to pass the bill without changes that will take time, create new controversy and push the issue past the reconciliation window.

Can Republicans reform health care at some point in the future? Yes. Well, maybe. The window between now and April 28 (or earlier) represents the best opportunity to pass a bill. There will be other opportunities during the 115th Congress (through December 2018) to pass legislation through the reconciliation process.

At the same time, politicians have very little control over history as it is being written. Republican leaders are keenly aware that President George W. Bush’s top domestic priority in 2005, after his re-election months before, was to allow Americans to place a portion of their Social Security payroll taxes into accounts that they owned and could pass on to their designated heirs. It was a bold departure from the current system in which payroll taxes fund current recipients’ retirements and leave those paying taxes at the mercy of future Congresses to continue to offer benefits in the future.

Before Bush could advance his program, Hurricane Katrina hit the Gulf Coast, the federal government’s response to the storm was roundly criticized and the window of legislative opportunity closed for the president. Republican leaders fear that if they don’t pass health care reform now, while the topic is “hot” and both the president and Republican majority in the Senate appreciate that their opposition to the ACA is the issue most responsible for their being in positions of power today, they may not have another opportunity to do so.

Republican prospects

Republicans are fighting themselves on health care reform. Democrats are watching the process unfold with both concern for the future of their party’s signature domestic legislation during the Obama administration and, for lack of a better term, glee that Republicans are being assaulted politically as Democrats have been since they passed the ACA seven years ago.

Ever wonder what a dog would do if it ever caught the car that it was chasing? Look at the Republicans today. Since 2010, they’ve run on a platform to “repeal Obamacare.” That single applause line vaulted many Republicans into Congress and is credited with helping them retain control of the Senate in the 2016 election against all projections. They’ve quickly learned that it’s a lot easier being against something than it is offering an alternative comprehensive approach to an issue.

Many Democrats held their noses as they voted for the ACA in 2010. Many objected to certain provisions in the bill. They voted for the proposed legislation because they believed in the approach in general, individual members understood that they weren’t going to see a bill that met all their specific desires and they were confident that over time they could amend the legislation to improve it.

Republicans, by contrast, appear to be comfortable withholding their support for the bill over certain provisions that they don’t like, rather than viewing the proposed legislation as their leadership wants them to see it: as a first step in the process of fundamentally reforming health care coverage and financing.

At the end of the day, Republican leaders – President Trump, Senate majority leader Mitch McConnell, House speaker Paul Ryan – are likely to deliver a halftime-like speech in which they challenge their colleagues to consider the country’s (and their own) political future:

“You didn’t cast a vote for the ACA. You’ve actively campaigned against the ACA since its passage. You’ve promised voters that you’d repeal the law as soon as Republicans had the ability to do so. Most of you even voted for a total repeal bill that president Obama subsequently vetoed. Now, when you have a chance to reform substantial parts of the ACA, are you really going to let the law – the law that you’ve opposed for seven years – remain on the books because you don’t agree with every provision of the bill?”

It’s unclear whether this approach will bring the bill’s critics – the House Freedom Caucus; Sen. .Rand Paul, who calls the bill “Obamacare Lite”; Sens. Rob Portman and Lisa Murkowski, who are concerned about losing the Medicaid expansion in Ohio and Alaska and Sen. Tom Cotton, spooked by a staged town-hall meeting crowd that lambasted him for not supporting the ACA’s key reforms (which, coincidentally, are included in the replacement bill) – into the fold.

Republicans have targeted the ACA during the past four election cycles with spectacular political success. And now that they control both chambers of Congress and the presidency for the first time since the passage of the ACA, Republicans are in a position to line up as a firing squad and take direct aim at the ACA. Unfortunately for opponents of the existing law, the Republicans firing squad appears to be arranged as a circle.

What we’re reading

The nonpartisan Congressional Budget Office (CBO) “scores” all proposed legislation by estimating the impact on federal revenue, spending and the debt. What key financial impacts will the CBO measure? Learn more here.

There is no magic bullet to controlling medical costs. A better informed patient offers the hope of some monetary savings through treatment options better tailored to the individual patient’s priorities and preferences. Learn more here.

If you’re interested in learning more about how health care reform impacts Health Savings Accounts, watch this Webinar featuring two industry experts to appreciate the fundamental role that HSAs can play in financing medical services.


My Experiences on the Hill

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An employer isn’t going to continue a program that saves an employee between 22% and 38% in taxes if the employer has to pay a 40% excise tax on that money. For a family with a $2,600 Health FSA contribution, that means a tax increase of $600 to $900 annually.

By William G. (Bill) Stuart

Director of Strategy and Compliance

March 2, 2017

One aspect of my job that I value most is the opportunity to visit Capitol Hill to speak to members of Congress, their staffs and staff members of Senate and House committees responsible for health and insurance issues. I visited Washington, DC, twice in February to deliver messages from three different organizations with which I’m affiliated.

Here’s a report:

American Bankers Association HSA Council

The HSA Council is composed of about two dozen companies that administer HSAs, hold HSA assets and deliver software, debit card, reporting and servicing solutions to the industry. For more than a decade, lawmakers have counted on the HSA Council to provide statistics and guidance as they review changes to HSA rules.

The key messages that we delivered to members of Congress and staffers:

  • The Cadillac Tax represents a serious threat to HSAs and Health FSAs. By counting employer and employee contributions (Health FSA) and elections (HSA) toward the threshold at which the 40% excise tax kicks in, the tax will virtually eliminate Health FSAs and employer contributions to HSAs. The result: a tax hike to the middle class.
  • We favor increasing the annual limit to the medical plan’s out-of-pocket maximum, rather than greater of the statutory limit ($3,400 for self-only coverage and $6,750 for family coverage in 2017). Particularly in the nongroup and small-group markets since implementation of the ACA, post-deductible cost-sharing in the form of coinsurance has increased dramatically. Today’s statutory limits are far below the financial exposure that many families face. We don’t support legislation that allows unlimited HSA contributions (proposed by Sen. Rand Paul) or limits of $10,000/$20,000 or more, as these initiatives paint HSAs as tax havens for the wealthy rather than financial protection for middle-class Americans.
  • We want to increase the number of Americans enrolled in an HSA-qualified plan who want to open and contribute to an HSA but can’t. This group includes active and former military personnel enrolled in TRICARE (coverage that they can’t drop and pick up again later) or who have received certain care at a VA facility during the last three months, Native Americans who have received non-preventive care through the Indian Health Services during the past three months and workers over age 65 who enrolled in Medicare Part A and remain covered on an HSA-qualified plan. Changes in HSA eligibility rules can eliminate these roadblocks to opening and contributing to HSAs.
  • We don’t favor including individual insurance premiums (other than when collecting unemployment benefits or continuing care through COBRA, as the law currently allows) on the list of items eligible for tax-free distributions. HSAs were designed to help individuals manage out-of-pocket medical costs and to enhance consumerism. Increasing the range of premiums eligible for tax-free distribution doesn’t further those aims.

Employers Council of Flexible Compensation

ECFC is a broad coalition of companies that offer Health FSA, HRA and HSA services to millions of American workers. The focus is broader than the HSA Council in that it incorporates the other reimbursement accounts. I was part of a team that met with staff members of eight members of Congress who have introduced legislation or are key players on committees that consider legislation related to these accounts. Our key messages:

  • Again, the Cadillac Tax is the enemy of ordinary Americans, who will lose access to Health FSAs and HSAs if elections (Health FSAs) and contributions (HSAs) are included in calculating total premium, as they are under current law. An employer isn’t going to continue a program that saves an employee between 22% and 38% in taxes if the employer has to pay a 40% excise tax on that money. For a family with a $2,600 Health FSA contribution, that means a tax increase of $600 to $900 annually.
  • Health FSAs and HSAs are not a tax-evasion device for the wealthy. Many staffers were surprised to learn that the average worker enrolled in a Health FSA or HSA earns between $50,000 and $65,000. And only a handful of individuals make the maximum contribution to their HSAs to maximize tax savings. These accounts help ordinary Americans manage increasing out-of-pocket costs.
  • Employers’ Health FSA and HSA programs must undergo annual nondiscrimination testing to make sure that highly-compensated employees don’t benefit disproportionately from the program. Thus, the rules ensure that they remain a program directed at the middle class. Many staffers didn’t understand this testing and the laws’ built-in mechanism to benefit all workers.
  • If the Cadillac Tax can’t be repealed (it has been delayed three times and is now scheduled to take effect in 2020), at least remove employees’ Health FSA elections and employer and employee contributions to HSAs from the calculation. It makes no sense to reclassify as “premiums” income that employees voluntarily choose to accept in the form of a benefit rather than as cash. And applying the tax to employer HSA contributions discourages employers from helping employees manage their out-of-pocket costs.

Republican staffers understood our message. In many cases, their bosses have cosponsored legislation to eliminate or modify the tax. On the Democrat side, they understand the issue and have heard from their constituencies – including labor unions – about the destructive impact that the Cadillac Tax will have on union benefits. The only resistance on the Democrat side seems to be over replacing the lost revenue.

National Association of Health Underwriters

NAHU is an organization composed of leading benefits advisors (brokers) throughout the country. It has an active presence in Washington and has provided advice to Congress on a wide range of benefits issues. The message that we delivered to our respective state congressional delegations concerned a broader range of issues than Health FSAs, HSAs and the Cadillac Tax, but was more focused.

Our plea to Congress: Stabilize the nongroup insurance market. This market has suffered since the full implementation of the ACA in 2014. Selection issues (the enrollee population is older, sicker and poorer than the overall population) and restrictions that force insurers to insurers to overcharge young people) have resulted in enormous insurer losses and insurers’ withdrawal from many state exchanges. The Republicans’ threat to repeal the ACA without an adequate replacement has led to further instability, as insurers fear the impact of immediate (however unlikely) elimination of the advance premium tax credits that subsidize premiums for consumers with lower incomes.

In 2017, one-third of counties in the United States had only one insurer participating on the exchange. And only last-minute action prevented one Phoenix-area county from having no insurers offering exchange products. Aetna and Humana, two of the nation’s largest insurers, whose proposed merger was scuttled by the Obama administration, have signaled that they may withdraw from many states’ public exchanges. Without viable private options, residents of these counties simply won’t be able to enroll in medical insurance for 2018.

We urged that Congress take the following steps immediately to stabilize the market before insurers make their final decision in April about participating in public exchanges in 2018:

  • Maintain the current advance premium tax credits (“premium subsidies”) for at least two years to assure insurers that a broader range of consumers will be able to purchase insurance.
  • Tighten off-cycle enrollments. A number of Americans have become “jumpers and dumpers.” They enroll in coverage off-cycle by claiming a qualifying event (often not verified), receive care and then drop coverage. These individuals don’t want insurance; they merely want someone to pay bills that they know they will incur. Limiting qualifying events and tightening verification will send a clear message to individuals that they can’t count on accessing insurance only when they believe that they need it. Insurers won’t have to pay claims without corresponding premium income.
  • Tighten non-payment rules. Insurers must continue to cover individuals when they are in arrears as much as 90 days on premium payments. Savvy consumers have figured out this loophole. They stop paying their premiums after September, then enroll again in January for a new year. This “buy nine, get three free” program costs insurers 25% of the premium income that they depend on to pay claims.
  • Allow residents of counties with only one insurer participating in the public exchange to apply their premium subsidies to nongroup products offered outside the exchange. Insurers who don’t offer products in the exchange often sell nongroup insurance directly to consumers. Under current law, though, buyers can apply premium subsidies to insurance only if it’s purchased through the exchange.
  • Permit anyone, not just young consumers and those not subject to the individual mandate, to purchase catastrophic insurance. The ACA defined that it considered adequate coverage and barred most consumers from choosing any policy that didn’t offer comprehensive care within certain out-of-pocket cost parameters. This change would allow individuals who want to reduce premiums and purchase care only to cover very high costs to exercise that option.
  • Support a hybrid high-risk pool through which insurers can purchase protection against high-cost claimants. Individuals would have access to the same products at the same premiums with the same premium subsidies as any other consumers. Behind the scenes, insurers would identify those with high claims and pre-existing conditions and place them in a pool in which all insurers would share the risk.

A second critical message that we delivered to members of Congress and their staffs is to preserve the employer exclusion. Under federal tax law, employers can offer insurance benefits on a pre-tax basis to employees. This is a good deal for employees (the portions of their premium that both they and their employer pay aren’t taxed as income) and good for employers (they avoid payroll taxes on their contribution to premium and remain motivated to continue to offer group insurance).

There is a move in Congress to repeal the employer exclusion. Some elected officials eye the “tax expenditure” (the potential tax income not collected) and want to bring that revenue into the federal treasury, even though it might mean a $6,000 to $9,000 annual tax increase to a family. Others want to create a new tax benefit that will equalize the tax treatment of insurance purchased through an employer or in the individual market.

Our message: Group insurance works. Unlike the nongroup market, the group market is stable (the covered population reflects the general population, individuals can’t “jump and dump” coverage and no one receives the “buy nine, get three free” special). Politicians need to focus on the segment of the market that isn’t stable without  creating new instability in the far larger stable employer-based insurance market.

The day after my  colleagues’ and my visits to members of Congress, the Trump administration proposed regulatory changes  to stabilize the market that are very similar to our recommendations. NAHU had conducted a two-pronged approach – educating both the administration and Congress – to prompt immediate action.

NAHU has other prescriptions to improve medical insurance, including increasing the flexibility of HSAs, repealing the Health Insurance and Cadillac taxes, repealing medical-loss-ration requirements and allowing small-business tax credits to continue for at least two more years. Those recommendations, though, take a back seat to stabilizing the individual markets.

Final thought

“Lobbying” is often a four-letter word outside the confines of the District of Columbia. Citizens often think of lobbying as the activity of evil corporations bent on gaining a personal advantage at the expense of ordinary Americans. A key feature of our form of government is that we have the right to petition the government in a variety of ways, including providing our perspective to our elected officials individually and collectively (whether collected as a corporation composed of individual owners or an organization with which we associate freely).

Yes, Benefit Strategies and our colleagues representing other companies in these organizations certainly benefit financially when insurance markets are stable, when employer-based insurance is supported by the tax code and when reimbursement accounts are strengthened. We believe that the products that we sell in a free and competitive market make ordinary Americans’ lives better by helping them manage the increasing cost of medical care. In that sense, our fight is more for the benefit of our customers and partners than it is a self-serving effort.

Importantly, in all of our discussions, members of Congress and staffers praised each of the organizations for sharing our observations and representing millions of voters. Because each of the organizations is nonpartisan, we don’t represent a political threat to Republicans or Democrats (though the statistics and studies that we cite may undermine some officials’ policy positions). They thank us and often ask us to follow up with specific information that helps them understand the practical implications and actual results of legislation on which they must vote (or on which they cast a vote in the past). This sharing of information represents a good partnership and can only improve the final legislation.

What we’re reading

What are your priorities and preferences when you seek medical care? You and your doctor should work as a team to determine the right treatment options for you, given your goals. Patients need to engage in a dialogue with their doctors to tailor treatments to patients’ needs. Read more here.

What risk factors are wellness programs addressing in 2017? Find out here.

The Cato Institute, a free-market think tank that conducts extensive research on health care, recently published a short paper on how to control prescription drug costs. Read its recommendations here.


Reform Effort Lands In Byrd Bath

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Elizabeth MacDonough

Their sentiment is consistent with the limits on Republicans’ power. They simply don’t have the numbers to repeal the law in full. They’re going to attack it piecemeal, eliminating what they consider the most onerous parts of the ACA.

William G. (Bill) Stuart

Director of Strategy and Compliance

February 16, 2017

One of the benefits of being a member of the American Bankers Association (ABA) HSA Council and the National Association of Health Underwriters (NAHU), as well as an active participant in the Employers Council on Flexible Compensation (ECFC) is that I have opportunities to observe and participate in the federal legislative process. I spent much of last week and this week in the nation’s capital talking to members of Congress, their staffs and House and Senate staffs about what’s coming next in health care reform.

Here’s my report from the trenches:

The Senate won’t get to 60. While the House of Representatives is a majority-rules free-for-all institution, the Senate has created rules over time to protect the rights of the minority party. Without expanding to a full civics lesson, Senate rules require 60 of 100 senators to vote for a bill before it can proceed. Rarely does any party control 60 seats (though the Democrats did so after the 2008 election and held that total when they passed the Affordable Care Act (nicknamed ObamaCare) in March 2010 without a single Republican supporter).

Republicans control 52 seats to the Democrats’ 48 (46 Democrats and Sens. Sanders of Vermont and King of Maine, who don’t affiliate with a party but align with the Democrats). Although there was some hope after the 2016 election that some of the 10 Democrat senators up for re-election in 2018 in states that President Trump carried would join Republicans in a clean repeal-and-replacement effort, that dream has died. There simply aren’t enough of them, and even without party pressure, only five were strong candidates to back a comprehensive bill.

The bottom line is that Republican’s simply don’t have the votes that they need to repeal and replace the ACA with one comprehensive bill.

Reconciliation. The legislative focus now shifts to a process known as reconciliation. The Senate instituted reconciliation as part of a federal budget reform act in 1974. Once the Senate follows its rules to pass the federal budget at a high level (spending and revenue totals), various committees approve budgets of agencies within their jurisdiction. These budgets are rolled up into a single comprehensive federal budget. Senators then vote on the final budget. Reconciliation, which requires a simple majority rather than a supermajority of 60 votes to pass the measure, is designed to prevent a small faction from holding up the entire federal budget because they’re unhappy with some particular levels of funding of specific agencies or efforts.

Both parties have applied reconciliation to other legislation besides the federal budget. Over time, the reconciliation process has morphed into a tool to pass legislation with a simple majority vote. The caveat is that the legislation must address federal revenue and spending specifically.

Republicans plan to use reconciliation to repeal and replace key parts of the ACA. Which parts? It depends on what provisions survive a series of “Byrd baths”.

Byrd baths. The Senate adopted rules named for the late Sen. Robert Byrd of West Virginia that prevent either party from attaching provisions not related to spending or revenue to a reconciliation bill. The Byrd rule allows any senator to object to a provision on the grounds that it’s unrelated to spending or revenue.

The challenge is heard by one of the less visible people on Capitol Hill – the senate Parliamentarian, an individual who supports neither party and is responsible for ensuring that the Senate’s rules are followed. Only six people have held the post since it was created 80 years ago. The current occupant, Elizabeth MacDonough, is the first woman to occupy the office.

Ms. MacDonough’s job is to put each challenged provision through what Capitol Hill insiders dub the “Byrd bath.” Her responsibility is to determine whether the provision in question is related to federal spending and revenue enough to allow it to remain in a reconciliation bill or whether it can be considered only via standard legislation with a 60-vote majority required.

Inverting the process. The legislative process typically works like this: A bill is introduced in each chamber. Typically, one or several members of both the House and Senate introduce identical bills into their respective chambers. The bills are then assigned to committees and subcommittees with jurisdiction over the issue. The committees and subcommittees are composed of members of both parties, with the chamber’s majority party holding the majority of seats on each committee and subcommittee.

Committees and subcommittees in the House and Senate then hold hearings to gather facts. Once they have the information that they need, they “mark up the bill” – a process of proposing specific changes to the legislation based on their fact-gathering and specific priorities of individual members. If the committee approves the bill, it’s sent “to the floor,” where it faces a vote by the full body.

When a piece of legislation passes both chambers, it’s usually no longer the same bill. Each chamber has added or subtracted provisions, altered budget numbers and perhaps added unrelated provisions to the bill. In this common situation, Republican and Democrat leaders in the House and Senate form a conference committee – a small working group of legislators who go through the two bills and create one bill that they believe will pass their respective chambers.

The bill then goes back to a vote of the full membership in the House and Senate. If it passes both chambers, it goes to the president for his signature, formal veto or inaction.

Reconciliation forces Republicans to “bat out of order.” They need to do the conference committee work – ensuring that an identical bill is introduced in each chamber – before the process begins. And Republican leaders must ensure that no committee makes changes to the bill. The initial floor votes in the Senate and House must be for identical bills – every provision, word and punctuation must be identical in each chamber’s version of the bill – to ensure that it moves through the reconciliation process.

This is a tall order. Republicans in both the House and Senate must accept the bill exactly as written, with no amendments. They must defeat any amendments or changes proposed by Democrats in each chamber. If they don’t, the probability of a successful piece of legislation through the reconciliation process declines precipitously.

“Repeal and replace” or “repair and revise?” The HSA Council conducted two focus groups last month, the result of which it shared with the Republican retreat in late January. The two panels of 10 men and 10 women were asked about a variety of topics related to health care reform, the ACA and their personal coverage. They were apprehensive about repealing the ACA in its entirety because they were unsure what would follow repeal. They cited the law’s success in covering many Americans who had lacked medical insurance before passage of the ACA and voiced a preference to repair what’s not working rather than scrapping the law altogether.

Their sentiment is consistent with the limits on Republicans’ power. They simply don’t have the numbers to repeal the law in full. They’re going to attack it piecemeal, eliminating what they consider the most onerous parts of the ACA. They may then be able to secure some additional changes either through a comprehensive tax-reform bill expected later this year (through reconciliation if necessary, as the 2001 Bush tax cuts were enacted) or more constructive replacement legislation requiring 60 votes, passed whether in this session of Congress (with at least eight Democrats on board) or the 116th Congress in 2019 (if Republicans can gain a 60-seat advantage with 25 Democrat seats, including Sanders and King, and only eight Republican seats on the ballot).

What to expect before the end of April. The federal government will run out of money (spending authority) April 28. Congress will have to pass a reconciliation bill (though it may be a continuing resolution, which funds the government for a set period of time without finalizing a budget). Republicans hope to add major changes to the ACA to this bill, which will require only 50 votes rather than the 60 supermajority to pass the Senate.

The wild card is coalitions within the party itself. The Freedom Coalition in the House, a group of conservative GOP representatives, can defeat a bill if they vote as a bloc. This is possible but unlikely. In the Senate, with a fragile majority of only 52 votes and Sen. Rand Paul of Kentucky pushing hard for a market-based approach rather than what he calls “ObamaCare Light,” finding common ground among at least 50 Republicans is more problematic

Republicans appear to be coalescing around the approaches below:

  • Repeal all ACA taxes, including the high-cost excise tax (nicknamed the Cadillac tax), the medical devices tax and the Health Insurance Tax that applies to employer-sponsored insured medical plans and is projected to result in a premium increase of $500 for the average family. Eliminating the taxes not only kills the key funding source for the ACA; it also lowers the baseline federal government revenue, which will aid Republicans in crafting a tax-reform measure later this year.
  • Eliminate the tax/penalty for failing to purchase coverage (the individual mandate).
  • Eliminate the 3.9% tax on certain income, including passive income and the sale of real estate, that hits higher income Americans.
  • Retain for one or two years and then  eliminate the current advance premium tax credits (premium subsidies) to which about 83% of the 10 million or so Americans who purchase nongroup insurance through public exchanges are entitled. These subsidies reduce the net premium cost to these individuals.
  • Replace the premium subsidies with an age-adjusted, refundable, advanceable tax credit to allow Americans not covered by an employer, Medicare or Medicaid to purchase medical insurance. This change effectively bases the tax credit on age rather than income, since an applicant’s age drives premium costs.
  • Enhance HSAs. Likely enhancements include raising contribution limits (to a much higher fixed limit or up to the medical plan out-of-pocket maximum), removing some eligibility restrictions (TRICARE coverage, utilization of VA or Indian Health Services during the past three months) and allowing individuals up to 60 days after they gain HSA eligibility to incur expenses before they open their HSAs. These enhancements are part of the content of a bill that Sen. Orrin Hatch (R-UT) and Rep. Eric Paulsen (R-MN) introduced in the 114th Congress and introduced again earlier this week.
  • Possibly reform Medicaid as much as possible after a Byrd bath, although Medicaid reform may not be part of this reconciliation bill as Republicans continue to disagree on approaches to reform. Proposals include providing block grants to states rather than funding the ACA’s Medicaid expansion piecemeal from Washington and allowing states more freedom to innovate, including introducing programs with accounts similar to HSAs for the Medicaid population.

Many aspects of the ACA are unlikely to pass the Senate Parliamentarian’s Byrd bath exercises. Among the provisions of the law that are likely to remain untouched through reconciliation include:

  • Maintaining the most popular provisions of the ACA, including coverage for children to age 26, community rating, no pre-existing condition clauses and guaranteed issue. These features all help to destabilize the insurance markets, but the Parliamentarian is likely to conclude that the impact is borne by private insurers rather than the government (although they indirectly impact the size of advance premium tax credits).
  • Continuing the transfer of $500 billion from Medicare to the ACA.
  • Maintaining the 3:1 ratio of lowest-to-highest premiums in the nongroup market. Although older enrollees incur claims equal to about six times the claims incurred by young enrollees, insurers can’t offer rates more than three times the premiums to the lowest class of applicants. In this design, young enrollees would subsidize older enrollees – except that younger individuals aren’t enrolling, and insurers are losing collectively more than $1 billion annually in nongroup markets. The Trump administration last week made what appears to be a rather clumsy attempt to revise this figure by indicating that it might take administrative action to make the ratio 3.49:1 on the grounds that 3.49 “rounds down” to 3.00, the figure in the ACA that can’t be altered except by congressional action.
  • Continuing the ACA’s mandated benefit designs and coverage levels. These provisions limit choice, but those limits are on consumers who can’t buy the coverage that they choose rather than on the government. Republicans are likely to argue to the Parliamentarian that they’re germane to federal spending because many consumers prefer more catastrophic plans (lower premiums, higher out-of-pocket costs) that would result in lower advance premium tax credits.
  • Maintaining risk adjustment, the program designed to help stabilize the nongroup insurance market by forcing insurers whose covered population incurs lower costs than other insurers’ to write checks to the federal government for redistribution to insurers with a poorer risk profile in their nongroup markets. This plan doesn’t involve any federal tax dollars. (Recipients of risk-adjustment payments were paid only about 12 cents for every dollar owed because the “losers” have exceeded the “winners” by a wide margin every year.) The other two components of the “Three R’s,” reinsurance and risk corridors, expired at the end of 2016.
  • Continuing medical homes, alternative payment methods and other activities designed to enhance coordination of care and reform payments so that insurers continue their efforts (which began before the ACA was enacted) of paying for performance rather than mere provider activity.

Final thoughts. Reforming the ACA won’t be easy. And it won’t follow the textbook explanation of how a bill becomes a law. Democrats passed the ACA in 2010 without a single Republican supporter just as their 60-seat window in the senate closed (with Republican Scott Brown’s unexpected victory in a special election to replace Sen. Mo Cowan, a Democrat, who was appointed to the seat after the death of Sen. Ted Kennedy a year earlier).

It’s going to happen in stages. Stage 1 (outlined above) will repeal as much of the law as is allowed under reconciliation. Stage 2 likely will occur in a comprehensive tax-reform bill that will be debated later this year and may pass the Senate through the reconciliation process. Stage 3 is likely to be a bipartisan effort to pass some meaningful insurance market reforms that will attract at least 60 votes in the Senate.

At the same time, the president can take administrative action. He’s already signed an order weakening the tax-enforcement aspect of the ACA. The ACA itself gives broad powers to the executive branch to essentially “fill in the blanks” in the legislation. The Obama administration did so in a way that narrowed consumer choice and increased costs by mandating that more benefits be covered as part of a standard package.

New Secretary of Health and Human Services Tom Price, a physician and until recently a representative from Georgia, has wide latitude in redefining a number of aspects of the ACA; he has been confirmed and met with Senate leaders earlier this week. Look for him to issue a number of smaller but important changes to the law to increase the range of consumer options.

What we’re reading

What are insurers doing to manage the cost of prescription drugs? Read my guest blog at the Healthcare Trends Institute here.

Want to learn more about the Three R’s (discussed above)? Check out this brief article.

While the federal government implemented the ACA during the past seven years, Republicans offered a number of alternative programs to achieve President Obama’s goal of more Americans covered and lower growth of medical spending. Two of the most popular were offered by Price and House Speaker Paul Ryan (R-WI). You can read about their proposals here.