The “Other ACA Subsidies” Take Center Stage

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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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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.

Is Reference Pricing a Part of the Solution?

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Patients were given information before they underwent surgery and understood that they would be responsible for costs above a certain figure. This change gives patients a tremendous incentive to choose the right facility to deliver their care.

By William G. (Bill) Stuart

Director of Strategy and Compliance

February 2, 2017

In the battle to control medical costs, insurers, employers and covered individuals could learn a valuable lesson from the Golden State.

The California Public Employees’ Retirement System (CalPERS) is one of the nation’s single largest consumers of medical services, providing more than 1.3 million retirees and their eligible dependents with medical insurance. The system spends about $7.5 billion annually.

In other words, it’s big. And with such large size come two important considerations. First, when CalPERS’ costs go up by even a small percentage, the actual dollar total is huge. Second, with its size, CalPERS can implement strategies unavailable to smaller purchasing groups, such as private employers, smaller insurers and most states.

In 2010, CalPERS officials worked with their insurer, Blue Cross of California, to change the way it paid for joint (knee and hip) replacements. Why joint replacements? The cost had risen 39% from 2005 to 2008. Joint replacements aren’t a procedure that must be provided on an emergency basis to save a life, so patients have time to research a provider. CalPERS and Blue Cross had streams of data about relative quality of providers (including readmissions, hospital-acquired infection rates and other measures).

Under the system then in effect, patients could receive care from any provider or facility in the network. They would be responsible for a small, fixed portion of the bill (in the form of a copay or deductible) while Blue Cross paid the provider the balance of the contracted rate.

Under the new system, CalPERS instructed Blue Cross to limit what it paid for joint-replacement surgery. Patients were given information before they scheduled surgery and understood that they would be responsible for costs above a certain figure. This change gives patients a tremendous incentive to choose the right facility to deliver their care.

Reference pricing

Reference (sometimes called reference-based) pricing is a simple concept. Rather than cover all services with the same cost-sharing (deductibles, coinsurance, copays) regardless of the location of the service, a reference-based plan pays all or most of the cost of a service up to a benchmark price. The benchmark could be the lowest or second lowest or average of the five lowest prices within a given geographic area.

Here’s a simple example:

  • Provider A:     $12,000
  • Provider B:     $20,000
  • Provider C:     $25,000
  • Provider D:     $40,000
  • Provider E:      $75,000

A medical insurer using reference pricing can choose any figure at which it caps its maximum payment – typically a low (but not the lowest) plan might reimburse the service at $25,000 (the third-lowest cost) or perhaps $19,000 (the average of the three lowest prices).

Don’t believe there’s that much variation among providers for the same service? The $12,000 and $75,000 figures represent the low and high contracted prices for joint replacement among network providers in the CalPERS example.

(To put that in perspective, imagine an employer’s instructing five new sales reps to purchase a Toyota Corolla and charge it to the company. The employer then receives bills from five different dealerships, ranging between $12,000 and $72,000. This doesn’t happen with other products but is an everyday occurrence under third-party payer medical insurance.)

Let’s compare the preferences of three consumers with three different levels of coverage:

  • Patient No. 1: $3,000 deductible, then services covered in full.
  • Patient No. 2: $3,000 deductible, then 20% coinsurance up to an additional $3,000 ($6,000 total out-of-pocket).
  • Patient No. 3: No deductible, with reference pricing based on an allowable charge of $20,000 (the second lowest price in the market).

In the table below, you can see how much a patient and the insurer (in parentheses) pay for a joint replacement at each of five facilities.

Patient No. 1 Patient No. 2 Patient No. 3
Provider  A    $12,000







Provider  B    $20,000







Provider  C    $25,000







Provider  D   $40,000







Provider  E   $75,000







Patient No. 1 is completely insulated from the wide differences in prices at the five facilities once he meets his $3,000 deductible. This patient has little effective incentive to choose a lower-cost facility, even when outcomes are identical. His insurer pays anywhere from $9,000 to $72,000. This patient’s only incentive to shop for a better price is his conscience and knowledge that his decisions impact future group premiums if the group is experience-rated. (Click here for information about how insurers set premiums.)

Patient No. 2 isn’t insulated from the price differences, but the impact to her is capped. Under her plan, she saddles her insurer with 80%, then 100%, of the cost of her choosing a higher-priced facility. Her insurer pays anywhere from $7,200 to $69,000 for the procedure. That additional cost delivers no additional clinical value.

 Patient No. 3 has a strong financial incentive to choose a lower-cost facility, since he pays the entire difference between the reference-based price and the provider’s price. In our example, with no deductible, this patient actually pays nothing out-of-pocket for the procedure at any facility with a price at or below the reference price. Patient No. 3 can pay as much as $55,000 more out-of-pocket for a joint replacement at Provider E than at Provider A without receiving any higher value care.

Again, to emphasize the key point, there is no difference in clinical quality tied to these prices. While we know that facilities and surgical teams that perform more procedures tend to produce better quality at a lower cost, the range of prices for CalPERS patients didn’t reflect clinical quality (infection rates, readmissions, complications while undergoing rehab, etc.) in any way. It was as though patients were buying the same automobile for up to six times the lowest price based on the dealership from which they purchased the vehicle.

Systemic impact of reference pricing

What happens when a buyer (an employer, an insurer or a large buyer like CalPERS) adopts a reference-price model as CalPERS did? Let’s look at the CalPERS results. Higher priced facilities, effectively shut out of a pool of 1.3 million patients, came back to the bargaining table to renegotiate prices. They brought their prices down – at least for CalPERS members. Some hospitals reduced the prices that they charged the CalPERS system, while others simply waived charges above $30,000.

By how much did prices go down? The 95th percentile price dropped from almost $75,000 to just over $40,000. CalPERS paid about 26% less – or about $9,000 on average – for each joint replacement after implementing reference pricing and renegotiating prices. In two years, the system saved $7.8 million in total joint replacement costs – again, with no difference in quality.

The average 26% savings weren’t reflective of across the board reductions. The most expensive hospitals reduced their prices the most – about 37% on average, from $35,400 to $28,700. Less expensive hospitals adjusted their prices downward only 3%. Their average price was $24,500 – a full $2,000 (about 15%) lower than the more expensive hospitals after those higher-cost facilities reduced their prices.

The savings to CalPERS (and ultimately California taxpayers, since CalPERS is self-insured) isn’t game-changing by itself when placed in context. The average annual savings of about $3.9 million on expenses of $7.5 billion represents a tiny drop in a very large bucket. It does illustrate progress, though, and signals to everyone engaged in care – patients, providers and provider units, insurers – that the game is changing.

Since then, CalPERS has extended the program to cataract surgery (range $1,000 to $6,500), colonoscopies and arthroscopic knee surgery (range 1,250 to $15,500). All of these procedures share characteristics that make them ideal candidate for reference pricing:

  • Many providers in different settings (from academic medical centers to stand-alone facilities) perform the procedures.
  • All but rural residents have access to more than one facility (and CalPERS makes special provisions for members who live more than 50 miles from a lower-cost facility).
  • The procedures are so common as to be considered commodities by many.
  • Quality variances are minimal and bear no relation to either cost or the intensity of the facility (teaching hospital vs. freestanding endoscopic center for colonoscopies, for example).

The impact of reference pricing in perspective

Reference pricing isn’t a magic bullet. It’s not a panacea for everything that’s wrong with the medical delivery system and won’t reverse decades of above-inflation growth of medical premiums. It’s not appropriate for urgent and emergent care – my old boss used to quip, “You can’t be cost-conscious when you’re unconscious” – and the administrative cost may outweigh the savings for low-ticket items.

As you can see, though, reference pricing changes the game at multiple levels.

First, patients must become more engaged in the cost of services, just as they are engaged in all financial decisions in their lives in which they bear the full cost of the service. Consumers know how to shop. They, like criminals, need the means, motive and opportunity. Reference pricing gives them the motive. The accompanying transparency teams required to make the program work present the means. And each medical service covered by reference pricing represents the opportunity.

Second, providers must become more competitive in their pricing of each service. The standard price of a bag of Pepperidge Farms Goldfish, whether the consumer buys it in a high-volume grocery store, lower-volume convenience store or the boutique gift shop at a teaching hospital. The same should hold true for an ankle x-ray, a mammogram, a colonoscopy, kidney dialysis and other services that can be delivered as effectively at facilities without the capital- and staff-intensive infrastructure of a trauma center or academic hospital.

Third, providers likely will be driven to offer a single guaranteed price for a service such as a joint replacement, rather than billing multiple parts (surgeon, anesthesiology, operating room, recovery room, hospital room and board, post-discharge therapy, etc.). Consumers and insurers will demand a single price, guaranteed and protecting them against the cost of readmission due to post-discharge complications.

Providers with low prices will advertise these prices, in effect forcing consumers to raise the issue with other providers. We’d quickly develop a pricing system for medical care similar to the structure that exists with vision-correction surgery (such as LASIK), orthodontia, medical care for pets and just about every other product that we purchase in our everyday lives.

So, is reference pricing a panacea? No. Then again, neither is it a placebo.

An effective means of simplifying (and reducing) costs for certain medical? Check.

An effective means of motivating patients to spend their insurer’s (and ultimately their employer’s and their own) money more carefully. Double-check.

A concept that should be incorporated into any discussions among elected officials, public program administrators, insurers and employers who offer group medical insurance? Triple-check.

What we’re reading

The latest elected official to unveil an alternative to the Affordable Care Act is another physician, ophthalmologist Rand Paul (joining fellow physicians US Rep. Tom Price of Georgia, now Secretary of HHS-designate, and Sen. Bill Cassidy of Louisiana). Paul is a Republican who has bucked the party in its initial efforts at repealing sections of the ACA through the reconciliation process last month. He’ll be a key player in any reform package. He favors less federal control, more state oversight and a heavy dose of Health Savings Accounts. You can read more about his proposal here, find a summary here and read the full text (volume alert: 149 pages) here.

When you need emergency care, are you concerned about the gender or race of the doctor treating you? Someone might be blocking a medical professional from assisting you promptly if that professional doesn’t fit someone’s image of a doctor or nurse. Read about this disturbing situation here.

We’ll conclude with a Super Bowl thought just days before the big game. The NFL reports that concussions diagnoses were down slightly during the 2016 season. Learn more about the concussion protocol from this NFL Players Association memo.

The QSEHRA Opportunity

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Obama signs 21st Century Cures Act

President Obama signs the 21st Century Cures Act.

Employers: Are you willing to share your expertise with other benefits professionals? Healthcare Trends Institute, a leader in analyzing and disseminating information about employee benefits, is seeking input. You can find more information and the link to a five-minute survey here.

“QSEHRAs give employers a fourth option: Not sponsor or administer group medical insurance, but provide employees with a tax-free stipend to help them purchase a policy that fits their medical and financial needs in the individual market.”

By William G. (Bill) Stuart

Director of Strategy and Compliance

January 19, 2017

The federal government has created a new opportunity for employers to contribute to employees’ medical insurance premiums with the passage last month of the 21st Century Cures Act.

The law, broadly supported by both Democrats and Republicans, focused primarily on streamlining certain Food and Drug Administration (FDA) testing requirements that pharmaceutical manufacturers must meet before FDA approval of a new drug. It also provides additional cancer, precision medicine and biomedical research funding.

Section 18001 of the law, relevant to benefits advisors, employers, employees and third-party administrators, allows small employers to help employees offset the cost of medical premiums in the individual insurance market by funding Health Reimbursement Arrangements (HRAs). This new form of HRA has been dubbed the Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA.

Brief history of HRAs and premiums

Employers have used HRAs to fund retiree medical coverage for a decade, thereby switching funding strategies from defined benefit (employer sponsors a plan and pays a high percentage of the premium) to a defined contribution (employer sends employees to a private Medicare exchange with a fixed dollar premium subsidy).

Prior to 2013, employers had the option of using the same arrangement for active employees as well. The  Internal Revenue Service (IRS), Department of Labor (DOL) and Department of Health and Human Services (HHS) determined that the Affordable Care Act (ACA) didn’t allow this use of HRAs and issued clear guidance against the practice again (Section III A, Q&A 1) and again (Q&A 1) and again (Q&A 2).

While some third –party administrators continued to sell the concept to employers, the federal regulators made it clear that violations were subject to fines of $100 per day ($36,500 annually) per employee covered.

Led by a physician, since-retired US Rep. Charles Boustany (R-LA), a bipartisan coalition in the House and Senate introduced the Small Business Healthcare Relief Act of 2015. The bill did not become law on its own, but it was subsequently – and to many of its supporters, somewhat surprisingly – included as part of the 21st Century Cures Act.

 You can read more about the legislative history of this movement here and an excellent in-depth profile of two companies’ very different approaches to the issue here. [Note: One of the companies profiled in the article, WEX Health, leases its software to a number of TPAs, including Benefit Strategies LLC.]

How QSEHRAs work in practice

Here are some key points (but not an exhaustive list of rules) to help you understand QSEHRAs:

  • Only QSEs can offer HRAs that reimburse premiums. QSEs don’t face penalties for failing to offer affordable coverage to their employees, as large employers do.
  • Only employers who don’t offer group coverage can sponsor a QSEHRA.
  • Employers are required to give written notice to employees 90 days before the effective date that a QSEHRA will be offered. There is transitional relief for 2017 due to the sudden passage of the provision in mid-December.
  • As with standard HRAs, contributions are limited to employers. QSEHRAs cannot be funded by employee salary reductions.
  • The value is capped. Employers can’t offer more premium subsidy through a QSEHRA than $4,950 (individual coverage) or $10,000 (family coverage) – figures that will be indexed in future years. And these figures are pro-rated if the coverage is for less than 12 months (for example, a new hire picks up individual insurance during the HRA plan year).
  • Unlike standard HRAs, individuals who terminate coverage while covered by a QSEHRA don’t have COBRA continuation rights to the QSEHRA. Also, QSEHRAs don’t fall under ERISA regulations that require plan documents and SPDs.
  • Employees can’t apply for federal premium subsidies (available based on income through public exchanges) AND employer QSEHRA allotments in full toward their premium. If employees qualify for advance premium tax credits (the technical name for premium subsidies), the amount of their monthly subsidy is reduced dollar-for-dollar for any funds that their employer provides through a QSEHRA.
  • They can reimburse all or a subset of Section 213(d) expenses only.
  • An employer who offers QSEHRAs must offer them to all full-time employees except those who haven’t completed the employer’s qualifying service time requirement (not to exceed 90 days), are under age 25 or are covered by a collective-bargaining agreement. Employers may exclude part-time and seasonal workers from participation.
  • Employers generally make the same contribution to all employees with individual coverage and usually a higher uniform contribution to those with family coverage. Employers can adjust QSEHRA contributions to reflect differences in premium resulting from premiums dependent on the number and/or ages of family members covered.

Note that particularly with the last two flexible provisions, it’s important to understand the regulations to keep the program in compliance while adjusting for certain eligibility standards or employees’ different costs of coverage. Before consulting with a benefits attorney to evaluate and establish a plan, you might want to absorb information here, here, here and here].

Impact of QSEHRAs

Fewer than half of all small businesses offer group medical plans to their employees. The most common reason cited is cost – both premium cost and the commitment of resources to sponsor and administer the plan. Many of those companies are small, family businesses with owners or employees who have access to group insurance elsewhere. They’re unlikely to offer QSEHRAs.

On the other hand, larger small groups that want to provide some assistance to employees to purchase medical coverage without placing the financial future of the company in peril may find QSEHRAs an attractive middle ground for employers and employees.

You can read more about the coverage statistics for small businesses and forecasts of QSEHRA adoption here.

Are QSEHRAs good or bad?

That remains to be seen.

What’s good about QSEHRAs is that they provide an additional option for employers. Employers had three choices before the 21st Century Cures Act became law. They could sponsor, administer and contribute toward the cost of group insurance; not offer insurance; or not offer insurance but help employees with a post-tax stipend (that typically would shrink by 20% to 30% of its value, depending on the employee’s marginal federal income tax rate and the applicable state and local income taxes, if any.

QSEHRAs give employers a fourth option: Not sponsor or administer group medical insurance, but provide employees with a tax-free stipend to help them purchase a policy that fits their medical and financial needs in the individual market. This option relieves employers of the burden of administering a group plan while making tax-free provisions to help employees purchase their own insurance. For employees, QSEHRAs provide them with financial assistance when purchasing insurance.

Some observers are concerned that QSEHRAs may result in less group coverage as employers find them a reasonable middle ground between continuing to provide group coverage that they can no longer afford and dropping group coverage altogether. QSEHRAs allow employers to shed the administrative burden of offering group coverage and manage their annual commitment through a fixed-dollar (defined) contribution decoupled from premium increases while still helping employees offset premiums on a tax-advantaged basis.

You can read more about the pros and cons here.

The benefits advisor’s role

Where do benefits advisors fit into the QSEHRA opportunity? That’s an open question.

Many small employers who don’t offer insurance are very small (1-9 eligible employees). They don’t hire benefits advisors, and they may be less likely to value an investment in professional benefits advisory services on a contract basis.

Brokers with one or more of the following characteristics may benefit from QSEHRAs:

  • Property and casualty insurers with existing relationships who deliver demonstrated value to their clients. If the P&C houses have benefits advisors, they have a natural entrée to these clients.
  • Benefits advisors who can offer efficient education and enrollment services – for example, brokers with a private exchange that accommodates nongroup business.
  • Benefits advisors who support aggregators like chambers of commerce and trade associations. Advisors would benefit from a captive audience and member organizations would find value in having a turnkey program to help employees manage medical premium costs. A key factor in any successful program is an efficient education and enrollment service through which an advisor can make a profit on small navigator payments or insurer commissions on nongroup sales.

Perhaps the greatest potential lies with advisors whose existing group insurance clients drop coverage. Prior to the 21st Century Cures Act, these employers exited the benefits business entirely and left advisors without an income stream. The introduction of QSEs allows these employers to remain in the game with a different model. Incumbent advisors may be able to secure a fee-based contract to support the client’s initial move and ongoing business with the new model.

In any of these cases, the winners among advisors will be those who can offer an efficient, effective turnkey solution to their clients. A turnkey solution includes (A) a TPA partner who provides value at a reasonable cost, (B) an educational portal that can automate much of the process of informing employees about the program and (C) an electronic enrollment tool that replaces paper. Without this favorable pricing and automation, the program is unlikely to contribute to agency profitability.

Benefit Strategies’ role

Our system accommodates the QSEHRA program. We’re working now to create a program to support this new option. We anticipate a roll-out in early spring. Stay tuned for more information.

What we’re reading

If you aren’t offering a Health Savings Account (HSA) program to your employees, you may soon be a late adopter, according to this recent article.

Do you (or does your client) have an employee who applied for a subsidy to purchase medical insurance on a public exchange.? Employers in this situation receive a notice and may be subject to fines, or the employee may have made a mistake and will receive an unexpected tax bill. What is the process, and what does an employer need to do? Here’s a good article, at the end of which you can download a helpful book.

What to Expect with Health Care Reform

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By William G. (Bill) Stuart

Director of Strategy and Compliance

Jan. 5, 2017

With the 115th Congress convening in the nation’s capital this week, all eyes will be on Republicans and their approach to the Affordable Care Act. Readers know that the Patient Protection and Affordable Care Act (dubbed the ACA or ObamaCare) passed Congress without a single Republican vote in 2010 and has been the law of the land since then.

During the intervening six years, Republican and Democrats in Congress have proposed – and sometimes passed – legislative changes to the law. President Obama has made unilateral changes through executive orders. Read more here.  In addition, the Obama administration has exercised the broad power that Congress ceded to the executive branch to issue regulations to fill in the administrative details where Congress was vague and gave broad powers to the Secretary of Health and Human Services.

All the while, Republicans vowed to eliminate the ACA. With President Obama in the White House, they understood that their efforts wouldn’t become law. They proposed legislation to defund the ACA, forbid any government employee from implementing any part of the law and withhold pay of any federal official who implemented the law.

In late 2015 and early 2016, Congress passed legislation along party lines that repealed several key sections of the ACA. President Obama predictably vetoed the legislation, thus preserving his signature domestic achievement.

Republicans’ efforts haven’t been in vain, though, as they’ve made a clear political statement that the party stands behind repealing the ACA. Voters responded to that message by retaining GOP control of both chambers of Congress and electing a Republican president. A Republican president and majorities in both the Senate of House of Representatives aren’t enough to repeal and replace the ACA, however.


Under Senate rules, a single senator can filibuster (speak continuously – see the movie Mr. Smith Goes to Washington for an example) a bill to kill it. Only if 60 senators vote to end the filibuster and bring the bill to the floor of the Senate for a vote can the proposed legislation become law.

Democrats controlled 60 seats in the Senate when they passed the ACA in 2010. They promptly lost the 60th seat in a special election in January 2010 (Republican Scott Brown won the seat occupied by the late Sen. Ted Kennedy, a Democrat). Neither party has approached 60 seats since then. The 115th Congress has 52 Republican senators and 46 Democrats, with two Independents (Sanders of Vermont and King of Maine) who caucus and typically vote with Democrats.

In the coming weeks, you’ll continue to hear the term reconciliation. Reconciliation is a process reserved for legislation that impacts fiscal issues (taxing and spending). Created four decades ago to simplify the process of reconciling the preliminary and final federal budgets, it requires only 51 votes to pass legislation.

The most famous use of reconciliation involved President George W. Bush’s tax cuts in 2001. The Senate passed the measure through reconciliation and put an expiration date on the tax cuts so that the projected impact on government tax receipts wouldn’t doom the legislation.

Republicans passed the ACA repeal measure in the last Congress using reconciliation. That legislation wouldn’t have repealed the full  ACA, a law with 10 specific parts, called Titles. Instead, it could repeal only the titles that involve federal taxes and spending. These provisions are contained only in Title I, Title II and Title IX.

GOP lawmakers face a similar problem in the 115th Congress. Without a filibuster-proof majority in the Senate, their only prospect once again is to use reconciliation to disable the spending and tax provisions of the law. This action would eliminate advance premium tax credits (premium subsidies) for the 83% of roughly 10 million people who enroll in commercial insurance through public exchanges and end the Medicaid expansion that has enrolled about 10 million individuals who otherwise wouldn’t have qualified for Medicaid coverage.

The total number of Americans enrolled in coverage through these two programs will be between 20 million and 22 million in 2017. Not all will lose coverage with a repeal of the ACA because they have access to other care, such as through an employer or the pre-expansion eligibility rules for Medicaid of which they weren’t aware prior to publicity generated by the passage of the ACA.

This approach would eliminate taxes associated with the law, including the excise tax on high-premium plans (the Cadillac tax), the tax on medical devices and the application of Medicare taxes to investment income for certain taxpayers. It also would allow individuals covered by Health FSAs and Health Savings Accounts to reimburse over-the-counter drugs and medicine tax-free without a prescription.

 The Republican approach

Washington insiders expected Republicans to introduce a bill almost immediately to repeal key provisions of the ACA through reconciliation. They weren’t disappointed, as Sen. Mike Enzi (R-WY) offered the bill Tuesday, the first day of the 115th Congress.

One central question is how much of the ACA can be repealed through reconciliation, since the procedure is designed to apply to legislation and laws with a fiscal impact.

In this battle, the spotlight will shine on two virtually unknown Americans: Thomas J. Wickham, Jr. and Elizabeth MacDonough. They don’t hold elective office, don’t appear on cable TV news shows and aren’t contestants on the celebrity versions of Family Feud or Jeopardy!  Living far from the limelight, Mr. Wickham and Ms. MacDonough are, respectively, parliamentarians for the US House of Representatives and Senate. They have the authority to rule on what titles and provisions of the ACA may be repealed through reconciliation.

The GOP doesn’t have a replacement bill in the works. Rather, Republican lawmakers and think tanks have submitted a variety of proposals during the past six years that are touted as “ACA replacements.” While all contain sometimes similar free-market principles, they differ in their approaches. Republican support hasn’t coalesced around a single approach to healthcare reform, a signal that Republicans won’t be able to repeal the ACA and simultaneously offer a replacement.

Congress is expected to repeal what it can of the ACA this winter while keeping the law in place an additional two or three years until lawmakers can agree on a replacement. While it fulfills a campaign promise to repeal the law, this approach carries huge risks.

First, uncertainty is likely to lead more insurers to pull out of public exchanges. Currently, residents in about one-third of US counties can choose from plans offered by only one insurer. This situation is likely to lead to higher future premium increases than the average of 25% in 2017.

Second, more lawmakers and think tanks will introduce additional proposed replacement plans, which will cause further fraction and legislative paralysis.

Third, Republicans will find it increasingly difficult to craft a bipartisan replacement plan on their terms as Democrats opposed to certain provisions in a GOP replacement plan see the clock ticking with a fast-approaching deadline before tens of millions of Americans lose access to their current coverage.

So, what makes immediate repeal and future replacement attractive to Republicans?

First, it’s like eating dessert before the meal. They can fulfill a campaign promise and score major political points by killing key provisions of an unpopular law without the corresponding difficult work of crafting and passing an alternative quickly. Immediate gratification is a key motivator to politicians.

Second, it gives them time to sort through various proposals to find the best ideas and incorporate them into a comprehensive reform bill.

Third, they may gain certain advantages by waiting. Republicans must defend only eight Senate seats in the 2018 mid-term elections, while 23 Democrat senators and two Independents who caucus with Democrats face voters. Ten of those Democrats represent states that voted for President-elect Trump. If Republicans can gain a net of eight seats – very difficult in any mid-term election for the president’s party, but a scenario in play given the volume of seats that Democrats must defend – the GOP will enjoy a filibuster-proof majority and could then pass legislation without a single Democrat vote.

The advantage in that situation is that Republicans can craft the legislation as they wish, with no requirement that they compromise on key issues to gain the support of enough Democrats to avoid a Senate filibuster. The disadvantage is that they’ll face the same issue that Democrats experienced when they passed the ACA without a single Republican vote: They own it. The opposition party can watch them twist in the wind if their law fails, without any political motivation to assist.

The bottom line

Expect an almost immediate repeal of the provisions of the ACA that Republicans can erase through the reconciliation process. We should see that action within the first 60 days or so of the Trump administration – perhaps symbolically as late as March 23rd, the seventh anniversary of President Obama’s signing the ACA into law.

Look for a lot of infighting among Republicans as they distill provisions from many different approaches to a more free-market health care reform. To glimpse at the future, read the proposals offered by House Speaker Paul Ryan (A Better Way), US Rep. and Secretary of Health and Human Services-designate Dr. Tom Price (Empowering Patients First Act) and US Sen. Dr. Bill Cassidy (the modestly named The World’s Greatest Health Care Bill. Ever).

Watch the actions of the 10 Democrats up for re-election in 2018 who represent states that voted Republican in the 2016 presidential election. Some are idealogues (Sherrod Brown of Ohio) or are popular with voters (Debbie Stabenow of Michigan, whose state is normally reliably Democrat). They’re unlikely candidates to work with the GOP except on their own terms.

Others are more politically motivated to explore their options. Keep an eye on Heidi Heitkamp (North Dakota), Jon Tester (Montana), Joe Donnelly (Indiana), Joe Manchin (West Virginia, who could switch parties), Bob Casey Jr. (Pennsylvania) and Claire McCaskill (Missouri).

Heitkamp, Tester and Manchin, as well as Sen. Tim Kaine (D-VA), weren’t in Congress to cast a vote on the ACA in 2010 and may not want to see the law’s unpopularity impact their re-elections. You can read more about the key Democrat senators facing voters in 2018 and their political situations here.

Time frame

Let’s assume that the ACA will remain in place for another two to three years after a vote for delayed repeal. That moves the calendar to 2019 for a replacement bill. That bill may be phased in over a period of two to four years as the ACA was (though the president unilaterally extended deadlines on a number of provisions). That means that the new law won’t take full effect until 2022 to 2023.

By that time, we will have had another presidential election. Republicans will have to defend a disproportionate number of Senate seats in 2020 and 2022, which increases the chances that the Senate could flip to Democrat control. And the decennial census in 2020 will impact House districts in the 2022 election, which could impact Republican control independent of any political issues.

In this dynamic political climate, we could see a very different dynamic by the time the provisions of a new bill become effective. And especially if that new bill isn’t bipartisan, we’ll likely see a repeat of the past few years with a party role reversal:

  • Democrats speaking out against the ACA replacement law.
  • Democrats refusing to support desperate Republicans trying to amend flaws in the new law as it is enacted.
  • Democrats repealing key provisions of a partisan GOP law if they have the opportunity.
  • Democrats perhaps gaining sufficient seats in both chambers to propose or heavily influence a replacement to the replacement to the ACA.

And in that case, we’re likely to see an immediate repeal with a future replacement – a situation that could drag into 2030 or later.

In other words, we may never see this issue settled and the market stabilized.

What we’re reading

The Kaiser Family Foundation, one of our favorite sources for good balanced information, surveyed voters to determine what factors, including healthcare, influenced their votes in the presidential election. You can see the results here.

How Well Do You Know Health FSAs?

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By William G. (Bill) Stuart

Director of Strategy and Compliance

Dec. 22, 2016

Health FSAs are pretty well understood by employers and benefit advisors. They’ve been in place since federal tax reform and have changed little during the intervening three decades. For that reason, Health FSA participation hasn’t grown much in recent years. The only real sources of growth are (1) increased growth of the labor market, which has been a challenge during the last decade, (2) increased participation among employees who would benefit from the cash-flow and tax advantages of participating and (3) increased plan sponsorship by employers who don’t currently offer a program.

While most readers understand Health FSAs generally, some nuances aren’t as well understood as they should be. Employers, benefits advisors and employees who understand the points below have the equivalent of a master’s degree in Health FSAs. These employers and benefits advisors tend to give employees good direction when questioned. The employees who understand these concepts tend to enroll in Health FSAs and make larger elections than those who don’t grasp this financial benefits of Health FSAs.

Take a victory lap if you already know all the information below or now grasp it and its importance to understanding Health FSAs.

Health FSAs are notional accounts. Notional account simply means that it’s a bookkeeping entry. When an employee makes a $1,000 election to a Health FSA, the employer doesn’t send the administrator $1,000. Rather, the administrator in effect extends a line of credit to the participating employee. When participants submit claims or swipe their debit cards for eligible expenses, Benefit Strategies pays the claims and then invoices employers weekly for claims paid the prior week. (Some administrators require a working balance from which they pay claims and then invoice employers to replenish the working balance.)

Participants have a claim to their election only to reimburse eligible expenses as defined by the Internal Revenue Service (IRS). They can’t withdraw funds for other purposes, as they can with Health Savings Accounts (HSAs) or employer-sponsored qualified retirement plans like 401(k) plans. Health FSA elections don’t constitute financial assets that a participant would list on a financial disclosure form.

Health FSAs are medical plans. We don’t think of a Health FSA as a medical plan, but the IRS does. When we see it in this light, some of the rules around the plan make more sense. A Health FSA is a self-insured, limited-benefit medical plan. Self-insured means that the employer, rather than a traditional insurance company, is responsible for paying claims and assumes claims risk. Limited-benefit means that the plan has a maximum value (the amount of the employee election), beyond which the employer has no additional claims liability.

The IRS sets a limit on employee elections ($2,600 for 2017). Employers can set a lower limit if they wish. Each employee who enrolls in a Health FSA determines her benefit limit, which equals her election. Health FSA are unlike other medical plans in that each enrolled participant sets a personal benefit limit.

Participants’ payroll deductions constitute the premiums paid to enroll in this medical plan. Those payroll deductions are in equal amounts throughout the year regardless of how much of the benefit the participant accesses at a given point in the plan year – just like a major medical plan. Participants who pay more in premiums than they receive in benefits don’t have access to the difference – just like a major medical plan. Instead, they forfeit the balance. And participants who spend more than they have paid in premiums and then leave employment leave their employer on the hook for the difference between benefit received and premium paid – just like a major medical plan.

Now that you see a Health FSA in this light, do uniform coverage (employees’ right to spend their entire election at any point in the plan year) and forfeiture of unused balances make more sense?

Health FSAs cover family members.   Medical insurance plans may deny coverage to some individuals who live with an employee, including a domestic partner and possibly even a spouse if he or she can access coverage through an employer. Those eligibility rules are set by the federal government, the state government in which the policy is issued, the insurer and, with some discretion, the employer.

By contrast, Health FSA eligibility rules are set by the federal government. Claims incurred by a domestic partner or ex-spouses aren’t eligible for reimbursement through an employee’s Health FSA, even if those individuals are covered on the major medical plan. As with other medical plans under the Affordable Care Act (ACA), eligible expenses incurred by a participant’s children to age 26 can be reimbursed from a Health FSA, even if the children aren’t covered on the participant’s major medical plan . . . even if they have their own major medical coverage . . . even if the children have their own Health FSA . . . and even if they’re married and covered on a spouse’s major medical plan or Health FSA.

Former employees may have COBRA rights to their Health FSA. This is a tricky topic, with nuances beyond the scope of this article. Here’s a quick summary of the rules: Participants who have spent more from their account then they’ve contributed in payroll deductions at the time that their employment is terminated do not have the right to continue their Health FSA. Those who have paid in more than they’ve received in reimbursements and are COBRA-eligible generally do have a right to continue their Health FSA.

Mileage and parking are eligible expenses. That’s right – Health FSA participants can reimburse reasonable travel and parking expenses directly related to their incurring eligible expenses. For example, a participant can reimburse mileage (at a rate set annually by the IRS – it’s 19 cents per mile in 2016 and drops to 17 cents per mile in 2017) to and from a physician visit and the cost of parking to take her child to see a specialist at a Boston teaching hospital.

Here’s one trick that’s perfectly legitimate (and that I’ve used). Say you need regular care – physical therapy, chiropractic care or acupuncture (my particular example). You can choose a provider near where you live or near work. If you choose one near work, you can reimburse your mileage between your home and your practitioner. In effect, you can reimburse the cost of your commute – an expense that otherwise isn’t deductible.

Individuals and families may be able to elect more than $2,600 in 2017. The annual limit on Health FSA elections is per participant per plan. Let me illustrate: I elected to receive $2,600 in my 2017 pay tax-free through my Health FSA. My wife, who’s benefit-eligible with her employer and declined medical insurance (she’s covered on my policy) also made a $2,600 election to her 2017 Health FSA. With our combined Health FSAs, we will have access to the full $5,200 in early January and will have saved more than $1,500 in federal and state income taxes and federal payroll taxes.

We’re limited to no more than $2,600 per plan (or  lower, if the employer chose a lower limit), but because we enrolled in multiple plans and are two different people, we had access to more than one $2,600 limit. This concept is important to couples, individuals who change jobs and individuals who work more than one job and are eligible for benefits with more than one employer. Even if spouses work for the same employer, each working spouse – as a separate participant – can elect up to the maximum.

Also, note that the $2,600 limit per participant per plan applies to employee elections for that year only. Employer contributions to Health FSAs (allowed under federal tax law, but not common) and employee rollover of unused funds (allowed up to $500 if the employer elects this option) don’t count against the $2,600 limit. So, an employee who rolled over $500 and had his employer give all employees a portion of their annual compensation in the form of a $500 employer contribution to the Health FSA could have access to $3,600 to spend during the plan year.

Important note: The Dependent Care FSA limit of $5,000 ($2,500 if filing income taxes separately) is a limit per family per calendar year. Spouses and individuals who hold more than one job can’t “double dip” on that benefit. And as many readers are aware, that $5,000 limit isn’t indexed. It’s hard-wired into the 1986 federal tax reform and won’t change without a change in the law passed by Congress and signed by the president.

To learn more about Health FSAs, we recommend IRS Publication 969, printed annually. This easy-to-read guide summarizes rules for Health FSAs, Health Reimbursement Arrangements and Health Savings Accounts. The IRS will publish a new version of this document in January 2017 to assist taxpayers in completing their 2016 personal federal income tax returns.

What we’re reading

A growing consensus among Republicans is to attack the ACA by repealing it this winter and keeping the law in place for up to three years while Congress works on an alternative. Bob Laszewski, whose thoughts we’ve shared previously in this space, argues that this strategy ignores a fundamental reality: Insurers are unlikely to continue to lose money in the public marketplaces for up to three more years in the hopes that the new plan will be better for them financially.

Sally Pipes of the Pacific Research Institute warns that some misconceptions may interfere with a meaningful debate on new directions for reform. She lists those misconceptions here .

Devon Herrick at the National Center for Policy Analysis is one of our favorite thinkers and writers on medical economics. In this brief October commentary, he explains in layman’s terms how the 21st Century Cures Act, passed overwhelmingly in Congress and signed into law last week by President Obama, will play a small role in increasing patient access to and reducing the cost of some prescription drugs.