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

$3,000

 ($9,000)

$4,800

($7,200)

$0

($12,000)

Provider  B    $20,000

$3,000

 ($17,000)

$6,000

($14,000)

$0

($20,000)

Provider  C    $25,000

$3,000

($22,000)

$6,000

($19,000)

$5,000

($20,000)

Provider  D   $40,000

$3,000

($37,000)

$6,000

($34,000)

$20,000

($20,000)

Provider  E   $75,000

$3,000

($72,000)

$6,000

($69,000)

$55,000

($20,000)

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.

Reconciliation

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.

 

 

Where Are Accounts Headed?

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By William G. (Bill) Stuart

Director of Strategy and Compliance

December 9, 2016

A business colleague recently called me to secure some information for his annual white paper on the reimbursement industry. He asked me questions about the future of Health FSAs, HRAs and HSAs. Here are the thoughts that I shared with him:

Overall Market

How is the reimbursement market in New England different from other parts of the country? I see several differences:

  • We have more HRAs than HSAs in Massachusetts, New Hampshire and Maine, whereas the rest of the country has a majority (and growing) of HSAs. We’ve seen a real uptick in HSA sales in the New England market during the past two years, though they’re far from catching HRAs (and often don’t close the gap when an employer offers a Post-Deductible HRA alongside an  HSA). Employers like HRAs because they can design the program, manage costs and pay a fraction of their total potential liability (because most employees don’t incur high deductible expenses).
  • Our local market – particularly the greater Boston area – is disproportionately composed of health care provider networks and institutions of higher education. These industries have traditionally offered “rich” benefits to their employees. They’ve been the last employers to adopt consumer-driven health, or CDH, approaches. During the past two or three years, though, they’ve begun to realize that they can offer a “rich” benefit plan that includes lower premiums, high deductibles and tax-advantaged accounts. They’re adopting HSA plans, either as a third benefit option or in place of an existing PPO.
  • Many insurers in the region have increased the member cost-sharing sharply on their nongroup and small group medical plans. HRAs are a natural way for employers to help employees manage these higher out-of-pocket expenses. HSA-qualified plans are a good fit for nongroup purchasers (lower premiums, plus no access to group reimbursement plans like a Health FSA or HRA) and small employers (lower administrative fees than a health FSA).
  • No single HSA administrator has become the dominant player in the region. A number of national administrators have gained business in New England, but few have committed the resources to an in-region presence and in-person support of employers and employees.

Health FSAs

Does an estimated growth rate of about 5% annually sound accurate? Yes. Health FSAs have been around for 30 years. Most employers are familiar with them and either offer them (because of the tax benefits that they and their employees enjoy) or they don’t (because they’re one more program to administer, the fees are too high for a very small group or they fear employees’ spending their funds early in the year and leaving employment).

Describe a headwind and tailwind on Health FSA adoption in the future. The ACA’s Excise Tax on High-Cost Employer-Sponsored Health Coverage, more commonly known as the Cadillac Tax,  is definitely the headwind. As the tax is currently written, the portion of salary (their election) that employees choose to receive through a Health FSA is considered a medical plan premium for purposes of imposing a 40% excise tax on all premiums above a certain threshold.

Implementation of the tax will kill Health FSAs in their tracks because few employers whose premiums exceed the allowable maximum will pay a 40% excise tax so that employees can save 20% to 35% on taxes. We are part of several initiatives (see one here) that seek changes in the law by either (1) repealing the levy [which has been delayed three times already] or (2) removing employee contributions to Health FSAs and HSAs from the premium calculation.

Implementation of the [Cadillac] tax will kill Health FSAs in their tracks. . .”

As a member of the American Bankers Association HSA Council and an active visitor to congressional offices, I work to educate lawmakers at the national level of the impact that the Cadillac Tax will have on middle-income families (the average FSA participant has a family income in the $60,000 to $75,000 range) with financial challenges stemming from a sick child, a spouse with a chronic condition or a child who needs orthodontic care.

Absent any change in the law, the Cadillac Tax will be applied beginning in 2020.

The tailwind is raising out-of-pocket medical, dental and vision costs. Health FSAs are still an effective way for a family to realize tax savings of up to $800 when they make the IRS maximum $2,600 election (2017 figure) into their Health FSAs.

HRAs

Does an estimated growth rate of about 15% annually sound accurate? Yes, though it may be a little low for us. As members’ out-of-pocket responsibility continues to rise in all group sizes, employers are looking for ways to reduce premiums (which typically involves increasing deductibles and coinsurance) and helping employees pay those higher costs). Also, as employers increase plan deductibles to manage premium costs, a growing number are implementing a back-end HRA to pick up the additional costs, so that employees are “whole” – at least in the first year or two of the new plan.

Describe a headwind and tailwind on HRA adoption in the future. The Cadillac Tax is a headwind, but not as strong as with the Health FSA. Whether an employer offers (1) a lower-deductible plan or (2) a higher-deductible plan with an HRA, it’s all employer money going toward the Cadillac Tax calculation, and a higher HRA value is offset by a lower premium.

A tailwind is the growing member financial responsibility each year. Employers want to help employees offset these higher costs or even to increase the deductible and use an HRA to keep the net deductible unchanged. HRAs are attractive because employers control the design of the HRA (total value, eligible expenses, payment order, whether to allow carryover of unused funds, limits on carryovers).

Another tailwind is a bill before Congress to allow small employers who don’t offer employees medical insurance to fund an HRA to pay their premiums in the nongroup (individual purchase) market. Under current tax law, HRAs can’t be used by active employees to pay medical premiums (though they are an increasingly popular vehicle to fund employer contributions to retirees’ medical premiums).

If this plan passes, employers can provide a tax-free stipend to employees, who then can shop in the nongroup market and choose a plan that works for them. Employees would be able to use either their employers’ HRA funds, or if they qualify, an advance premium tax credit (premium subsidy financed by the federal government), but not both.

HSAs

Does an estimated growth rate of about 25% annually sound accurate? Yes. I’ve seen other independent reports showing account growth and balance growth in the 20% to 25% range. HSAs are clearly the fastest growing of these three programs.

Describe a headwind and tailwind on HSA adoption in the future. The Cadillac Tax appears to be a headwind at first glance because employer contributions to their employees’ accounts and employee pre-tax payroll contributions are included when calculating the premium subject to the 40% excise tax. That’s a barrier to acceptance.

On the other hand, unlike with Health FSAs and HRAs, employees can make personal (after-tax) contributions to their HSAs and deduct the contributions when they file their personal income tax returns. Employers can make post-tax contributions to employees, who can then place the money in their HSAs and take the personal income tax deduction. In either case, employees can reduce their federal and state (if applicable) income tax liability, though they can’t recoup FICA taxes paid.

A possible headwind or tailwind is insurer pricing of HSA-qualified plans. These plans have lower claims costs than other medical plans. The question is whether the lower claims are a result of members’ becoming more prudent consumers of services or simply a result of healthier individuals enrolling in these plans. Insurers tend to be conservative in pricing these products, seemingly believing that the lower claims costs are a result of selection, which will even out over time.

Many employees are cost-sensitive and will enroll only if two factors – premium differential vs. another plan offered and employer contribution to an HSA – can reduce a substantial portion of the out-of-pocket cost difference between plans offered. Lower premiums on the HSA-qualified plan help reduce that net gap.

Building medical equity in an HSA is more advantageous than saving for retirement medical costs in a traditional or Roth IRA or 401(k) . . .

A tailwind, as with HRAs, is the growth of plans with higher out-of-pocket responsibility. HSAs allow both employers and employees to contribute to employees’ HSAs. Both parties enjoy tax savings.

Another tailwind is the growing media coverage of HSAs as investment and retirement medical savings accounts. HSA owners can accumulate funds (no use-it-or-lose-it) with triple tax advantages (pre-tax contributions, tax-free account growth and tax-free distributions for eligible expenses).

Building medical equity in an HSA is more advantageous than saving for retirement medical costs in a traditional or Roth IRA or 401(k), all of which are taxed at the time of contribution or distribution.

An additional tailwind is the consolidation of HSA administrators (read my November 10 blog post on this here) and a shift from banks to third-party administrators (like Benefit Strategies) that offer a full range of employer services under a single roof. This consolidation has two benefits.

First, employers will face less confusion with fewer voices crying for their attention.

Second, the move toward full-service TPAs will make it easier for employers to offer this service with an incumbent partner.

Are there opportunities to exploit with product innovation in the HSA market? Definitely. Few account owners are using their HSAs as investment accounts, despite growing balances and more articles in the popular financial press that focus on this approach (see here and here and here). The HSA administrator that can create a product or program that substantially increases account owners’ investment balances will be a winner.

Also, HSAs are potentially more susceptible to fraud than some financial accounts, for several reasons. First, individuals often open and close several accounts as they change jobs and move assets to their new employer’s preferred administrator. Also, HSA owners often don’t monitor their accounts as often as they do personal checking accounts – particularly when they’re healthy or savers and thus make few distributions from the account. HSA security will be an area of opportunity for administrators.

What We’re Reading

We’re always eager to receive the annual Employee Benefit Research Institute (RBRI) report on the state of HSAs. The 2016 version (2015 information)  has some interesting information:

  • 85% of HSAs have been opened since the beginning of 2011, demonstrating that HSA programs are growing in popularity.
  • The average balance in an existing HSA increased from $1,332 at the beginning of 2015 to $1,844 by the end of the year.
  • Only 3% of HSA owners are investing their balances. The Benefit Strategies HSA allows account owners to designate a threshold above which balances are automatically invested in owners’ chosen investments, which increases balances invested and allows owners to build their balances automatically.
  • Account owners who contributed to their accounts deposited an average of $1,864. Employers who contributed to their employees’ HSAs gave an average of $948.

It’s worth taking the time to read the report to learn more about how these figures vary by account owner age, employer size, age of the HSA, etc.

 

 

 

 

Rebuilding Healthcare

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By William G. (Bill) Stuart

Director of Strategy and Compliance

November 23, 2016

What do this month’s national election results mean for healthcare in 2017 and beyond?

We’ll have some solid answers soon enough. Healthcare is likely to be on the agenda for early action when the 115th Congress convenes in early January and President-elect Trump is inaugurated later that month.

To level-set the conversation, keep in mind two important points. First, no matter the results of the elections, key elements in the Affordable Care Act (ACA) were failing and would have to be near the top of the political agenda in early 2017. The biggest failure is the collapse of states’ individual (nongroup) medical insurance markets due to design elements of the ACA. These were not issues that could work themselves out over time within the context of the ACA as written and interpreted.

Second, it’s highly unlikely that Congress will repeal the ACA without a replacement plan in place. Millions of newly covered individuals would suddenly lose access to insurance or premium subsidies. That’s very unlikely to happen, as it would be political suicide for the new Republican government.

Election impact

Let’s review what happened earlier this month. The White House switched parties, from Democrat President Obama to Republican President-elect Trump. Since no law is passed without the president’s signature, this change is important. The current Congress, controlled by Republicans, passed a bill earlier this year repealing the ACA. President Obama, a Democrat who points to the ACA as his signature domestic policy, vetoed that legislation, as Republicans knew that he would, and it didn’t become law.

Republicans maintained control of both houses of Congress. In the Senate, their lead shrunk from 55 seats to probably 52 of 100. We say probably because voters in Louisiana, a state with different voting laws from the rest of the nation, will elect a senator in early December. Republican John Kennedy, who garnered the most votes in the Nov. 8 nonpartisan primary, is expected to win the seat in the Dec. 10 general election.

With a majority, the Republicans choose all committee chairs and have a majority on each committee. Committee chairs and the majority leader decide the legislative agenda – which bills are brought to the floor and which never see the light of day.

What Republicans lack is a filibuster-proof majority. Under Senate rules, 41 senators can block any legislation, effectively killing it. One benefit of the filibuster is that it ensures that a bill has some bipartisan support (unless one party controls 60 seats). Back in 2010, the election of Republican Scott Brown to replace the late Sen. Edward Kennedy, a Democrat, gave the Republicans a 41st vote to filibuster the Affordable Care Act. Senate Democrats acted quickly before Brown was seated and approved a healthcare bill that had already been passed by the Democrat-controlled House of Representatives.

Senate Democrats didn’t like some provisions of the bill, but they were confident that they could make changes later. President Obama then signed the bill into law. Democrats couldn’t pass any subsequent legislation amending the ACA before Republicans gained control of the House and Senate in the 2010 mid-term elections.

Republicans retained control of the House of Representatives as well. The House has no filibuster rules, so a simple majority prevails. Again, Republicans control the chairmanships and the legislative agenda. Republicans can pass any bill that they want with only their party’s support.

The appetite to repeal or amend the ACA

Democrats must defend 25 seats (23 party members and two independents who typically vote with Democrats). A number of those defending their seats are a group of nine who either (1) represent states that voted for Mr. Trump for president or (2) weren’t in Congress to vote on the ACA in 2010 or (3) both. They’ve seen the beating that their party took in two post-ACA mid-term elections (2010 and 2014) and may conclude that their reelection hinges on delivering a better coverage solution to their constituents. They should be eager to craft a better bill.

The Democrats’ new leader in the upper chamber is Sen. Chuck Schumer of New York, who is a pragmatist and a dealer. His particular interests include tax reform and health care – two topics that will be at the top of President-elect Trump’s agenda.

I have met with his key healthcare advisor, who understands the issues and realizes the value that Health FSAs, HRAs and HSAs bring to employees and employers. While some of his colleagues prefer a government-driven solution to a consumer-centric model, Schumer and his staff understand the value of designing a new system that meets consumers’ needs and evolving preferences.

Repeal and replace? Amend?

The ACA has become entwined within the federal government, individual insurance markets in 50 states and every medical insurer. It’s very unlikely that Congress and the president will repeal the ACA as their first step toward reform. The result would be market chaos that would impact patients, providers, insurers and government officials.

What’s more likely is that Congress and the president will begin to dismantle elements of the law by having Mr. Trump rescind some regulations written by the Obama administration, and Congress defund some of the more controversial (and possibly illegal) funding of the ACA. Congress can defund portions of the law by majority vote, with no Senate filibuster permitted. By the way, these changes will deny insurers billions of dollars that they were expecting but weren’t budgeted.

Having made these changes, members of Congress then likely will sit down and hammer out a new structure for healthcare reform that incorporates some elements of the ACA and replaces or phases out others. Any remaining pieces of the ACA will stand unless separate companion legislation specifically eliminates them.

Individual markets established and designed by the ACA have been a failure in most states, reflected in the average 25% increase in 2017 premiums. Premiums have skyrocketed because a disproportionate number of older and sicker individuals have signed up for coverage and younger and healthier Americans haven’t. The plans offered are more expensive, are more restrictive (many fewer plans with an out-of-network option), offer far smaller provider networks and require much higher cost-sharing than plans offered in these markets pre-ACA.

With the defeat of Secretary Clinton, we can be sure that some of her solutions won’t be part of the final bill, particularly:

  • Public option: She sought to set up a federal government program that would compete directly with Anthem, Cigna, Aetna, UnitedHealthcare, Blue Cross and Blue Shield, Harvard Pilgrim, Tufts and other private insurers. This plan would have to be heavily subsidized to achieve her goal of two levels of affordability (lower premiums and lower out-of-pocket costs for patients).
  • Early Medicare: Secretary Clinton wanted to allow early retirees to have access to Medicare beginning as early as age 55. They’d have to pay a premium for this coverage, but that premium would be subsidized by federal taxpayers.
  • Costsharing subsidies: The ACA allows the federal government to reduce poor individuals’ out-of-pocket costs by paying a portion (often a very large portion) of their deductibles, coinsurance and copays directly to insurers. While the ACA legislation allows this transfer, Congress has never appropriated money to fund the program. When President Obama released payments to insurers, Republicans in Congress took the president to court to stop payments that weren’t authorized by Congress.

Secretary Clinton’s defeat is particularly heartening to those who believe that the ACA itself, as well as the subsequent fixes that she advanced, put the country on the path toward a single-payer system in which the federal government assumed control over the financing and structure of healthcare delivery.

 Possible elements in a new bill

While President Obama criticized Republicans for having no alternative to the ACA, congressional Republicans and think tanks have advanced a number of free-market alternatives to the current law. Between comprehensive healthcare and tax reform in the early months of the  new congressional term, we expect to see the following elements at a minimum:

Cadillac tax: Likely to be killed. Very few politicians approve of this excise tax on high-cost medical coverage – not only premiums, but also employee voluntary salary reductions to fund Health FSAs and HRAs. The tax has been delayed three times by politicians loath to see it implemented on their watches.

Medical device tax: Likely to be killed after multiple delays. Even politicians who don’t turn their backs on additional tax revenue – like Sens. Warren and Markey of Massachusetts – realize that this tax hinders innovation and harms patients by assessing a levy on gross sales.

Minimal essential coverage: Federally mandated minimum benefits may be altered so that insurers can design products that individuals want to purchase and can afford. Today, in the individual market, childless couples must buy coverage that includes pediatric services, while priests must purchase plans with a variety of birth control services covered in full.

Premium ratios: Men in their 60s incur, on average, about six times the dollar volume of claims as 25-year-old men. The ACA requires that the ratio between the highest premium (charged to older individuals) be no more than three times the lowest premium. As a result, young people don’t purchase insurance in the individual market because they’re subsidizing older individuals under this arrangement. These markets attract too many older, sicker individuals and not enough younger ones. Without relaxing or abolishing this artificial ratio, lawmakers can’t stabilize individual markets.

Tax deduction for medical premiums: Under current law, employers can deduct the cost of employer-sponsored medical insurance as a compensation expense. Some Republican proposals eliminate the employer deduction and replace it with a tax credit for individuals. This change, they believe, will put employer-sponsored and individual insurance on a level playing field. Currently, employees receive tax advantages that individuals buying insurance in the individual market don’t enjoy. Critics of this approach believe that this shift will destroy the incentive for employers to provide group insurance and that employees’ buying insurance in the individual rather than group market will increase administrative costs.

Premium credits: Many of the Republican proposals replace advance premium tax credits (the subsidy that individuals with incomes below 400% of the federal poverty level receive to offset the cost of medical insurance premiums) with tax credits.

Medicaid: Republican proposals give states far more latitude in redesigning the Medicaid program within the state. Medicaid is a joint federal-state program designed to serve primarily poorer individuals. The current program is heavily financed by the federal government, which imposes rules that typically don’t take into consideration unique factors in different states.

Impact on accounts

Here are some features that we expect to see in the new bill. The House has passed the Hatch-Paulsen bill (summary here)  that includes these provisions already:

  • Participants can reimburse tax-free all over-the-counter drugs and medicine through Health FSAs and HSAs.
  • Individuals who meet all other HSA eligibility requirements and enroll in Medicare Part A can continue to contribute to their HSAs.
  • Individuals can purchase medical insurance through tax-free HSA distributions. Under current law, distributions to pay premiums are tax-free only in specific circumstances.
  • Employers have the option to allow employees to roll over unused Health FSA or HRA funds into an HSA, which would seed the accounts and eliminate HSA eligibility issues when the reimbursement and medical plans don’t have the same end date.
  • HSA owners can go back to their date of HSA eligibility to reimburse eligible expenses tax-free. Today, they can go back only to the date that the HSA is established under the applicable state trust law, which in many cases is the date of the initial deposit.

In addition, US Rep. Dr. Charles Boustany (R-LA) championed a bill, passed unanimously by the House, to allow small employers to use HRAs to give employees a tax-free stipend that they can apply to individual coverage purchased in a public exchange. Small employers don’t have to provide employer-based insurance, and many lack the resources (both financial and administrative) to offer coverage to their employees. This legislation allows employers to help employees with the cost of insurance. We expect to see this feature incorporated into the new health care law.

 The bottom line

The ACA replacement bill will be a bipartisan bill, unlike its predecessor. Both Republicans and Democrats will be invested in the future success of the bill, and we can expect cooperation as future Congresses tweak the bill to make healthcare work better. The bill will include more free-market solutions – more consumer choice, more insurer flexibility to create and sell plans that consumers want to buy, more innovation with the elimination of many arbitrary one-size-fits-all dictates from Washington DC and less regulatory interference in the important interaction between patients and providers.

No one – not Republican or Democrat, statist or free-marketer – will receive everything that she wants. In the end, though, with open deliberations involving both major political parties, we’ll likely end up with a bill that has broader political support than the partisan ACA and fewer rules restricting innovation, flexibility and quality.

What we’re reading (about healthcare reform)

Republicans in the House of Representatives unveiled their approach to reform, A Better Way, in June. Read about it here.

To learn more about the use of HRAs to offset small business employees’ premiums for coverage in the individual market, read the text of HR 5447 here and articles about the bill here and here.

Another Louisiana physician in congress, Sen. Bill Cassidy, has introduced a comprehensive reform measure with the rather presumptuous nickname The World’s Greatest Health Care Bill Ever. You can judge for yourself by reading the text of the bill here or the Health Affairs article about the legislation here.

For a look at comprehensive reform by a group of scholars, read this article published in Health Affairs.

The Changing HSA Administration Landscape

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By William G. (Bill) Stuart

Director of Strategy and Compliance

Nov. 10, 2016

A dozen years ago, when HSAs were launched as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, a number of banks applied to become HSA trustees and custodians. Lured by the prospect of new assets under management, banks and other financial institutions of all sizes eagerly hired staff, built products and marketed accounts through employers, medical insurers and benefit advisors.

Fast forward a dozen or so years. Today, the HSA graveyard is full of tombstones bearing the name of some of the nation’s major financial institutions. Wells Fargo. Sovereign (now Santander). US Bank. JP Morgan. The Bancorp Inc. M&T Bank. Much of this activity has occurred during the past two years, as these banks have left the industry to concentrate on more lucrative business and sold their assets to former competitors.

What happened?

First, while HSAs are growing at a 20 to 25% annual growth figure (even during the depths of the recession that began in 2008), they represent only an infinitesimally small portion of total assets in financial accounts. The banks that sold their HSA business either couldn’t attract a critical mass of HSA balances, shifted their focus to more lucrative and larger asset opportunities or sold their HSA assets to raise capital.

Second, employers view HSAs as a reimbursement program rather than a financial product. The distinction is important. While employers typically contract with a single financial institution to deliver only an employer-based qualified retirement plan. By contrast, the same employers prefer a single vendor partner to administer tax-advantaged reimbursement programs (Health FSAs, HRAs, commuter reimbursement programs) and COBRA administration. While some financial institutions partnered with reimbursement companies to offer a full suite of products with a single point of contact and unified employer and employee portals, most didn’t respond soon enough to this trend.

Third, banks reassessed their business models and portfolios. Some needed to raise cash to weather the recession. Others chose to shed units that couldn’t become major players in their market segments. Still others realized that they couldn’t reach the scale necessary to justify the investment in new technology (like mobile applications and electronic billpay) and human customer support necessary to remain competitive. Finally, most weren’t able to make a sufficient spread (interest received from lending HSA balances less the interest paid to accountholders) to justify remaining in the business.

A new model emerges – and dominates

Today, very few large banks remain HSA trustees or custodians. Instead, the market is dominated by administrators – companies that offer other reimbursement services, provide customer and employer support, maintain records and report account activity to accountholders and the IRS. These administrators work with financial institutions that hold deposits, usually in FDIC-insured accounts.

This model provides accountholders with the best of both worlds. Administrators can also manage a Limited-Purpose Health FSA (sometimes with a single debit card that has multiple “purses”) and Health Reimbursement Arrangements through one Web site and coordinate payments from an employee’s various accounts. Administrators provide all customer support. They usually partner with a technology company that has the scale (combining many administrators’ HSAs onto one platform with more accounts under management than the largest independent HSA providers) to invest in mobile applications, more robust educational libraries, electronic billpay options and employer self-service portals.

The bank that works with the administrator holds funds and provides FDIC insurance. Either the administrator or the bank contracts with an investment company to provide mutual fund options into which accountholders can invest balances that exceed a threshold set by the administrator, employer or accountholder. In many cases, these banks focus exclusively on HSAs.

Benefit Strategies’ solution

Benefit Strategies is an HSA administrator. We aren’t a bank. We offer reimbursement services to employers, including HSAs, Health FSAs, HRAs, commuter and parking reimbursement, COBRA administration, direct billing and fulfillment (including tuition, wellness and fitness reimbursement programs). We manage HSAs on a platform that includes more than 2.5 million accounts. We lease the platform from a company that provides and maintains the infrastructure to support more than 200,000 employers and more than 17 million employees’ accounts – giving it the scale to invest in innovative solutions and to apply technology from its other businesses (managing truck fleet fuel programs and supporting the transfer of money from consumers ordering airplane tickets, hotels and rental cars on most online travel portals to the vendors offering those service).

Our primary banking partner, a division of one of the largest independent banks in the Midwest, focuses exclusively on HSAs. It partners with a company that specializes in evaluating and recommending HSA investment options to offer an investment platform and best-in-class mutual funds. Accountholders can invest once they meet a threshold (typically $1,000 or $2,000). They can automatically direct new contributions into their chosen funds at their chosen allocation and liquidate investments when their cash balance falls below a pre-set amount that they choose.

When employees direct a portion of their income into a Limited-Purpose Health FSA to reimburse eligible dental and vision expenses, they receive a single debit card with two purses. The card is coded so that a debit card swipe pulls from the Limited-Purpose Health FSA at a dental or optometrist office and the HSA at a pharmacy, physician’s office, lab or hospital. If the employee exhausts their Health FSA balance, all subsequent transactions pull funds from the HSA. Employees can follow this activity through a single personal online portal.

When employees are covered by a Post-Deductible HRA as well as an HSA, we can receive a claims file from the insurer. We post those claims on employees’ online portals. Employees can see when the HRA begin to pay claims so that employees don’t inadvertently reimburse an expense from their HSAs that will be paid automatically from the HRA. Again, all activity is contained in a single personal portal.

The next few years

We expect to see continued consolidation in the HSA market. We believe that many of the hundreds of smaller regional and local banks will reassess their continued involvement in the market as consumers, particularly the growing number of Millennials enrolling in medical coverage demand better technology solutions. Smaller banks may not be able to invest the resources necessary to improve their product in this small piece of their portfolio of holdings. We anticipate that they’ll look for a friendly buyer or partner who can deliver effective administrative services efficiently so that the bankers can hold account assets without assuming the burden of managing accounts.

As the market reshapes itself, you can bet that Benefit Strategies will be at the forefront with innovative solutions that are affordable and easy to use and are supported by friendly customer service and a multi-media library of education tools to help accountholders maximize their HSA performance. We look forward to your joining us in that journey.

What we’re reading

Here’s an early look at Medicare Part D (prescription drug) plans and pricing for 2017 from Kaiser Family Foundation.

While many insurers have reported losses in ACA marketplaces and are selectively abandoning the individual markets in many states, Blue Cross and Blue Shield plans have experienced mixed results. While half the Blues plans have lost money in the public marketplaces, half have been profitable. A lot of factors come into play in determining success. Read more here.

Quick quiz: What was the average premium for family coverage in the US in 2015?

A. $14,000

B. $16,000

C. $18,000

D. $22,000

Answer: None of the above. It was actually just over $17,300. The figures above are for, respectively, Arkansas, Hawai’i, Wisconsin and Alaska, illustrating differences in average premium by state. Learn more in this Commonwealth Fund report.

 

 

 

 

What’s better – an HRA or an HSA?

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By William G. (Bill) Stuart

Director of Strategy and Compliance

October 27, 2016

It’s a trick question. There is no clear answer. It’s like asking, “What’s a better vehicle – a pick-up truck or a compact sedan?” The answer in both cases depends on your current and projected needs, your budget and your preferences.

 Defining the Terms

A Health Reimbursement Arrangement, or HRA, is an employer-funded supplemental health plan that companies integrate with a medical plan with high cost-sharing. The HRA reimburses a portion (or, in some extreme cases, all) of employees’ out-of-pocket medical expenses. The employer determines the funding level, expenses that the arrangement reimburses, whether the employee or the HRA pays the first dollars of expenses and whether to allow a rollover of unused funds. Because they’re health plans, HRAs are subject to the continuation of coverage rules under COBRA. HRAs remain very popular in the Northeast, particularly when compared to the rest of the country, though we’re seeing a definite shift from HRAs to Health Savings Accounts, or HSAs.

An HSA is a personal financial account that eligible employees establish, often with the help of their employer. Employers can make tax-free contributions and employees can reduce their taxable income with personal contributions to the account. An HSA isn’t a health plan, so the account itself and employer funding aren’t subject to COBRA continuation rules (though the underlying health plan usually is).

Employers have little design discretion other than the level and timing of employer funding. Employees with HSAs manage all distributions and report their activity on their personal income tax returns. Although HSAs are the dominant program outside the Northeast, only during the past two or three years have we seen a larger effort with mid-size and larger employers to offer an HSA program as one of two or three coverage options.

Advantages and disadvantages of an HRA

HRAs offer a number of advantages to employers:

  1. HRAs can be paired with any medical plan; there is no “HRA-qualified medical plan.”
  2. An HRA is merely an IOU; employers don’t have any financial liability until an employee incurs an eligible claim. Employers’ financial responsibility often is between 20% and 40% of the total value of all employees’ HRAs, with variation as a result of medical plan design, HRA design and overall medical utilization.
  3. Employers can design the program to meet their budgets and employee satisfaction goals. An HRA that reimburses the second half of the deductible, for example, typically costs the employer half the total outlay of an HRA that reimburses the first half of the deductible, since many employees incur few deductible expenses.
  4. With a claims feed directly from the insurer to the third-party administrator, employees can receive their reimbursements without filing any paperwork.
  5. A third-party administrator keeps the plan in compliance (including substantiation to ensure that all expenses reimbursed are eligible).

HRAs also have some limitations:

  1. They are a health plan, so employers must maintain a Summary Plan Document and other materials to remain in compliance with IRS regulations.
  2. Because they are a health plan, they’re subject to COBRA continuation, including proliferation of accounts. The employer can charge a premium to former employees who continue coverage through the HRA.
  3. HRAs don’t offer employees an opportunity to reduce their taxable income (though they can be paired with a Health FSA or, in some cases, an HSA to help employees manage their tax liability).
  4. Administration is costlier than an HSA. An administrator typically charges an annual fee to draft and review plan documents, set up the HRA in the administrator’s claims system, process claims and submit reimbursements.

Advantages and disadvantages of an HSA

HSAs offer a number of advantages to employers:

  1. Employer contributions are tax-deductible and employees enjoy triple-tax benefits with pre-tax contributions, tax-free growth and tax-free distributions for eligible expenses.
  2. Employees can build medical equity by building balances in their HSAs.
  3. Employees can vary their contributions during the year.
  4. HSAs aren’t a medical plan, so employer compliance issues are limited (primarily to employer and employee pre-tax contributions through a Section 125, or Cafeteria, Plan).
  5. All unused balances roll over automatically for employees’ future use.
  6. Employees can use funds to pay not only medical plan cost-sharing, but also certain medical services not covered by insurance, dental and vision expenses, certain OTC expenses and certain medical and long-term care insurance premiums.
  7. Fees are low because administration is simpler (no claims substantiation, accountholder-directed distributions) and no plan documents are required. Employers usually have the option to absorb the fees, and most do, though some administrators allow employers to shift that responsibility to employee accountholders.

HSAs also have some limitations:

  1. HSAs can be offered only in conjunction with an HSA-qualified medical plan.
  2. Employees enrolled in an HSA-qualified plan aren’t automatically eligible to open and contribute to an HSA. They must meet individual eligibility criteria to take advantage of the account itself.
  3. Unlike an HRA, when an employer’s pledge of a dollar of reimbursement usually results in less than (often much less than) 50 cents of actual liability, employer contributions to HSAs are in cash and vest immediately.

Why HSAs are gaining in popularity

While the Northeast still has more employees covered by HRAs than HSAs (in contrast to the rest of the country), we’re definitely seeing the tide turning in our primary region. The process has been slow, but it definitely has accelerated during the past two to three years. This increased adoption represents more strategic thinking on the part of employers (who are including an HSA plan among their benefit offerings) and employees (who are adopting HSAs in growing numbers).

What’s behind this accelerating growth?

  1. Many companies already offer plans with $2,000 or $3,000 deductibles for one-person coverage that aren’t HSA-qualified. They realize that by broadening the deductible to include physician visits, prescription drugs and any other services currently covered with a copay, they can offer employees an HSA program to help them offset this higher potential liability.
  2. Employers understand that they must fund an HRA each year. By contrast, they can provide some employer funding during the first several years of an HSA program and then reduce their contributions as employees have time to build their own balances.
  3. Millennials are the largest population of workers today, and they are looking for financial flexibility as they struggle to pay student loans, save for a home and meet family obligations. An HSA medical plan typically has lower premiums than a comparable plan, so they can build HSA balances to meet their projected expenses (using premium savings), then channel those savings into other financial priorities. The alternative is to pay higher premiums to insurers for services that they often don’t access.
  4. Employers are evolving in their beliefs around “rich benefits.” Even hospitals and institutions of higher education – which represent a disproportionate share of regional employment and traditionally have attracted and retained employees with generous benefit packages – understand that they can design a benefits program with an HSA-qualified plan and a generous employer contribution that makes the program more attractive to employees than “first-dollar” coverage plans.
  5. Many employees now grasp the concept of medical equity and comprehending the parallels between saving for retirement and saving for future medical expenses. They understand that a well constructed employer HSA program allows them to save on premiums and apply those dollars toward future medical costs.
  6. Rising medical costs are forcing more employers to offer medical plans with higher out-of-pocket costs. Switching to an HSA-qualified plan creates a “win-win” when employees have access to the tax advantages of an HSA.

The future of HSAs

It’s difficult to project the future of HSAs. Some trends clearly point to continued growth. Employers are increasing employees’ out-of-pocket costs (sometimes to reduce premiums and sometimes because carriers are cancelling lower out-of-pocket plans). As more individuals purchase insurance in the nongroup market, where they are responsible for the entire premium if they don’t qualify for advance premium tax credits (premium subsidies), they gravitate toward lower premium options like HSA-qualified plans. As more individuals become aware of HSA plans and the financial advantages of participating in an HSA program, enrollment increases as well. Several proposed bills before the US Congress are designed to make HSAs more attractive by increasing contribution limits, allowing more services to be covered outside the deductible, allowing certain other forms of coverage (like enrollment in Medicare Part A) without an individual losing HSA eligibility and even allowing a variation of an HSA that individuals can own and fund without being enrolled in an HSA-qualified plan and meeting HSA eligibility criteria. Read about one here.

At the same time, some trends are discouraging. Earlier this year, the Obama administration issued new guidelines for plans offered in the public marketplaces (public exchanges). The guidelines are voluntary in 2017 and mandatory in 2018, though many insurers are adopting them in 2017 to avoid reconfiguring plans again and disrupting enrollees. The new plan requirements rule out HSA-qualified plans by mandating cost-sharing that falls outside the legal parameters for HSA-qualified plans. And some critics object to HSAs because they put more power in the hands of consumers and less within the control of elected officials and public policy advocates.

Working together

While we’ve analyzed the HRA/HSA choice as an either/or proposition, the two plans can work in unison. Individuals who have access to reimbursement through a traditional HRA aren’t HSA-eligible, but an employer can pair a Post-Deductible HRA with an HSA-qualified plan in an arrangement under which employees can be HSA-eligible. We discussed this topic at length in our last blog, which you can read here.

What we’re reading

The Society for Human Resource Management wrote an article earlier this month about a webinar in which Jason Cook of WEX Health and I presented information to benefits advisors and employers about HSAs. You can read the article here, view and listen to the webinar here or access the slides only here.

Not tired of the election coverage yet? The Kaiser Family Foundation, a good source of information on health care, outlines the health care policy proposals of Mrs. Clinton and Mr. Trump here.

Managing Benefit Costs with an HRA/HSA Combination

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A construction worker works on the framework for a single family home currently under construction in Los Angeles, California October 18, 2011. U.S. housing starts surged in September at their fastest annual pace in 17 months on a big increase in groundbreaking for multi-family units, while permits for future construction fell, a government report showed on Wednesday. The Commerce Department said housing starts increased 15.0 percent to a seasonally-adjusted annual rate of 658,000 units. REUTERS/Fred Prouser (UNITED STATES - Tags: BUSINESS CONSTRUCTION REAL ESTATE)

William G. (Bill) Stuart

Director of Strategy and Compliance

Oct. 13, 2016

Do you want to learn more about how Medicare impacts HSA eligibility or whether you can reimburse a domestic partner’s eligible expenses from your HSA? We’ve added a lot of new information to our website. You can access the HSA GPS Fact Sheet series here.

A benefits adviser called recently to ask for advice with a client renewal. The client offered an HSA-qualified plan with a $3,000 (self-only)/$6,000 (family) deductible. To help employees with their out-of-pocket costs, the employer funded participating employees’ HSAs to the value of the deductible.

The employer’s goal was to keep employees enrolled on the plan HSA-eligible, offer them additional opportunities to reduce taxable income, cover most or all of employees’ deductible expenses and, if possible, save the employer some money.

Some of those goals conflict with each other (like “cover most or all of employees’ deductible expenses” and “save the employer some money”). As we discussed the options we constructed a program that indeed met all the employer’s goals. Here’s what we did:

  • Kept the same medical plan.
  • Reduced employer contribution to employees’ HSAs to half the deductible.
  • Introduced a Post-Deductible HRA to reimburse remaining deductible expenses.
  • Offered a Limited-Purpose Health FSA.

Let’s analyze this proposal in steps.

Kept the same medical plan. The employer wanted to minimize medical plan disruption as employees gain understanding of how the plan works. This medical plan offers low premiums relative to most other plans on the market because of the increased up-front cost-sharing.

Reduce employer contributions to employees’ HSAs. The employer has been incredibly generous in funding HSAs. If his population reflects the total population, most of his employees (about 80% on self-only coverage and about 60% on family coverage) were able to end the first year with positive HSA balances if they spent their funds on deductible expenses only. These contributions represent a major commitment to the employer because HSA contributions are in the form of cash and vest immediately, whether or not employees and their dependents need that much money to reimburse claims in a given year.

Introduce a Post-Deductible HRA. For years, benefit advisors have been told that employees whose employer offers an HRA can’t be HSA-eligible. And that’s true – for most HRAs. There are several plan designs that allow individuals to receive reimbursements and remain HSA-eligible. Of these, the Post-Deductible HRA is the most popular. We’ll examine it in greater detail in a moment.

Offer a Limited-Purpose Health FSA. This product was the subject of our September 15 blog (read it here).

Employees can elect to place a portion of their income (Up to $2,550 in 2016) into an account from which they can draw funds tax-free to reimburse dental, vision and preventive services not reimbursed through other coverage.

Exploring the Post-Deductible HRA

An HRA integrated with a medical plan reimburses tax-free certain medical plan out-of-pocket expenses – usually deductibles and sometimes coinsurance as well. While employers, employees and even administrators view HRAs as reimbursement accounts, the Internal Revenue Service, or IRS, considers HRAs to be additional medical plans. An employer who offers an HSA-qualified medical plan with a HRA to help employees manage their cost-sharing is offering two distinct medical plans to its employees. The employees can’t become HSA-eligible unless both plans are HSA-qualified.

A popular solution to this issue is to make the HRA an HSA-qualified plan. Introducing an HRA deductible of at least $1,300 for self-only coverage or $2,600 for family coverage (2016 and 2017 figures) accomplishes this goal by creating a Post-Deductible HRA. Note that “Post-Deductible” refers to the IRS statutory minimum deductible, not the deductible of the medical plan with which the HRA is paired.

When we pair the medical plan with the Post-Deductible HRA, the design looks something like this:

HSA                        HRA                    Insurer

Self-only coverage            First $1,500       Next $1,500      After $3,000

Family coverage                 First $3,000       Next $3,000       After $6,000

Splitting deductible reimbursement between HSA contributions and HRA makes sense for the employer. Today, the employer contributes $3,000 cash into the HSAs of employees with self-only coverage. One New England medical insurer’s statistics show that fewer than 25% of individuals enrolled in an HSA-qualified medical plan with a $3,000 deductible incur expenses above $1,500. Rather than giving employees the second $1,500, the employer promises to pay any deductible expenses that the employee incurs in the second half of the deductible. That figure will average no more than about $500 per employee, rather than the $1,500 cash.

This program makes these employees better off than nearly all other companies’ workers. Very, very few employers offer to eliminate employees’ deductible responsibility through a reimbursement program. In this case, employees will stop receiving that employer gift of additional HSA contributions that they’re saving or spending on non-deductible expenses (such as glasses, contact lenses, vision-correction surgery and dental services). They can elect to fund a Limited-Purpose Health FSA, which can reimburse these expenses and reduces their taxable income.

Impact on HSA contributions

How does the introduction of the Post-Deductible HRA or the Limited Purpose Health FSA impact employees’ HSA contribution limits? It doesn’t. Accountholders who are HSA-eligible can contribute up to the statutory maximum annual contribution (less employer contributions, which count toward the limit). That’s right – the employer-funded Post-Deductible HRA reduces their net financial responsibility for deductible expenses, but it doesn’t offset their maximum HSA contribution. Also, elections to a Limited-Purpose Health FSA are in addition to, not in place of, HSA contributions.

As a refresher, the statutory annual contribution limits for 2017 are:

  • Self-only contract: $3,400 (in this case, $1,500 employer and $1,900 personal)
  • Family contract: $6,750 (in this case, $3,000 employer and $3,750 personal)
  • Catch-up: $1,000 additional if age 55 or older

Does this plan make sense?

A logical question to ask is whether the addition of two moving parts (Post-Deductible HRA and Limited-Purpose Health FSA) makes sense. After all, the employer can offer employees the same out-of-pocket exposure by offering a medical plan without any deductible or an HSA-qualified plan with a $1,500/$3,000 deductible and the same HSA contribution policy. In that case, why buy a medical plan with a higher deductible and reimburse the higher deductible with an HRA?

For groups in the regulated market (50 and under), this strategy may make a lot of sense. These groups are community rated. That means that the insurer sets their rates based on the claims experience of all similar-size groups that it insures, rather than that group’s claims. In this case, if the group’s experience is better than the community average, the group benefits when it “self-insures” as much of the claims costs as possible through a higher deductible. Increasing the deductible is the only way that these groups can benefit from their superior claims experience. Making employer HSA contributions and funding an HRA help employees manage those costs.

Note: It’s often difficult for employers and their advisors to know whether a small group’s experience is better than the community, since insurers don’t provide utilization reports in the small-group market. Employers may see healthy employees every day, but typically an employer doesn’t see more than half the lives covered on its insurance (medical dependents).

For fully-insured large groups, this approach may or may not make sense. The larger the group, the more its claims experience drives the rates. This approach may save money under one of two conditions:

  • The insurer blends a combination of the group’s utilization and the overall population utilization to factor rates. The smaller the group (say, 75 employees, vs. 500), the more likely this blending will come into play.
  • The insurers’ price relativities don’t reflect actuarial differences. In other words, the difference between claims on a $3,000/$6,000 and a $1,500/$3,000 plan is, say, 15% and the insurer sets the premium factor at 20%. In that case, the employer who chooses the higher plan and combines it with an HRA can come out ahead financially.

For self-insured groups, this approach may not make much sense. The employer pays all deductible claims, whether in the form of employer HSA contributions covering the first half of the deductible, reimbursements through a Post-Deductible HRA (that by law is funded by employer only) or the medical plan (which is funded directly by the employer.) The money is coming out of different employer accounts, but the source is the same.

This plan probably creates more confusion without offering a financial advantage to employer or employees. The one difference between a first-dollar plan and this approach is that employees have an incentive to become better consumers in the first half of the deductible. They can keep the employer contribution for future eligible expenses or for current dental, vision and certain over-the-counter items when they keep their deductible expenses low.

Tips

Think creatively. Don’t assume the role of a victim of higher premiums. You have tools at your disposal that may help you craft a more cost-effective strategy, whether you’re an employer or a benefits advisor.

Understand your options. The more you understand the reimbursement programs available, the more creative you can be in your approach to benefits. Don’t get too creative, though, as your possibilities are realistically limited to your benefits department employees’ ability to communicate the program and employees’ ability to comprehend the program in open-enrollment meetings and again when they begin to incur claims.

Engage Benefit Strategies. We have a great deal of experience helping benefits advisors and employers craft carrier-agnostic programs to pair with medical insurance to deliver the most bang for the buck. We’re eager to work with you to explore these possibilities.

What we’re reading

Ever wonder how your medical insurance premiums and plan design compare to other employers’ benefits programs? You can learn more by reading the Kaiser Family Foundation 2016 Employer Health Benefits Survey.

The Healthcare Trends Institute also conducts an annual survey which will provide you with additional benchmarking information. you can access the HTI 2016 employer survey here.