Affordable Health Insurance: Employers Should Adopt Account-Based Health Plans to Keep Costs Down

This is the second in a two-part series. To read the first part, click here.

Why isn’t every company offering account-based health plans?  They may have to if the so-called “Cadillac plan” tax in the health reform law (the Patient Protection and Affordable Care Act or PPACA) goes into effect in 2018. I believe that companies have few other options as effective as account-based health plans to keep their costs below the thresholds where the excise tax will affect them ($10,200 for single coverage; $27,500 for family coverage).

For larger employers (including self-funded companies), cost pressures will continue under the PPACA as the “Cadillac plan” tax looms in 2018. However, other issues are or will create challenges much sooner than 2018. For example, employees with health savings accounts (HSA), health reimbursement agreements (HRA), and even Flexible Spending Accounts (FSA) must now obtain a prescription from their doctors to seek reimbursement for over-the-counter medicines. The irony is that these medications have been approved by the U.S. Food and Drug Administration as safe and effective for purchase without a prescription. But a provision in the PPACA requires individuals to obtain a prescription for these products or they will not be allowed to use their HSA, HRA, or FSA funds to pay for these medicines. This provision has been in effect since January 1, 2011.

In 2014, the PPACA will require employer-based health plans (including self-funded plans) to limit their plan deductibles to no more than $2,000 for single persons and $4,000 for family policies. Many employers are already offering account-based health plans with deductibles above these limits, especially employers that have been offering account-based health plans for several years. If plans are required to lower their deductibles, plan costs will likely increase. Premiums (and employee premium cost sharing) will then be increased to offset the lower out-of-pocket costs. This would send account-based health plans in the wrong direction!

Also in 2014, the PPACA will require employer-based health plans (including self-funded plans) to provide a minimum actuarial value of at least 60 percent. This means the plan must be designed to pay at least 60 percent of the cost of the benefits covered, and the employee/patient must pay the remaining 40 percent. While this sounds reasonable, recent guidance issued by the Internal Revenue Service (IRS) and the U.S. Department of Health and Human Services (HHS) reflects a bias against account-based plans in favor of traditional first-dollar coverage plans. The guidance proposes to devalue the typical employer contributions to HSAs and HRAs when determining whether a plan provides the minimum actuarial value. Thus, even if an employer is providing the same amount of total contributions, the plan might not meet the minimum 60 percent standard.

Here is an example of how this could happen. Consider an employer that is providing coverage through a traditional PPO group health plan at a cost of $5,000 per employee. The company then chooses to switch to an account-based health plan and lowers its per-employee premium costs to $4,000 but contributes the $1,000 savings to each employee’s health savings account. From the employer’s perspective, its total costs remain $5,000 per employee. But under the IRS/HHS guidance, the employer’s $1,000 contributions to employees’ HSAs will not receive full credit (e.g., might be cut in half or more) towards the plan’s actuarial value, putting the employer at risk of not meeting the minimum actuarial value of 60 percent. This again sends the wrong message to employers about account-based health plans.

In its comment letter to HHS dated May 16, 2012, the American Academy of Actuaries said:

“This adjustment . . . could have the effect of discouraging employers from contributing to HSAs/HRAs. For a given amount of employer spending toward health insurance, a higher [actuarial value] likely would be achieved by devoting more of those dollars directly toward a health insurance program than to an HSA/HRA. To the extent that HSAs encourage plan enrollees to seek cost-effective care, discouraging this option may run counter to goals of achieving more effective use of health care dollars.”

Likewise, in its 2008 report analyzing major health insurance proposals, the Congressional Budget Office (CBO) said that:

“. . . the actuarial value of consumer-directed plans would include the expected value of any contributions that an insurer or employer sponsoring the plan would make to an enrollee’s account—so that contribution could be set to make the overall actuarial value of the consumer-directed plan equal to the value of a conventional health plan.”

I agree completely with the Academy and CBO. I believe that employer contributions to HSAs and HRAs should be valued at the full amount of the contribution, not “adjusted.” In addition, employee contributions made through payroll deduction should be counted as well and in full (not “adjusted”). Currently, the guidance does not provide any credit for employee contributions.

Another issue that will impact the availability of account-based health plans to some companies is the new minimum medical loss ratio (MLR) requirements under the PPACA. This issue affects plans sold by insurance carriers to small and medium-size companies that are not self-insured. Unfortunately, the MLR regulations do not take into account HSA or HRA contributions, thus making it extremely challenging for account-based health plans to meet requirements they were not designed to meet. I have been seeking changes to the regulations to reflect the unique circumstances of account-based health plans, but no changes have been made so far.

If the issues discussed above are not resolved favorably, it could be very difficult for account-based health plans to continue to grow. This would be a very sad result, given their potential to slow cost growth while improving Americans’ health by better aligning the incentives in our health care financing system.

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