A Rule by the Internal Revenue Service, the Employee Benefits Security Administration, and the Health and Human Services Department
Federal Register, June 20, 2019
Action: Final rule.
Effective date: These final rules are effective on August 19, 2019.
Summary: This document sets forth final rules to expand opportunities for working men and women and their families to access affordable, quality healthcare through changes to rules under various provisions of the Public Health Service Act (PHS Act), the Employee Retirement Income Security Act (ERISA), and the Internal Revenue Code (Code) regarding health reimbursement arrangements (HRAs) and other account-based group health plans. Specifically, the final rules allow integrating HRAs and other account-based group health plans with individual health insurance coverage or Medicare, if certain conditions are satisfied (an individual coverage HRA). The final rules also set forth conditions under which certain HRAs and other account-based group health plans will be recognized as limited excepted benefits. Also, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are finalizing rules regarding premium tax credit (PTC) eligibility for individuals offered an individual coverage HRA. In addition, the Department of Labor (DOL) is finalizing a clarification to provide assurance that the individual health insurance coverage for which premiums are reimbursed by an individual coverage HRA or a qualified small employer health reimbursement arrangement (QSEHRA) does not become part of an ERISA plan, provided certain safe harbor conditions are satisfied. Finally, the Department of Health and Human Services (HHS) is finalizing provisions to provide a special enrollment period (SEP) in the individual market for individuals who newly gain access to an individual coverage HRA or who are newly provided a QSEHRA. The goal of the final rules is to expand the flexibility and use of HRAs and other account-based group health plans to provide more Americans with additional options to obtain quality, affordable healthcare. The final rules affect employees and their family members; employers, employee organizations, and other plan sponsors; group health plans; health insurance issuers; and purchasers of individual health insurance coverage.
Background: Executive Order
On October 12, 2017, President Trump issued Executive Order 13813, “Promoting Healthcare Choice and Competition Across the United States,” stating, in part, that the “Administration will prioritize three areas for improvement in the near term: association health plans (AHPs), short-term, limited-duration insurance (STLDI), and health reimbursement arrangements (HRAs).” With regard to HRAs, the Executive Order directs the Secretaries of the Treasury, Labor, and HHS to “consider proposing regulations or revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with nongroup coverage.” The Executive Order further provides that expanding “the flexibility and use of HRAs would provide many Americans, including employees who work at small businesses, with more options for financing their healthcare.”
Isolated quotes under “II. Overview of the Final Rules on Individual Coverage HRAs and Excepted Benefit HRAs—the Departments of the Treasury, Labor, and Health and Human Services”:
“Some commenters expressed general support for allowing employers to move to a defined contribution approach for health insurance coverage, including because this likely permits greater employee choice.”
“One commenter expressed general concern about the shifting of employees from a defined benefit health plan system to a defined contribution health plan system, because, according to the commenter, it may result in less comprehensive coverage.”
“Other commenters stated that individuals in the individual market could face more expensive plans, lower employer contributions, narrower networks, and higher cost sharing.”
Could next year be the beginning of the end of traditional employer-sponsored health insurance?
By Michael Kolber
The Hill, August 20, 2019
The same type of transformation that turned traditional pension plans into employee-directed 401(k)s may be coming for employer-sponsored health plans—and sooner than most realize.
The consequences of this transformation would be widespread, with impacts throughout the health care system, from hospitals and doctors to drug and device makers to insurance companies, brokers and vendors. It could even impact the political debate about single-payer health care.
A new rule from the IRS and other federal agencies could set this afoot. Beginning in January 2020, any employer can give employees pretax compensation to buy individual market health insurance instead of providing a traditional employer-sponsored group health plan.
Thinkers from across the political spectrum have long decried the uniquely American phenomenon of tying health benefits to employment. In addition to creating an artificial linkage between employment and health coverage, generous employer-sponsored health benefits may play a role in driving health care inflation. But two factors have generally preserved the status quo, with about half of Americans in employment-based coverage.
First, until the Affordable Care Act was implemented, the individual market for health insurance was not functional in many places, leaving employers with few options if they wanted to ratchet back their health benefits. Individuals could have been denied coverage or charged higher rates based on health status, or had pre-existing condition exclusions imposed.
Second, both before and after the ACA, employers had a significant incentive to provide generous health benefits because employer spending on a health plan is not treated as taxable income for the employee, effectively increasing the value of this form of compensation to the employee. The ACA added to this incentive by affirmatively requiring large employers to share in the responsibility for providing health coverage to employees. On top of this, Obama-era rulings interpreting the ACA effectively precluded all employers (large and small) from contributing to the cost of individual coverage obtained by employees.
The ACA fixed the first problem—guaranteeing access to individual market coverage at a uniform price regardless of health status and without pre-existing condition exclusions—but in doing so exacerbated the second. The new federal rule now solves the second problem: Employers will be permitted to fund “health reimbursement arrangements” (HRAs) for employees to buy individual market health insurance. The employee does not pay income tax on amounts the employer contributes to the HRA.
The major remaining constraint on the 401(k)-ization of employer health benefits will be the pressures of the labor market. Will employees accept jobs that don’t guarantee them particular health benefits but instead offer defined contributions to an HRA that may or may not be sufficient to buy equivalent coverage on the individual market? Many employers would love not to have to bear the administrative burdens of running a traditional health plan, and all are looking for ways to keep health costs down. How many will be willing to test the labor market in this way?
The federal government estimates that within five years, about 11 million people will receive individual market coverage funded through an HRA, but those people will be spread across 800,000 employers, meaning only about a dozen employees will get health care this way from each participating employer. The IRS admits this estimate is highly uncertain, but there is little reason to think so few employers will make this shift, or that it will remain limited to very small employers. As with other disruptive innovations, it is entirely plausible that what begins in the low end of employers will take over the entire sector. Further, even among the 11 million the IRS predicts, the IRS estimates that most will be replacing conventional group health plans with HRAs—these are not employees, for the most part, whose employers are using an HRA to offer coverage for this first time.
The consequences could be dramatic. Today, reimbursement by employment-based health plans is the fuel that drives many sectors of the health economy, in many cases keeping afloat hospitals, physicians, dialysis providers, drug and device makers, and other providers that may receive lower reimbursement for patients on Medicare or Medicaid (and nothing for those who remain uninsured). And, at least today, the individual market coverage that an HRA would buy is quite different from employment-based coverage: Typically there are fewer providers in network, who may receive lower reimbursement rates. There may be no out-of-network benefits except in emergencies, and deductibles and other enrollee cost-sharing are often much higher.
If millions more people join the individual market through HRAs, these plan design features could change to look more like conventional employment-based coverage—or HRAs may further incentivize lower-premium plans, reinforcing the need for less comprehensive plans. Either way, each sector of the health care system will need to think about the implications: Hospitals and doctors will need to continue their focus on collecting payments from individual patients with high-deductible plans, and all providers will need to understand a world of potentially lower reimbursement and higher enrollee cost-sharing. Brokers and tech vendors will need to help employees navigate increasingly complex coverage decisions. Insurers may need to adjust to the higher administrative costs implicit in individual market coverage.
The shift could also impact political realities: A significant hurdle to state and federal “single payer” health care reform is the general satisfaction today of the millions of people in employment-based coverage, representing about 60 percent of nonelderly adults. If these people are shifted to higher-deductible plans with narrower provider networks, and are forced to comparison-shop for a plan each year, the fortunes of single payer could improve, as the alternative begins to seem less attractive.
n short, the health care system must wrestle with whether HRAs will make traditional group health plans as rare as traditional “defined-benefit” pensions, and, if so, how quickly.
Michael Kolber is a partner at Manatt Health.
By Don McCanne, M.D.
President Trump’s Executive Order of October 12, 2017 (quoted above) generated alarm because he ordered the prioritization of association health plans (AHPs), which historically have had a terrible track record, and the prioritization of short-term, limited-duration insurance (STLDI), which are grossly inadequate plans. Although considerable concern was expressed then about these recommendations, it is likely that any impact will be negligible since there is essentially no market interest in these plans. What should concern everyone instead is his third order: the prioritization of health reimbursement arrangements (HRAs).
HRAs sound benign, sort of like health savings accounts (HSAs) or flexible spending accounts (FSAs). The primary difference is that HRAs are designed to be full health benefit plans by pairing them with health insurance plans. Why is that important?
Most of you are aware what happened when 401k retirement plans were established. Employers began discontinuing their traditional pension plans which provided a defined benefit – essentially guaranteed income in retirement, but they are mostly history now (only 16% of Fortune 500 companies offer them, down from 59% in 1998). In contrast, the 401k plans are funded by a defined contribution with no guarantee of the amount the plan will pay nor how long the payments will last. This shift from defined benefit to defined contribution has been disastrous for many who find that Social Security payments along with the 401k distributions fall far short of the financial needs in their retirement years.
It looks now like the new rule based on Trump’s order to prioritize HRAs is a setup to convert today’s defined benefit employer-sponsored health plans into defined contribution HRA health plans, beginning with smaller businesses, especially new businesses that are just initiating their plans. But large businesses have been looking for relief so certainly a defined contribution approach will be appealing to them. According to today’s Quote of the Day sources, that conversion means lower premiums that buy less generous plans, higher deductibles and other cost sharing, lower provider payments and narrower networks which may threaten the adequacy of the health care delivery system. Those currently favoring employer-sponsored plans over Single Payer Medicare for All should immediately reconsider what they are wishing for.
Michael Kolber suggests that the inevitable increased dissatisfaction may drive greater support for a single payer system, but based on previous decades of the perpetual inertia preventing us from enacting effective, efficient, and equitable reform, it may be a decade or more before the light bulb goes on. Many more people will suffer, go bankrupt, or even die prematurely.
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