Update: Please see Reform Creates Opportunities, Uncertainties for Consumer-Directed Plans, SHRM Online Benefits Discipline, March 2010
Health Reform: A Backhanded Boost for Consumer-Driven Plans?
With the specifics of congressional proposals for U.S. national health care reform still being debated as of this writing, and the ultimate success of any final bill providing comprehensive reform still up in the air, it might be too soon to answer the question of how reform would impact the broad shift among U.S. employers toward account-based consumer-directed health care (CDH) plans—primarily portable health savings accounts (HSAs) funded by employers and/or employees, and non-portable, employer-funded health reimbursement arrangements (HRAs).
Even so, the 2009 Consumer Health Care Congress, held Sept. 30-Oct. 2, 2009, in Alexandria, Va., offered some tentative assessments by one industry watcher.
William R. Boyles, editor and publisher of the Consumer Driven Market Report, noted that in 2009 "large employers began opting for CDH plans in droves." More than 10 million Americans are now covered by HSAs, Boyles noted, and more than 7 million are covered by HRAs. While HSAs have traditionally attracted their fastest growth in the small group and individual health plan markets, they are now gaining ground with all employee groups.
The reasons that momentum for CDH plans, and HSAs in particular, is expected to continue include:
• Lower premiums are "becoming a matter of survival" for many employers (premium costs are typically shared by employers and employees), and high-deductible plans have the lowest premiums.
• Employee resistance to higher deductibles is less than their opposition to higher monthly premiums.
• CDH accounts offer some “buy back” of cost-sharing by allowing employees to save and rollover unspent funds from year to year for future medical needs.
• Wellness incentives, such as cash rewards for achieving and maintaining health goals, are increasingly being integrated into CDH accounts. (The Senate Finance Committee's health reform bill would expand these incentives, increasing the limit on monetary rewards from 20 percent to 30 percent of the cost of an employee's coverage.)
Outlook Under Reform
While comprehensive reform could have positive and negative consequences for CDH plans, the shift toward CDH adoption by employers is expected to continue to escalate. On the negative side, as of this writing, a reform package might include a provision to add additional penalties for non-health-related HSA distributions, increasing verification burdens and costs for administrators.
But some of the positive implications, Boyles pointed out, could be:
• Bolstering the effect of economic stimulus spending on health information technology, which could help provide cost and quality information that consumers need to make better-informed purchasing decisions under CDH approaches.
• Funding to develop evidence-based medicine further (benchmarking the most effective procedures), which could advance the development of value-based designs that promote health by identifying preventive care services and medications that, when paid on a first-dollar basis, are most likely to create long-term health care savings. Value-based designs increasingly are being integrated with CDH plans, which typically cover preventive care, to varying extents, outside of the required deductible.
• Health exchanges could boost low-premium plans as an attractive option for those purchasing individual coverage.
Also, proposed restrictions on flexible spending accounts (FSAs) could make HSAs more appealing.
Among predictions from Boyles, by 2012:
• HSAs in the U.S. will reach 25 million people.
• Health reform will, overall, have a favorable impact on CDH plans.
• Public support for HSAs will grow to levels akin to individual retirement accounts (IRAs).
Health Care Reform Looms Large
A recent study by consultancy Towers Perrin concurs that a potential impact of health care reform could be to further increase the adoption of account-based consumer-directed health (CDH) plans, such as high-deductible plans linked to tax-favored health savings accounts (HSAs) or health reimbursement arrangements (HRAs).
Employer adoption of CDH plans rose significantly from 2004 to 2009, from 20 percent to 60 percent of surveyed big U.S. companies, according to Tower Perrin’s 2010 Health Care Cost Survey, which draws on data provided by approximately 300 of the largest employers in the U.S. (See Forecast: Health Care Costs Over $10,000 per Employee with Covered Dependent.)
“Employers recognize and embrace the value of these plans in controlling their health care costs and reducing the employee affordability gap,” says Dave Guilmette, managing director of the Towers Perrin health and welfare practice.
According to Towers Perrin, annual premium costs for account-based CDH plans are $8,927 per employee (averaging together those with and without covered dependents), which is 13 percent less than the average traditional plan.
Moreover, one of the most controversial provisions of reform proposed by the Senate Finance Committee is an excise tax that would apply, beginning in 2013, to health programs with combined coverages (medical, dental, vision, flexible spending accounts, etc.) valued at more than $8,000 per year for individuals and $21,000 for families. Although these caps sound high, more than 50 percent of companies will hit the caps within the next three years if current cost trends continue, and the impact of the caps will increase over time, even with indexing on the tax thresholds after 2013, according to Towers Perrin.
“Because [CDH] plans have lower actuarial value than traditional health plans, they could help employers delay hitting excise tax cap limits by up to two years,” Guilmette says, because “the lower cost of these plans would likely hold family benefit values below the proposed $21,000 excise tax cap.”
Health Bill Could Restrict Use of HSAs, Some Fear
Limits also placed on high-deductible plans
Several provisions in the health care bills passed by the House and Senate (and which, as of the start of 2010, must be reconciled into a final bill) could impact the use of health savings accounts (HSAs) and other account-based consumer-driven health plans, according to benefits experts. Some of these are discussed below.
Excise Tax Math
Ron Bachman, president and CEO of Healthcare Visions Inc., has penned a warning that the proposed 40 percent excise tax on health plans considered "high value" (under the health reform bill passed by the Senate in December 2009) could limit the use of HSAs. The tax would be levied if a health plan's "aggregate value" exceeds $8,500 for individuals and $23,000 for families. Under the language of the Senate bill, calculation of the aggregate value would encompass health, dental and vision coverage, as well as HSAs, health reimbursement arrangements (HRAs) and health flexible spending accounts (FSAs).
For an individual employee, "If one puts the [annual] maximum $3,050 into an HSA, that leaves only $5,450 to purchase medical insurance, dental coverage, vision, and all other federally mandated health care benefits," Bachman explains. "For ages 55 or older, the [annual maximum HSA contribution] is $4,050. For those citizens putting in the maximum leaves only $4,050 for health premiums before the 40 percent excise tax would apply."
Concurs benefits administration firm Infinisource, "For those employers near the threshold, one can easily see that a flexible benefit could become a casualty of health care reform."
Restrictions on High-Deductible Plans
Under the Senate's health care reform bill, a health insurance plan in the small-group market must cover a range of “essential health benefits,” as defined under the bill and by the Department of Health and Human Services. No plan could have out-of-pocket limits exceeding those that apply to HSA-linked high-deductible health plans, and small-group plans could not have deductibles exceeding $2,000 for individuals and $4,000 for families (with an exception allowing higher deductible policies for people under age 30).
Many so-called "catastrophic coverage" health plans designed to cover only major health care expenses currently have individual deductibles of $2,500 or more for individuals and $5,000 or more for families. These high deductibles may be offset by sizeable employer contributions to HSAs that are intended to promote employees' cost-effective selection of medical services.
Other Potential Restrictions
A final health care bill is also expected to prohibit the use of HSAs, HRAs and FSAs for purchasing over-the-counter drugs while allowing their use to purchase prescription medications.
Another possible provision: requiring verification (known as "substantiation") that all purchases under the HSA are for allowed medical expenses, a change that could add to the paperwork burden of plan administrators. And both the House and Senate bills would increase the tax penalty on HSA withdrawals that are not used for qualified medical expenses from the current 10 percent to 20 percent.
Nevertheless, upward pressure on premiums under health care reform, anticipated by many (but not all) health care analysts, could also make permitted high-deductible plans, and HSAs, more appealing to individuals, as discussed in the article below.
Stephen Miller is an online editor/manager for SHRM.
Reform Creates Opportunities, Uncertainties for Consumer-Directed Plans, SHRM Online Benefits Discipline, March 2010
Employers Watch and Wait as Health Reform Advances, SHRM Online Benefits Discipline, January 2010
Employers Would Cut Benefits to Avoid Excise Tax, SHRM Online Benefits Discipline, December 2009
CDHP Enrollees Are Cost-Conscious, Use Wellness Programs, SHRM Online Benefits Discipline, December 2009
Report: Employers Hold the Line on Health Benefit Cost Increases, SHRM Online Benefits Discipline, November 2009
Improved Cost Control with HSAs, Surveys Show, SHRM Online Benefits Discipline, September 2009
Rebalancing Health Costs, HR Magazine, September 2009
CDHPs Increasingly Favored Over HMOs, HR News, August 2009
More Turn to Aggressive Health Cost Strategies, SHRM Online Benefits Discipline, July 2009
Strategically Controlling Health Costs with High-Deductible Plans, SHRM Online Benefits Discipline, June 2009
SHRM Online Benefits Discipline