Reform Creates Opportunities, Uncertainties for Consumer-Directed Plans

Some concerns, some pluses, and much to be determined

By Stephen Miller Mar 23, 2010

The Patient Protection and Affordable Care Act, the landmark health care reform measure signed into law by President Barack Obama on March 23, 2010 (modified by a "reconciliation" bill enacted a week later) provides comprehensive regulation of health care insurance in the U.S., with broad new coverage mandates for employer-provided coverage.

One area of particular concern to U.S. employers is the statute's effect on consumer-directed health plans (CDHPs)—high-deductible, low-premium health plans often linked to health savings accounts (HSAs) funded by employers or employees or to employer-funded health reimbursement arrangements (HRAs). Health care flexible spending accounts (FSAs), with an annual "use it or lose it" provision, are also impacted by the new law.

While the law includes provisions that some see as restricting the use of CDHPs in general and of HSAs in particular, others see features likely to promote the adoption of HSAs. And it's clear that much will depend on how government agencies interpret the bill's provisions and the regulations that will be forthcoming over the coming years.

Much may depend on how

government agencies interpret

the bill's provisions.

Over-the-Counter Limits

There are a few facts that observers can agree on. The reform law prohibits reimbursement of over-the counter medications (unless a physician prescribes them) through an HSA, an HRA or an FSA, beginning in 2011.

Beginning in 2013, the law will cap health FSA contributions at $2,500 a year, to be indexed annually for inflation.

The law does not change the operation of HSAs directly, with the exception of increasing the penalty for nonqualified (that is, non-medical) distributions from 10 percent to 20 percent of the inappropriately withdrawn funds, as of Jan. 1, 2011. However, according to an analysis by the American Benefits Council, a not-for-profit association representing employers, many of the bill's provisions could discourage the use of HSAs indirectly by impacting the use of high-deductible health plans.

High-Deductible Plans

Currently, employees and other individuals may not establish HSAs unless they are covered under a high-deductible health plan (HDHP). For 2010, HDHPs must have an annual deductible that is at least $1,200 (self) or $2,400 (family). Cost-sharing, such as deductibles and out-of-pocket expenses, must be no more than $5,950 (self) or $11,900 (family). These limits are indexed annually for inflation. Concerns about health care reform's effect on HDHPs are based on several of the law’s provisions, discussed below.

Preventive Care Coverage

HDHPs, as defined by law, may not provide benefits until the annual deductible is satisfied, but IRS Notice 2004-23 created a safe harbor that allows (but does not require) HDHPs to cover preventive services without satisfying the minimum deductible and outlines the specific services that may be provided (see HSAs and Preventive Care).

The new law, however, requires that insured group health plans and self-insured plans (aside from those existing when the bill became law) cover preventive care on a first-dollar basis. Recommendations by the U.S. Preventative Services Task Force and guidelines from the U.S. Department of Health and Human Services are to determine what is considered under "preventive health services," and some fear that task force coverage recommendations will conflict with the current IRS safe harbor provisions.

"This has been a hotly debated issue, particularly around HSA-compatible plans," says Jay Savan, a senior consultant on health care at consultancy Towers Watson. Regarding whether future preventive care guidelines might conflict with the safe harbor in IRS Notice 2004-23, Savan says, "In all likelihood, the safe harbor will serve as a basis for future guidance. I envision that the task force is going to recognize there is a precedent set in the IRS notice, and any adjustment or expansion of benefits coverage would be within that framework. The IRS is going to be the regulatory body that oversees this new program, and they would be hard pressed to counteract what they said in 2004 as to what constitutes preventive care."

Now that preventive care must be covered at 100 percent by any commercially available plan, he adds, "Presumably that will neutralize the issue as regards HSA-compatible plans vs. traditional alternatives."

As for existing plans, the law includes a grandfathering rule that allows employers to avoid many (but not all) of the reform law's benefit requirements as long as the plan was in use when the bill was passed, notes Kathy Bakich, senior vice president and national health compliance practice leader at the Segal Co., an HR consultancy. "The first-dollar requirement [under the law] is not applicable to grandfathered employer plans in any event," she notes.

Minimum Actuarial value and Out-of-Pocket Limits

The law requires plans to meet a minimum actuarial value threshold of 60 percent or face penalties. The actuarial value of a health insurance policy is the percentage of the total covered expenses that the plan would, on average, cover. A plan with a 60 percent actuarial value means that consumers would on average pay 40 percent of the cost of health care expenses through features like deductibles and co-insurance.

At the same time, the reform law requires that small-group plans cannot have deductibles exceeding $2,000 (self) and $4,000 (family), with an exception allowing higher deductible policies for people under age 30. That's roughly one-third the level that has been allowed for HDHPs linked to HSAs. "Many people today would choose a $5,950 individual deductible over a $2,000 deductible and place the premium savings in an HSA," but they will no longer be given that choice, writes Ron Bachman, president and CEO of Healthcare Visions Inc. and a senior fellow with the conservative National Center for Policy Analysis. Bachman adds that some health benefit plans' high deductibles are offset by sizeable employer contributions to HSAs that are intended to promote employees' cost-effective selection of medical services (because employees can keep and save unspent funds), but that option, too, will be limited by the new deductible ceiling.

Moreover, the law increases the value of financial rewards and incentives that employers may provide to employees to alter certain behaviors, to participate in wellness programs or to meet certain health goals. However, "letting an insurer or employer put dollars directly into an HSA is not on the list of rewards that are allowed" under the reform law, according to Bachman.

Excise Tax Math

Bachman warns that consumer-directed accounts could fall prey to the law's 40 percent excise tax on high value (so-called "Cadillac") health plans. As stated in the reconciliation act, the tax would be levied beginning in 2018 for health plans with an "aggregate value" that exceeds $10,200 (self) and $27,500 (family). Calculation of the aggregate value would encompass HSAs, HRAs and FSAs (but dental and vision coverage are excluded from the value calculation).

But employers should not assume that the most negative possible scenarios will occur regarding the excise tax, according to Segal's Bakich, who comments, "It's much less of a punitive program than it was initially, and I think it's something that employers can rationally plan for." Regarding consumer-directed accounts, Bakich says, "It's the employer contribution to HSAs, HRAs or FSAs that would be counted toward the excise tax threshold. There's a formula for the employer contribution to be counted, and that's expressly addressed in the statute."

Towers Watson's Savan clarifies: "There is a nuance here. When we talk about employer contributions to an HSA, this includes amounts that the employee contributes via a cafeteria plan through payroll deductions on a pre-tax basis. Even though the money is coming out of the employee's check, because the employee never took constructive receipt of the money, it's actually considered an employer contribution." In other words, explains Savan, "When your employer puts money in your HSA, that's clearly an employer contribution. When you put money into your HSA through a cafeteria plan that your employer sponsors, that is also considered an employer contribution. It does go to the value of the plan overall."

But the excise tax can be viewed as a positive for HSAs, Savan adds. "The excise penalty in and of itself sends a message from the government that we don't like high-premium plans; we want low-premium plans. Well, in the commercial market, it doesn't get much lower for premiums than with a high-deductible health plan that's HSA-compatible. So as long as the plan meets the actuarial floor of 60 percent—which is pretty easy to do, as most HDHPs are somewhere in the 70 percent value range—and stays below the premium cap ceiling, employers have an opportunity to optimize their premium spending by providing an HSA-compatible plan."

In fact, according to a Congressional Research Service report, a typical employer-provided HSA-eligible plan has an actuarial value of 76 percent, and that goes up to 93 percent if a significant employer contribution to the account is included, reports the Wall Street Journal.

In a March 2010 letter to Congress, the Society for Human Resource Management urged lawmakers not to count contributions to spending accounts toward the excise tax threshold.

Health Care Exchange Questions

Under the reform act, by 2014 each state is to open a health insurance purchasing exchange for individuals and small businesses without coverage. President Obama, after his February 2010 health care summit with members of both political parties, said he favors permitting HSA-qualified higher-deductible policies to be sold through the exchanges. But critics say the law's restrictions on the types of policies that may be sold through the exchanges remain an obstacle that was not addressed in the reconciliation bill.

Moreover, the president "did not actually say anything about changing the minimum actuarial values required in both the House- and Senate-passed health bills for qualified insurance plans within the exchanges, or whether contributions to HSAs would count as ‘insurance’ dollars. Or whether HSAs would be exempt from the first-dollar coverage mandates and income-based caps on out-of-pocket spending supported by the president and his congressional allies," according to Thomas Miller, a resident fellow at the conservative American Enterprise Institute who studies health care policy and regulation, in a March 5, 2010, post on the Health's Affairs blog.

"The president endorsed HSAs and high-deductible health plans after the health care summit and said they should be included in the health care exchanges," Bakich counters. Employers and plan sponsors will want to see approval to offer a wide variety of plans. And while there is definitely a policy position not to allow people to have substandard coverage, if you have a comprehensive benefit plan that happens to be high deductible, that is within the intent of the law."

A More Positive Outlook for HSAs

Much will depend on regulations to be issued at some point by the Department of Health and Human Services and other agencies, says Bakich. "It's not clear what the future regulations will be."

"I think the people who have been playing Chicken Little with HSAs for years are allowing their emotions to overtake reason," adds Savan. "Because of the annual contribution cap of $2,500 that's being placed on FSAs, which is below the out-of-pocket limit for most traditional medical plans, more employees who anticipate expenses above $2,500 are likely to consider moving to an HSA-compatible plan, so that those expenses could be paid with pre-tax dollars. In other words, the fact that we've now capped FSAs gives HSAs more allure."

Moreover, Savan continues, "With HSA-compatible plans, the premium is lower, which means it's probably below the excise tax cap, the value is equal to or greater than the floor, which puts the plan above the required benefits minimum, and employees can put more money into a tax-protected account than they can with an FSA and not have it subject to a ‘use it or lose it’ rule. Not to mention that marginal tax rates are going up, and when marginal rates go up, there is a natural incentive to look for tax-protected vehicles to accumulate assets, which is what an HSA is."

His conclusion: "So far, I don't hear many reasons not to think that adoption of HSAs is going to explode."

Stephen Miller is an online editor/manager for SHRM.


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