Large employers self-insure their employees for one overarching reason: they believe their group health plans offer better value to their employees and families than what employees could purchase on their own. Up until this point, the tax-advantaged status of employer sponsored health plan coverage was a significant part of that value equation. Beginning in January 2020, employers will have the option of offering two new types of health reimbursement arrangements (HRAs) that can effectively shift specific employee subpopulations onto the individual market. This article provides an overview of these HRAs and factors employers should consider when determining the viability of a defined benefit contribution strategy.
In June 2019, the Departments of Health and Human Services, Labor and Treasury finalized regulatory guidance allowing employers to fund premiums on coverage purchased on the individual market while preserving the tax-exempt status of their contribution. It does so by creating two new types of health reimbursement arrangements (HRAs): individual coverage HRAs (ICHRAs) and excepted benefit HRAs (EBHRAs).
The new rules may open the door for more widespread use of HRAs. In fact, defined contribution strategy may now be applicable to some employee subpopulations. In light of these new rules, employers may want to take a step back and assess if their health plans are still a better value, both from the employer’s cost standpoint and as perceived by employees, than what is available to the public through tax-exempt funding to an ICHRA. Further, this question needs to be answered individually for different types of employees (i.e. different classes of employees) and for key geographies. The state of the local individual market and the plans available there is also a major factor in determining the viability of this strategy.
|Lower financial volatility inherent in managing a self-insured plan||Employers lose the ability to advocate on behalf of their employees in disputes with providers and protect them from premium volatility on the individual market.|
|Decrease in administrative burden of managing multiple vendors.||Employers would lose visibility to claims data and the ability to implement targeted programs tied to health and well-being.|
|Employees might appreciate the greater variety of plans offered||Ensuring that employees understand the implications of purchasing on the individual market|
New HRAs and the Employee Classes, Defined
HRAs have long been a tool through which employers set aside funds for their employees’ qualified medical expenses. Funded and owned by the employer, historically HRAs have been offered to help employees cover their out-of-pocket costs or otherwise uncovered but eligible expenses. HRAs are not portable when an individual exits the organization; however, if the employee retires or terminates employment, the HRA may (but is not required to) continue to reimburse health expenses with any remaining funds.
Effective January 1, 2020, employers will be able to use the following HRA arrangements as part of their strategy:
||Individual Coverage HRAs (ICHRAs)||Excepted Benefit HRAs (EBHRAs)|
|In what new ways can these can these funds be used?||Reimbursing premiums in individual health insurance markets, whether through state/federally facilitated exchanges or elsewhere.||Reimbursing premiums for short-term, limited duration coverage, COBRA premiums and other excepted benefits (e.g., dental and/or vision coverage).|
|Is there a contribution limit?||No, although employer funding can vary by age and/or family size.||Yes: EBHRAs have an $1,800 annual employer contribution limit.|
|Who can be these be offered to? Note: see below for descriptions of employer classes||Employee classes who have not also been offered an employer-sponsored health plan. In other words, if a group of employees is offered ICHRAs, they can no longer be eligible to enroll in the employer sponsored plan.||Employee classes who have been offered alongside another group health plan (and therefore cannot be offered alongside ICHRAs) as a nonintegrated general fund, although employees do not have to participate in that plan in order to use EBHRA funds.|
The new rule allows employers to offer ICHRAs to specific “classes,” or groups of employees. These classes can in turn be combined to create additional groups. Class determinations can apply to employees hired after a specified date (e.g., allowing the new ICHRA benefit to be extended prospectively, while current employees retain eligibility under a traditional group health plan). The amount of funding within each class provided by the employer can only vary by age (capped at up to three times as much as the contribution to the youngest participant) and family size to protect against adverse selection.
The classes identified in the regulations are:
- Salaried, non-salaried (hourly) employees;
- Full-time, part- time employees;
- Seasonal employees;
- Employees in a unit covered by a collective bargaining agreement;
- Employees who have not satisfied a waiting period for coverage;
- Nonresident aliens with no U.S.-based income; and
- Employees whose primary site of employment is in the same rating area (based on what is used for ACA premium rating requirements in the individual market).
An important side note is that Health Savings Accounts (HSAs) are still an option for employees choosing to use an ICHRA if they meet all other requirements (e.g., enrolling in a high-deductible health plan with no other disqualifying coverage). However, the ICHRA must be structured in such a way that it does not reimburse for first-dollar cost sharing, as both HRA and HSA dollars cannot be used for medical expenses.
What employee classes might be best like to benefits from ICHRAs?
|Part-time/seasonal/temporary employees||Employees who work under 30 hours a week are often limited in the benefits they are eligible to receive, particularly with respect to health insurance. Similarly, seasonal employees might not stay at a company long enough to meet “waiting period” requirements for coverage. ICHRAs enable employers to help these employees gain health insurance coverage without placing them on the large group plan.|
|Employees covered by a collective bargaining agreement||Some unions and their members might welcome the ability to choose their own coverage on the individual market, while other entities who have successfully negotiated very rich benefits might see this as a potential disruption in collective bargaining negotiations.|
|Employees living in certain rating (geographic) areas||Employees living in states with robust individual markets may be more amenable to transitioning to these plans from their employer’s group coverage. Employers, in turn, can consider this approach in high-cost areas where they were unable to reduce costs through value-based initiatives or direct contracts.|
Which Employers May find ICHRAs More Applicable to Their Strategy
|Companies that employ significant “gig economy” populations||The rules can help employers choosing to provide ICHRA contributions attract talent into roles not affiliated with long tenure.|
|Companies wary of the volatility of the health care market||Companies that value the cost and cash flow stability inherent in direct contribution strategy and are not positioned strategically to absorb the increasing volatility and unpredictability of the costs associated with health insurance coverage through self-insured plans.|
|Companies with recent merger activity||Employees living in states with robust individual markets may be more amenable to transitioning to these plans from their employer’s group coverage. Employers, in turn, can consider this approach in high-cost areas where they were unable to reduce costs through value-based initiatives or direct contracts.|
Does the Rule Redefine the Role of Employers in Insuring Their Employees?
Not quite, not yet. But the new rule and the changing value equation brings up a philosophical question that must be considered in the context of the total rewards and talent acquisition strategy. Large employers have long been aware that providing health care requires more than a “one size fits all” approach. At first glance, HRAs can be now be considered a vehicle for employers to avoid offering and administering health plans in favor of assisting their employees in purchasing individual coverage elsewhere. However, this approach might prove overly disruptive if implemented for an entire employee population.
Employers should determine HRA-funded individual market coverage’s potential impact with respect to:
Managing Health Care Cost Volatility
Employers, particularly small and mid-sized companies, are increasingly concerned with the possibility of a single catastrophic cost claim (especially occurring towards the end of the fiscal year). This type of claim could potentially put pressure on their company’s overall financial projections. ICHRAs can function as a means for employers to distance themselves from this financial risk.
However, employers must take a long-term view in making this decision considering the viability of ICHRAs/EBHRAs and market stability in all cost environments (including the periods when health care trends may again reach double digits). The individual market also tends to operate less efficiently than employer-sponsored plans, partially due to various state and premium taxes and other regulations. To what extent will they be positioned to shelter their employees from resulting premium volatility without having influence over plan design and formulary choices when health care inflation returns to the levels we have seen in prior years?
External factors will play a role as well: will there be enough uptake to stabilize the public marketplace and ensure that each geography can have the level of choice and premium stability that employers desire for their populations?
Transitioning employees to individual market insurance coverage can streamline benefits administration for employers lacking the in-house resources to manage the complexities of carrier and point solution arrangements. ICHRAs can alleviate the administrative burden of coordinating benefits between health plans, vendors and other partners, as the employer would no longer be the purchaser and plan administrator for employees on the individual market.
Size and negotiating power are significant factors in why large employers can tolerate the risk associated with self insurance. Shifting some of their population to the individual market through HRA funding may effectively turn large employers into medium-sized employers. As a result, they could face the challenges of smaller size with their remaining group plan population, such as the need for stop-loss coverage and a decreased level of resources that can be dedicated to support programmatic solutions.
How Employees Navigate the Individual Market
Keep in mind that as with any change to plan offerings there will be “winners and losers.” Younger employees may benefit from lower-cost premiums in the open market and the ability to buy more coverage using the employer contribution than their older counterparts. Employers choosing not to differentiate their contribution by geography through creating different groups may put those living in states with higher health care costs at a disadvantage. Health plans on the individual market vary from group plans currently offered by large employers. For example, premiums vary widely from market to market and can fluctuate year over year; individual market premiums also tend to be higher than those for employer-sponsored insurance.
There is a risk that overall enrollment in health insurance by employees may go down, since employers cannot default their employees into coverage. Because individuals are not mandated to have health insurance coverage and employers cannot endorse or guide their employees on the plans they choose, overall health insurance literacy becomes a determining factor on whether an employee enrolls in the most appropriate health plan for their overall health status. Effective communication campaigns will be key to a smooth rollout of a new HRA strategy.
Employees might also lose the benefit of negotiated rates of prescription drugs, particularly those on higher tiers and specialty drugs and may have more difficulty affording their prescriptions as a result. Employer plans typically offer cost sharing plan designs specific to prescription benefits and may have lower negotiated drug prices or higher rebates. Members on high cost medications may be impacted more severely if they transition to the individual market, as their drugs may be subject to higher cost sharing in the medical plans available there. In addition, employees might lose access to resources typically offered through pharmacy benefit managers (PBMs) such as home delivery options or holistic specialty drug management.
Employee Perceptions and Overall Experience
Employees might appreciate the “visibility” of funds being attributed to their HRA accounts for premiums, compared to the opaque nature of subsidies for group plan premiums. Particularly for those less familiar with the basics of health insurance and employer-sponsored coverage, the degree to which an employer contributes toward the cost of health care premiums can be unclear or misunderstood, making the direct contribution option seems more attractive.
Decoupling employers from the role of insurers does not absolve the need to prioritize employee wellness. In fact, resources tied up with tasks related to health insurance administration could instead be deployed toward managing wellness and promoting a culture of health and safety for those employers who choose to direct their members to the individual market. Lastly, employers choosing to deploy this strategy should keep in mind that a new administration may rescind the rules, impacting employees enrolled in public plans from tax and/or coverage perspective.
Simply put, ICHRAs offer a new lever in self-insured employers’ strategy with respect to direct contributions and risk management. The new HRA rules may add fuel to the debate on whether health insurance should be decoupled from employment, given the emerging workforce dynamics, shorter tenures and increased interest among some employees to be more in control of their health care benefit.
The popularity of the new HRA arrangements will largely depend on how smaller employers respond to this newfound flexibility: will there be enough uptake to create a market that is viable and stable enough to offset the advantages that self-insurance provides? As the new rules are finalized and rolled out in January 2020, employers considering adopting these arrangements for some portion of their population should seek guidance from their legal, consulting and communication partners on the best course of action.
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