As we enter the fourth quarter, it might be helpful to take a look at some of the consumer-driven strategies we’ve considered in the past—as well as some we’ve avoided—and see if they might be a good option for our clients both this coming year and when all hell breaks loose in 2014.
We first dipped our toes into the consumer-driven pool back in the 1970s with flexible spending accounts. While some would argue FSAs aren’t really a consumer-driven approach at all (after all, they do encourage us to go on a spending spree at the end of the year if we over-estimate how much we’re going to spend on medical services), FSAs do make us think about our expected expenses ahead of time, and that’s more than most people normally do.
We kicked it up a notch with health reimbursement arrangements when the government ruled in 2002 that unused funds could roll over to the next year. With this ruling, HRAs accomplished something that FSAs by design could not—they encouraged people to shop around, to be wise consumers, and to save some of their money: “the less someone spends this year, the more they’ll have next year” was the idea.
Of course, for the consumer, there’s no real planning with an HRA since the employer—not the employee—funds the account, so we sort of took one step forward and two steps back. Not only was the up-front planning eliminated, the employee wasn’t even contributing her own funds to the account.
With the advent of health savings accounts in 2004, we got the best of both worlds—people could plan ahead and set aside their own money on a tax-free basis to use for qualified medical expenses, but because unused funds roll over from year to year, they weren’t encouraged to act like animals and spend every penny in the account before the end of the year.
This third approach has worked pretty well. HSAs have grown at a steady rate for the past several years, and people are saving more than they’re spending. That’s in a down economy when the United States has a negative savings rate. There are now more than 6.8 million health savings accounts nationwide covering 13.5 million Americans, and HSA assets now total more than $12.4 billion.
Consumer-driven plans took a punch to the gut in 2011 when one of the most popular features—the ability to use tax-free dollars to pay for over-the-counter drugs—died at the hands of the Patient Protection and Affordable Care Act.
While people with all three types of accounts were annoyed by this provision, the rule hurts FSAs the most. That’s because this was sort of the safety net for people with a flexible spending account—if they put too much money into their account, at least they could stock up on Tylenol at the end of the year rather than losing their money. So this rule actually could discourage FSA contributions.
[Read "What you may not know about your FSA"]
HRAs continue to be a popular plan design for employers, but not so much because of the consumer-driven aspect. Instead, employers are increasing their deductibles and using a Section 105 HRA to “self-insure” the additional risk. These back-end HRAs are more of a funding strategy for the employer than a consumer-driven approach—most employees don’t even reach their deductible, and with this type of plan design the employer usually doesn’t include the rollover feature.
To help clients keep the two strategies separate in their minds, I prefer to use the term medical expense reimbursement plan for back-end HRAs and reserve the term health reimbursement Account for plans that provide employees with some up-front funds to use on qualified expenses and roll over unused amounts to the next year.
For a true consumer-directed approach, HSAs seem to be the way to go—and, continuing with the recent trend, they have grown exponentially in 2012. This is just the opposite of what some people expected. Because President Obama said publicly he thought HSAs only benefited the wealthy, a number of people concluded they’d be eliminated by the health reform legislation, and we did see a temporary leveling in HSA enrollment in 2010. But once brokers and employers realized HSAs are here to stay, adoption of account-based plans actually accelerated.
There are a ton of reasons for an employer to offer a consumer-driven plan as one of their plan options, and the only reason not to do so this year—that they might be eliminated by health reform—isn’t actually true.
In football, a good quarterback throws not where the receiver is when he lets go of the ball but where the receiver is headed, and that’s the same strategy we should take when designing our benefits packages.
So what will the future look like? Looking at some of the decisions the Department of Health and Human Services has made in implementing the legislation, we now have a pretty good idea.
First, let’s look at plan design. There are four key provisions in the legislation that impact the way plans will look in 2014:
1) Essential benefits: The law calls for 10 categories of “essential benefits” that must be covered in all non-grandfathered plans, both inside and outside the exchange, but the government isn’t completely re-designing the plans. Instead, HHS has given states the option of choosing a “benchmark plan” for the next two years.
The benefits covered by that plan would become the “essential benefits” that all small group and individual plans must cover, but the benchmark plan would have to be beefed up in any area where it’s deficient to include all 10 categories. The easiest way to think of essential benefits is that some new mandates that are being added to our already-existing plans. The essential benefits provision doesn’t address cost sharing on the plans and doesn’t impact consumer-driven plans one way or another.
2) Deductible limits: The law states that the maximum deductible in the small group market will be $2,000 for single coverage and $4,000 for family coverage unless there are contributions to an HSA, HRA, or FSA above this amount. I actually think we’ll see this provision delayed or even eliminated, but if I’m wrong it will actually help account-based plans because that’s the only way a group with 2-100 employees could have a higher deductible.
3) Out-of-pocket limits: Beginning in 2014, the out of pocket limit on all plans will be tied to the HSA-qualified plan out of pocket limit, which will be about $6,350 for single coverage in 2014. Because HSAs already meet this requirement but some current PPO copay plans have a higher member exposure than that, this provision will create a bigger price separation between HSA plans and traditional PPO plans.
4) Actuarial value: Within the exchange, plans will be rated based on the percentage of the cost of the essential benefits the plans pay. For a bronze level plan, for instance, the carrier would pay 60 percent of the cost of covered services for a large population and the members would pay 40 percent. At the silver level, the plan pays 70 percent, at the gold level it pays 80 percent, and platinum plans pay 90 percent. Under the individual mandate, most people will be required to have coverage that at least meets the bronze level requirement in 2014, and employers with more than 50 full-time equivalents will have to offer a plan that meets this standard or face a penalty if their employees purchase a subsidized plan through the exchange.
5) Nothing about the plan design rules indicate that HSAs would go away, and, in fact, there’s reason to believe that the difference in premium between HSA plans and traditional plans will increase, making HSAs even more attractive.
6) Employer decision: Of course, employers will need to figure out which plan or plans to offer to their employees, and when making that decision they will need to look at both the penalties in the large group market and the subsidies available through the individual exchange.
In order to avoid a penalty, large employers will want to offer a plan that meets the minimum essential coverage requirements while paying as much of the cost as they can so that employees will not spend more than 9.5 percent of their W-2 income on their portion of the premiums. The way to do this is by offering a bronze level plan as your base plan and then allowing employees to buy up if they would like. Since the bronze level plan is likely to be HSA compatible, this favors HSA growth.
For small employers, there’s no penalty, but they too will want to pay as much of the premium as possible for a qualified plan so that it’s actually a benefit for their employees. Since most employees with group coverage will be ineligible for a subsidized plan, the employer wants to make sure that their employees do better on the group plan than they would if the group plan didn’t exist and they instead qualified for a subsidy.
One final thing to consider when looking ahead to 2014 is how groups and individuals will purchase insurance. While most people without group coverage will likely buy coverage through the Exchange since that’s the only way they can get a premium tax credit, it’s just the opposite on the group side. While it’s true that small employers that qualify for a tax credit are likely to purchase coverage through the SHOP exchange, there will be very little incentive for other employers to participate in a state-based or federally-facilitated exchange.
Instead, there will be a strong outside market, but it will look much different than it does today. That’s because, with the new modified community rating rules and no medical underwriting, it will be much easier for groups of all sizes to purchase coverage online. Web-based offerings, which will be called private exchanges, will continue to evolve and will become the new standard.
Workers will have more choice than ever, which is great from a consumerism standpoint, and online decision-making tools will grow in popularity. Employees will be able to log-in, use interactive technology to select the best medical plan for themselves and their families, and sign up for all of their ancillary benefits at the same time.
Account-based plans will certainly be among the offerings, and because they will cost less than some of the other options and people will be able to learn how they work using the interactive technology, a lot of people will sign up.
[Also read "Consumer-driven health care checklist"]
Eric Johnson is the president of ComedyCE.com, a continuing education company whose mission is to make learning fun. He is currently hosting a series of “health reform boot camps” across the country—visit his website for more information.