The 21st Century Cures Act, signed by PresidentBarack Obama in December 2016, puts into statutory law thatemployers with fewer than 50 full-time employees can reimburseworkers for individual health insurance through healthreimbursement arrangements, or HRAs.

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Many have written that clarifying this practice as compliant bystatute is a huge “win” for small employers. It also happens to be a bigwin for local brokers in the technology war between them and theventure-backed, small employer HR technology firms focused on cutting themout.

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Background on reimbursing for individual premiums

When the Affordable Care Act was signed into law in 2010, manyexpected a mass departure of employers from the group healthinsurance market. Given that individuals a) could no longer bedeclined for pre-existing conditions, and b) were eligible forsubsidies in the individual market, it made sense for employers tolook at dropping their group health plan and helping theiremployees get individual policies. This approach was especiallycompelling for employers with fewer than 50 employees that were notsubject to fines for not offering a qualified group plan.

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The IRS put a stop to this by interpreting a certain provisionof healthcare reform to prohibit the reimbursement of individualpremiums — whether done on a tax-free or post-tax basis.

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Violation of that provision carried with it a penalty of $100per employee per day. This worked out to over $30,000 per year peremployee, and made many employers stop reimbursing for individualcoverage - even employers who had been doing so for years.

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Now, with the passage of the 21st Century Cures Act, thenation’s small employers again have a clearly compliant way toreimburse employees who get their own individual policy tax-free.

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Big win for local brokers

This additional approach to providing health benefits is clearlya win for small employers. Given how expensive health insurance hasbecome, many are going to want to at least explore it with theirhealth insurance broker. This is great for local brokers, and badfor the HR technology firms trying to cut them out.

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To understand why, it is important to understand the valueproposition of the HR technology firms that cut out the localbroker. These firms win based on their ability to minimize HRtransaction costs for small employers. Their salespeople emphasizetheir ability to do this, while at the same time de-emphasizing theimportance of having a local health insurance broker who has localrelationships and a local understanding of the market. Why do theydo this? Because their software is, in fact, good at minimizing HRtransaction costs — and also because they don’t have localbrokers.

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This approach works often enough because many small employersthemselves do not fully appreciate the value of having a strategic,local broker. Larger employers appreciate it more, which is whyZenefits had such a hard time in its“Enterprise” segment and David Sacks’ first action as CEO wasdismantling it.

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The reason many small employers do not appreciate the value of alocal broker as much is because they have not yet found themselvesin a position where they really need one. But given the complicatednature of health insurance, many local brokers feel that thesesmall employers likely will one day. With the 21st Century CuresAct, that day is here for every small employer across thecountry.

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Why? Because dropping the group plan and reimbursing employeestax-free for individual coverage is just the sort of complicatedsituation where a small employer will want a strategic, localbroker’s advice. This approach could be a nice win-win for theemployer and employees alike, but structuring it correctly, havingthe proper messaging at the employee meetings, and then helping theemployees get individual policies — all of it needs to go justright.

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Most small employers will not feel comfortable announcing thison their own and they certainly won’t feel comfortable sendingtheir employees to a call center in Arizona for help evaluating andsigning up for individual policies.

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Are you a local broker who has lost a client to an HR technologycompany that cuts out local brokers? Call that former client andask them if they’ve heard of the 21st Century Cures Act. Despitethese HR tech companies’ very robust corporate blogs, as of thiswriting there is not a single mention of this new law on any ofthem. Which brings us to the challenges this new law poses forthese companies, and why the edge it gives local brokers is likelyto persist for quite some time.

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Challenges for HR tech companies trying to cut outlocal brokers

When small employers begin hearing about 21st Century Cures andthe ability to reimburse employees for individual coverage, manywill want to learn more. When the technology firm is the broker, itfaces a myriad of challenges:

  • The revenue model they’ve shown investors falls apart if groupsdrop their plan

  • Their software doesn’t support reimbursing for individualcoverage

  • Their support model doesn’t fit with advising individualemployees on individual coverage

  • Venture capital investors are not known for their patience

Let’s take these one at a time.

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The revenue model they’ve shown investors falls apart if groupsdrop their plan. On average, commissions are higher for small grouphealth insurance right now than they are for individual health insurance. We have seen them anywherebetween 50 percent and 300 percent higher. For a variety ofreasons, local brokers are in a much better position to navigatethis fact with clients than a remote HR technology firm.

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Their software doesn’t support reimbursing for individualcoverage. Ouch. They sold the client on how their HR software wouldminimize HR transaction costs, particularly around benefits. Andnow it doesn’t work for this really attractive strategy? Some ofthe HR technology firms that license their product to brokers suchas EaseCentral, BerniePortal, Maxwell Health, and EmployeeNavigator have reimbursement of individual premiums built-in.Another point in the column for the local broker.

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Their support model doesn’t fit with advising individualemployees on individual coverage. There is a huge differencebetween having one conversation with a decision-maker at a companyof 20 employees versus 20 different conversations with 20 differentemployees who are all the decision-makers for their own policies.Local brokers are in a better position to do this than HRtechnology firms.

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Venture capital investors are not known for their patience. Ifthe HR technology firms begin losing clients or simply not gainingnew ones at the clip they promised their venture investors,pressure will begin to mount on them. Local brokers can wait longerfor the economics of supporting a small group reimbursing employeesfor individual coverage to be more attractive; the HR technologyfirms trying to cut out the broker cannot.

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Also, bear in mind: the small employer doesn’t have to actuallydrop its plan in order for the local broker to be favored here. Itjust has to think it might want to do so at some point. In manycases, that alone will be enough to make the employer want to staywith a local broker. This will especially be true if the localbroker has begun incorporating HR technology into its own valueproposition — something more and more of them are doing.

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