By
Carlton Harker, FSA, MAA
for www.hsaplanning.com
Reducing the Number of
Uninsureds
Lowering Plan Costs
Conclusion
Introduction
The new Health Care Savings Account (HSA) legislation (codified at IRC §223) is being hyped as a great new cost savings tool (which it is not). However, it is the best solution there is to reducing the present number of uninsureds which number is both very large and growing rapidly. This article examines both of these assertations:
To provide the reader with background information and data, a New Web Site (www.hsaplanning.com) is being established. It is the hope that this new Web Site will be informative, proactive, useful, etc.
Many people believe, however, that only self-funding has the needed celerity and flexibility to reduce the number of uninsureds and thereby rescue employer-financed health plans from being replaced with some type of single payer plan. That is, if employer-sponsored health care is to be saved, it will be the self-funding of the HSA Model which will do it.
The tax advantages to the participants of the HSA (i.e., medical IRA) are too great to be ignored by the employer (plan sponsor or not). The lock on the HSA by the participant through a trust or custodial account means that the savings from the consumer-directed medical decision-making are largely owned by the participants and not by the plan.
The writer believes not that where consumer-directed health care is considered for employers, the HSA Model is the only reasonable option:
Many Compelling Reasons to accept or reject the HSA Model are rapidly appearing.
Compelling Reasons for and against the HSA plan are as follows:
For
the HSA Plan
· Has near universality of eligibility.
· Overcomes the disadvantages of the FSA, HRA and MSA.
· Tax advantages of a medical IRA.
· Withdrawals by either a debit or credit card.
· Introduces consumer-driven health care concept into plan design.
· While Rx cannot be carved out, it can be removed as a plan benefit.
· Levels the playing field between employees and non-employees.
· Removes stigma of managed care.
· Opening up the HSA as an option may encourage conflicts between the young v. old; active v. retirees; and affluent v. non-affluent.
· Financial impact of anti-selection is unpredictable and maybe significant.
· Concept of consumer-driven health care may be a myth.
· Financial hit on the U.S. Treasury may have to be recognized and reversed; politically, the financial award to the affluent may be too good to last.
· The threat of the HSA model destroying the traditional plans is considered by some to be significant.
· Calling the HDHP a low cost product is not correct, it can be quite expensive.
· Most prudent course of action relative the HSA is to wait and see according to some critics.
New Web Site (under construction) means www.hsaplanning.com and will contain the following support items:
Uninsureds means those employees whose compensation is reported by the IRS Form
W-2.
Gap in Coverage means for incurred claims, the HSA is exhausted and the HDHP $500 deductible has not been met. The problem may be ignored or dealt with directly. It may be dealt with directly in one of two ways:
1. Employer reimburses (or directly pays) such participant’s uncovered medical expenses on a selective basis. That is, as a payroll matter which means such employer reimbursements are taxable income to the participant.
2. Employer treats such payment as a medical reimbursement arrangement under IRC §105 (b) but only for rank and file employee so as to not discriminate under IRC §105 (h). This will likely be deemed another, or similar plan by IRC §223(c) (1) (A) (ii) and therefore may not a reasonable option.
Option number 1 is not unfavorable to the rank and file in that they will likely be in a low tax bracket and FICA will not apply because it is not earned income.
Acronyms used in this article:
ADA – Americans with Disabilities Act
ADEA – Age Discrimination in Employment Act
EPO – Exclusive Provider Organization
FICA – Federal Insurance Contributions Act
FSA – Flexible Spending Account
HDHP – High Deductible Health plan
HIPAA – Health Insurance Portability and Accountability Act
HRA – Health Reimbursement Account
HSA – Health Savings Account
IRA – Individual Retirement Account
IRC – Internal Revenue Code
MGA – Managing General Agent
MSA – Medical Savings Account
PPO – Preferred Provider Organization
TPA – Third Party Administrator
Reducing the Number of Uninsureds
The Risk Pool Manager should make available to Candidate Employers a High Deductible Health Plan (HDHP) along with its Administration and Funding Arrangements and should also offer on a one-stop service basis such requisite services as Block Stop-loss or Reinsurance, Managed Care and Marketing. Such Risk Pool Manager should also provide the ERISA Compliance, Actuarial / Underwriting, and Rating Support for the Risk Pool of Employer Plans.
The HSA Model should be priced reasonably and serve the common interests of both the employee and employer so well that most employers ought to feel embarrassed in not providing it. That is, any employer not providing a HDHP either (a) denies its employees the right to the tax-advantaged medical IRA (i.e., the HSA) or (b) puts such employees in the position of having to provide their own HDHP in the far more expensive individual market.
Risk Pool Manager means an MGA, TPA or Producer (Risk Manager, Consultant, Broker) firm with the requisite skills and the dimensions to provide or manage the multiple services needed to support the operation of the risk pool.
Risk Pool of Employer Plans means all plans of participating employers with commonality as regards plan design, structure, administration, etc. Employers retain the freedom to elect different levels of reinsurance. Each plan is a freestanding ERISA plan and the claims experience of one is not helped or hurt by that of another. Note: the legislation now under consideration in Congress that would allow a federally-regulated MEWA (called the Association Health Plan) might by changed so as to be permitted only with HDHPs.
Candidate Employers mean those who do not now have a health plan and are small employers in benefit parlance (i.e., between five and 100 participant lives).
HDHP means a plan with a minimum $5,000 calendar deductible and which otherwise meets the requirements of IRC §223. A lower deductible may be used but is not recommended. Features of interest with the HDHP include the following:
Administration means claims administration, recordkeeping and compliance. Typically, these functions will be done by the TPA.
Funding Arrangements mean the establishment and control of these accounts:
·
Health Saving Account
Trust or custodial account which trustee or custodian may be a bank, insurer or the risk pool manager. A time lag in getting geared up by some banks and insurers may be expected.
·
HDHP
Funding for the HDHP may be trusteed or general asset; may be managed by the TPA if not trusteed.
Block Stop-loss or Reinsurance means that risk device designed to the employer’s claims which exceed the specific limit. Such may be in the stop-loss or reinsurance format so long as the protection tracks the pool and not the employer subscribers. If in the reinsurance format, an unauthorized reinsurer may be needed. No aggregate stop-loss is contemplated; arduous annual shopping of stop-loss by employer is to be avoided.
Managed Care means all of the cost containment, letter solutions (PPO, EPO, e.g.) and steerage found with the present family of health care plans and may remain in place in the HDHP.
Marketing means the selling and placement of the HSA solution which typically will be the producer (agent/broker/consultant/risk manager) and the employer at the point of sale. The Risk Pool Manager will typically have a single-case agency agreement with the producer.
ERISA Compliance means that all of the present ERISA (as well as ADA, ADEA, HIPAA, etc.) rules apply and each subscribing employer will be deemed the sponsor of a freestanding ERISA single employer plan.
Actuarial / Underwriting and Rating Support means those needed disciplines which are needed to maintain the self-funded pool (albeit not jointly-shared by the employers). Rates, underwriting, etc. must be approved by the reinsurer and administered by the Risk Pool Manager or its delegate. Health questionnaires at the initial underwriting may be considered for smaller employers.
Lowering
Plan Costs
Employer-sponsors of existing traditional plans must necessarily make an HSA decision:
1. Ignore it
2. Adopt it but as an:
a. Option to an existing plan
b. Mandatory HDHP and HSA for all participants.
In reaching a decision, the employer will consider Plan Cost Parity, Anti-selection by Participants, Employee Relations, Administration/Practical Problems and the Effect on Plan’s Claim Costs.
Plan Cost Parity means the determination of the HDHP costs and the amounts to be deposited in the HSA so that the total cost of the HSA and the traditional plan will remain the same. Some adjustment for the expected Anti-selection by Participants will usually need to be made.
Anti-Selection by Participants means the tendency of the heavy plan users to elect the traditional plan and the others to elect the HSA Model: This introduces financial anti-selection.
In a model built by the writer, these assumptions were made:
· Of the total claims, 60% were attributable to the 10% with health problems.
· When the HSA option was offered, the 10% all elected the traditional option; the remaining 90% elected the HSA option.
· The division of cost for the HSA option was 60% for the HDHP and 40% for the HSA.
The anti-selection against the plan occurs because the 90% HSA electees have a significant cost savings in the 40% HSA portion but such savings inures to their benefit, and not the plan. It is the view of the writer that the plan can expect a plan-wide increase in costs when the HSA is offered optionally of 5-15%. This range is needed because of the many imponderables in assessing such anti-selection.
Employee Relations is an employer consideration because may employees will feel slighted if they are unable to have a medical IRA (i.e., HSA). That is, the employer has, in effect, blocked them from having the advantage of building their health care expense nest egg with after-tax dollars.
Administration / Practical Problems mean the myriad the unanswered questions which will necessarily be clarified, in time, by regulations, industry practices or case law.
Effect on Plan Claims Costs means that resulting from Consumer-Directed Medical Care. It included both care not obtained or obtained at a reduced cost. The HSA Model results in nearly all of such savings directly favoring the participants.
Conclusion
With as much haste as is practical, a self-funded HDHP ($5,000 or $2,600 deductible is recommended) along with an HSA should be adopted by most small employers who do not now offer a plan as a way of significantly reducing the number of uninsured.
To avoid being the roadblock or impediment to their employees who need or want a medical IRA, many employers will feel obligated by a code of ethics to at least offer the HSA plan as an option to the existing traditional plan.