GBA 1 - Assignment 5 - Consumer-Driven Health Plans

Discuss 1.) the origin and tax treatment of HRAs and 2.) why HRAs are not considered an ideal account structure

1.) By early 2002, the IRS and its parent agency, the US Department of Treasury, were besieged with insurance companies seeking guidance on the tax treatment of an HDHP that would be carried over from year to year. IRS and Treasury Department viewed these accounts favorably in part because health care inflation had again started to dramatically escalate after a few years of relatively modest growth. IRS ruled that HRAs funded solely by the employer and permitting unused amounts to be carried over from year to year, would qualify as health benefits exempt from federal income tax; but IRS specifically prohibited the use of employee contributions, including arrangements that in effect would be financed with employee money. 2.) HRAs, although utilized in CDHPs, are not considered an ideal account structure because they limit contributions to those expressly provided by the employer. Employees who need more tax-favored money to pay out-of-pocket expenses are unable to supplement the employer account with pretax dollars.

Explain 1.) The underlying premise on which consumer-driven health plans (CDHPs) are designed and... 2.) What core design attributes characterize these plans

1.) CDHPs operate on the underlying premise that when an individual is more directly aware of the full costs of health care, he or she will weigh with greater scrutiny whether the recommended care is needed and shop for that care as a cost-conscious consumer. 2.) Although there is no precise definition of a CDHP, many of the plans that are given the label share common core design attributes. The basic structure of a CDHP entails a high-deductible health insurance plan, an individually controlled health account, and information and decision-making tools regarding health care cost and quality.

What must an employer do to achieve success when implementing a CDHP?

1.) Educate employees as to the true cost of medical services and their role in managing health care spending. 2.) Increase the employee's responsibility for medical purchase decisions through innovative plan designs with built-in incentives. 3.) Provide clinical and financial information to enable employees to be true health care consumers. 4.) Provide proactive clinical management and coaching to optimize provider inefficiencies and courses of treatment.

What employer compliance issues apply to HSAs, HRAs and FSAs in the following areas: 1.) ERISA 2.) Nondiscrimination Rules 3.) COBRA continuation 4.) Trust requirementss

1.) HRAs and FSAs sponsored by employers subject to ERISA generally are ERISA plans. This would subject these plans to the normal responsibilities imposed by ERISA, such as reporting and disclosure requirements. HSAs, on the other hand, generally would not be considered ERISA plans, even if funded by the employer involvement with the HSA is limited. 2.) Different types of nondiscrimination rules apply to HSAs, HRAs and FSAs. HSAs (if receiving employer contributions) must provide comparable employer contributions to all employees participating in an HSA for each coverage period. If the HSA contributions are made through a cafeteria plan, these contributions would be subject to cafeteria plan nondiscrimination rules, rather than the general HSA comparability rules. HRAs are subject to the general nondiscrimination requirements for self-insured medical expense reimbursement plans (and for certain insured plans as a result of health care reform of 2010). Health FSAs are subject to both the general nondiscrimination requirements for self-insured medical expense reimbursement plans, and also are subject to the cafeteria plan nondiscrimination rules. 3.) COBRA continuation coverage rules apply to both HRAs and FSAs, but do not apply to HSAs. 4.) HSA assets must be held in a trust or custodial account, whereas no such trust or custodial account is needed for an HRA or an FSA.

Discuss additional plan design decisions an employer must make once the basic features of a CDHP (such as levels of cost sharing and type of individual account) are established.

Additional important CDHP plan design include the following: 1.) Preventive care - a critical component of consumer-driven health care given the premise that staying healthy is cheaper than treating illness. In cases of chronic illness or potential health issues, individuals may be assigned a health coach to assist in making health care decisions. 2.) Full replacement vs. option - the CDHP may be offered as an option alongside other plans, or on a standalone basis. Large employers are more likely to introduce a CDHP as an option. Full-replacement CDHPs are more common among small employers, although they are becoming more popular with larger employers as well. Standalone plans have the advantages of minimizing adverse selection and maximizing potential cost savings. 3.) Employer contribution strategy - Properly set employer funding and premium contribution levels affect employee acceptance, participation and behavior. Generally, employer account contribtuions fund only a portion of the deductible to encourage greater consumerism. 4.) HRA carryovers - Whereas HSA funds are fully owned by the employee and not subject to any use-it-or-lose it provisions, HRA accounts are employer dollars and the employer has the discretion whether to permit carryover of unused dollars.

Describe the deductible and out-of-pocket limits for an HDHP which accompanies an HSA.

An HSA can be used only if paired with an HDHP which meets deductible and out-of-pocket limits required by law. There are separate minimum deductible requirements for single coverage and family coverage, and also maximum out-of pocket requirements for single and family coverage. The amounts are adjusted annually for inflation.

What are the rules governing the use of multiple accounts?

As defined earlier, a CDHP involves a high-deductlbe health plan (HDHP) coupled with either an HRA or HSA. However, and employee may be eligible for, and enrolled in, more than one type of account. The rules provide: 1.) An employee covered by an HDHP and either a health FSA or an HRA generally cannot make contributions, or have employer contribution made on his or her behalf, to an HSA. However, an employee can make contributions to an HSA while covered under an HDHP and a "limited purpose" FSA. Limited purpose FSAs cover expenses not otherwise covered by the plan, such as dental or vision care. 2.) An HRA participant may also have a general purpose FSA. The employer establishes the priority, which is outlined in the plan document.

Briefly describe the key findings of the American Academy of Actuaries and Government Accountability Office (GAO) studies regarding impact of CDHPs on health plan cost and trend.

Both the American Academy of Actuaries and Government Accountability Office studies reported favorable cost results for CDHPs. The actuaries' study showed significant savings in first-year costs and subsequent year trend rates as compared to traditional PPO plans. Similarly, GAO reported spending and utilization increased by a smaller amount or decreased for HRA enrollees compared with those in PPO plans. However, note that these favorable results may not be generalized. Individual employer experience may differ because of such factors as plan design, large claim impact, group demographics and employer contribution strategy.

What do proponents about the CDHP have to say about the plan?

CDHP proponents conclude that until individuals pay for health care more directly, there is little pressure either for individuals to be actively involved in cost decisions or for the health care industry to control costs. CDHC must engage and inform the individual on the issues of health care costs by providing information on health care costs, quality and outcomes, so that individuals can escape the notion that more expensive health care is better care.

Describe the basic plan design of a CDHP

CDHPs typically combine a high-deductible health plan with one of two types of individually controlled accounts (HRAs and HSAs) which can be used to pay deductibles and other costs not covered by the high-deductible plan. The basic plan structure provides first-dollar coverage through either an HRA or HSA fund. The employee then bears full responsibility for the difference between the fund amount and the deductible. Once the deductible is met, the plan coinsurance and copayment features apply. Fund contributions, deductibles, coinsurance and copayments usually differ for single vs. family coverage and for in-network vs. out-of-network services.

Briefly discuess the tax treatment of HSAs.

First available in 2004, HSAs may be funded by an employer , and employee, or both on a tax-free basis. HSAs provide triple tax savings: 1.) pre-tax contributions 2.) tax-free interest on investment earnings 3.) tax-free distributions for qualified medical expenses

What restrictions apply to permissible reimbursements from HSAs, HRAs and FSAs?

Generally, the reimbursements applicable to HSAs, HRAs, and FSAs are the same. All three types of accounts can pay for Section 213 (s) "qualified medical expenses" incurred by the account holder, his or her spouse and dependents. However, there are some differences in connection with certain types of medical expenses. Specifically, differences apply when health insurance premiums, long-term care insurances or payments for long-term care services are involved. Whereas an HRA can pay for health insurance premiums, an FSA cannot. An HSA may only pay for health insurance premiums under the following circumstances: while receiving federal or state unemployment benefits, for COBRA continuation coverage, and for Medicare (excludes Medicare Supplemental plans) premiums and for employer-sponsored retiree health insurance premiums. Both HSAs and HRAs can pay long-term care insurance premiums; an FSA cannot. An HSA can pay for long-term care services, but neither HRAs nor FSAs can make such payments.

Describe the characteristics of cafeteria plan health FSAs.

Health FSAs are funded on a pretax basis by the employer or the employee. The amount being contributed to the FSA must be determined prior to the start of the plan year. Amounts contributed to an FSA are not subject to either federal income tax or to Federal Insurance Contributions Act (FICA - Social Security and Medicare) taxes. Avoidance of FICA taxes add another level of savings for both the employer and the employee. The major drawback of an FSA is the use-it-or-lose-it provision of the law. Essentially, unused balances at the end of a plan year may not be carried over to a future year. However, plans may permit a grace period of up to 2.5 months after the end of the plan year for remaining balances to be used. The forfeiture requirements for FSAs has been criticized as encouraging employees to unnecessarily spend remaining health care balances at the end of a plan year.

Describe the differences in funding provisions, other than contribution limits, among HSAs, HRAs, and health care FSAs.

In addition to the differences in contributions limits discussed in the previous question, there are substantial differences in other funding provisions among the various types of individual savings accounts. Whereas both employers and employees may contribute to HSAs and FSAs, only employers may contribute to an HRA. The provisions regarding carryover of unused balances from year to year and transfer of accounts also differ. There are no annual or lifetime limits on the amount that can be carried over or accumulated in an HSA. Although HRAs allow for the carryover of unused balances from year to year, an employer may impose annual or lifetime carryover limits. An FSA does not allow carryover of unused balances* (*Not true after 2013). Only the HSA is portable, meaning employees keep the HSAs when they leave or change jobs. HRAs and FSAs do not have this portability feature.

Discuss the importance of price and quality transparency to participate in a CDHP.

Since an underlying premise of CDHPs is that that plan participants are well informed, it is essential that they are given relevant health information germane to their decision making. This necessitates detailed and understandable information about provider quality, health costs, available treatments and best medical practices. The tools provided must be easy to access and use. Employees can often access this information from tehir company's website.

What are the three legally recognized types of individually controlled accounts for health costs that could be used with a CDHP to take full advantage of favorable tax treatment?

The three legally recognized types of individually controlled accounts for health costs that could be used in a CDHP to take advantage of favorable tax treatment are: FSAs, HRAs and HSAs.

What differences exist among HSAs, HRAs, and FSAs regarding their tax treatment?

There are differences that relate to HSAs, HRAs, and FSAs, regarding their tax treatment. Subject to funding limits, HSA and FSA contributions are excludable from gross income and not subject to FICA. HRA contributions receive the same tax treatment, but are not subject to any statutory contributions limits. Earnings on balances within an HSA generally are not taxable. This generally is not an issue for HRAs and FSAs since employers usually maintain balances as notional accounts so there are no earnings. If distributions are made from an HSA, HRA or FSA to reimburse medical expenditures there are generally no income tax issues. HRAs and FSAs may only make distributions to reimburse qualified medical expenses. An HSA, however, can make other distributions. There would be no income tax on timely distributions of excess contributions. For all other distributions from an HSA (not used to reimburse qualified medical expenses), federal income tax plus a 20% penalty would apply. The penalty tax is waived after the account beneficiary becomes Medicare eligible, is disabled or dies.

To what extent does federal law mandate specific features within CDHPs?

There are no specific or legally required features mandated, per se, for a CDHP at the federal level. Neither the Employee Requirement Income Security Act (ERISA) nor federal tax laws, impose additional requirements on CDHPs beyond those normally applicable to health plans generally. However, federal law does precisely define how the tax-favored individual health accounts (both HRAs and HSAs) common to CDHPs must be structured. Federal law also establishes some basic requirements for the high-deductible plans that must accompany HSAs if the accounts are to receive certain tax benefits.

Are there any restrictions with respect to funding mechanisms or underlying plan types that may be used with CDHPs?

There are no specific restrictions on funding mechanisms for a CDHP, it may be fully insured or self-insured. Likewise, there is a flexibility in the underlying plan type that may be used with a CDHP. For example, it could be a preferred provider organization (PPO), point-of-service (POS) or even a health maintenance organization (HMO) plan.

Explain how plan sponsors and CDHP designers seek to provide the necessary tools for allowing plan participants to fully realize to potential of these plans.

To fully realize the potential of CDHPs, participants must be equipped with the tools to help them care for their own health and find the best and most efficient health care providers. The following features that comprise a CDHP assist as described: 1.) A high-deductible health insurance plan. This type of health insurance plan provides protection for the catastrophic losses but leaves the burden of minor losses on the individual; this burden should provide an incentive to select the best and lowest cost providers when health care is needed. 2.) A health reimbursement arrangement (HRA) or a health savings account (HSA). Either one of these accounts provides funds to cover minor health expenses and/or expenses not covered by the health insurance. Since the account's balance can be carried over from year to year, participants are encouraged to accumulate funds for future use. This is a contrast to the use-it-or-lose-it aspect of flexible spending accounts (FSAs). 3.) Information sources and tools to educate on health issues and to locate the highest quality and most cost-effective health care providers. Without easily accessible information on health care alternatives, it is difficult for plan participants obtain and use existing health information, answer questions about the individual;s health issues, and provide guidance on use, choice and interaction with health care providers. 4.) A conveniently accessible health coach or consultant. Even if information is made available, there are times when individual participants require the counsel of an expert to assist in understanding health issues, and to provide guidance on use, choice and interaction with health care providers. 5.) A proactive medical professional empowered to actively assist in cases of serious chronic conditions or illnesses. In contrast to less extreme health cases, a serious chronic condition or illness requires greater input from a medical professional. Such a person may contact the patient on a regular basis and act as a liaison and coordinator between the patient and his or her medical providers.

Highlight the key features of HSAs.

When compared to HRAs or traditional health care FSAs offered under cafeteria plans, JSAs offer much more flexibility in funding and encourage participant savings for future medical expenses. Some key features of HSAs include: 1.) HSAs are fully owned by the employee 2.) The employee has unfettered access to HSA funds, even for nonmedical purposes. However, distributions for reasons other than qualified medical expenses are subject to income tax as well as an additional 20% tax penalty 3.) HSAs have the advantage of portability. Employees may take the funds with them upon changing employers or leaving the workforce 4.) Unlike HRAs and Health FSAs, which by law can either be coupled with any type of health plan or stand alone as the only employer health benefit, and HSA can only be utilized when it is coupled with an HDHP that meets specific criteria.

Discuss the impact of CDHPs on consumer behavior and quality of care.

While critics of CDHPs often contend that plan sasvings result from participants forgoing necessary care, a study conducted by the American Academy of Actuaries reported otherwise. Among the findings of the study were the following: 1.) CDHP participants received the same or higher levels of care as those in traditional plans. 2.) CDHP participants showed significantly higher use of preventive services. 3.) CDHP particiapnts received the same or higher levels of care fro chronic conditiions such as diabetes and hypertension.

Important in any employee benefit context, why are employee communication and education programs especially critical for consumer-driven plans?

With the number of working pieces involved in consumer-driven health care and the potential for consuion, a key component of a successful CDHP is an effective employee communication and education program. A successful CDHP requires that the employee not only understands the mechanics of the plan, but also is empowered to make informed and cost-effective personal health care decisions. Consequently, most plans offer some form of a health coach to help employees navigate the medical care system. The most effective communication and education campaigns reach out to employees early and often. While the initial media campaign is critical to employee acceptance and understanding, ongoing communications are important to achieving and sustaining the behavioral changes needed to make CDHP cost-saving objectives possible.