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Volume Eighteen, Issue One January 2015 ACCOUNT BASED HEALTH PLANS (ABHPs) TODAY Consumer Driven Health Plans (CDHPs) are now typically called Account-Based Health Plans (ABHPs). They became available in many markets in 2005. At the time, they were considered a cutting edge plan design. Although these plans are relatively new, they have quickly become more common. According to Mercer, in 2013, 39 percent of employers offered an ABHP. According to the 2014 MMA MI survey, 38 percent of southeast Michigan employers offered an ABHP. Employees are now selecting these plans when they are offered. According to Mercer, in 2013, 18 percent of employees enrolled in ABHPs. According to the 2014 MMA MI survey, 15 percent of employees enrolled in ABHPs in Southeast Michigan. An ABHP is a high deductible health plan paired with a tax-favored account. The accounts are typically either a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA). The accounts allow tax-favored dollars to offset the financial impact of a significantly higher deductible. Now that more employers are considering these plans, it makes sense to review the key details including: Factors Influencing Adoption of ABHPs Health Savings Accounts Health Reimbursement Arrangements Factors to Consider When Adopting ABHPs These plans are tough for some employees. The out-of-pocket liability is significantly higher than most PPO and HMO plans. Employees are not used to paying potentially high out-ofpocket costs. This is especially concerning, if you have a lower income, less educated workforce. Some employers have seen benefits from offering these plans. They find that employees tend to participate more in wellness and disease management programs. When employees are paying a greater share of the cost, they tend to focus more acutely on their health. Continued on Page 2 WORLD CLASS. LOCAL TOUCH. We welcome your comments and suggestions regarding this issue of our Benefit Advisor. For more information, please contact your Account Manager or visit our website at www.mma-mi.com. Volume Eighteen, Issue One These plans are complex. Employers need to understand the details to launch them effectively. FACTORS INFLUENCING ADOPTION OF ABHPs ABHPs place much more responsibility on plan members. The plans are designed to have members pay more for care. The concept is that the more of the cost employees pay, the more likely they will treat health care like a consumer. They will seek out generic rather than brand name medications and use the emergency room only for true emergencies. They may even investigate the price of services at different health care facilities and choose the least expensive one. The hope is that members will consider cost because they have a vested interest in trying to minimize their costs for necessary care. In fact, studies indicate that this approach has effectively reduced costs. Employees are wary of these plans. Employees are not particularly comfortable discussing necessity and cost of care with their physicians. For the last thirty years, employersponsored health plans have paid the majority of health care costs. Employees have not had to discuss costs with providers. As a result, many employees are unaware of the real cost for health care. They see the cost in terms of their copays for services. Under these plans, members not only see, but often must pay the full cost of health care services. January 2015, Page 2 Over the last decade, information resources have improved significantly. Tools are available to help members understand the cost of their care or reasonably estimate what to expect. As a result, plan members are more confident in these plans. They ask questions. They research costs. However, improved resources are not the only factor driving employers to offer ABHPs. The launch of the state Marketplace as part of health reform has also influenced the decision. The Marketplace offers plans in four metal tiers (bronze, silver, gold and platinum). The deductibles in the bronze and silver tier offerings are significantly higher than the deductibles in most ABHPs. This is a new benchmark employers may consider in their renewal planning. The employer mandate may also prompt more employers to offer ABHPs. The employer mandate requires employers to offer most fulltime employees (working 30 or more hours a week) a minimum value (60 percent value), affordable health plan (single cost of less 9.5 percent of household income) to avoid penalties. Many employers offer full- time employees ABHPs with an actuarial value just above 60 percent at an affordable single contribution. This approach may be the most costeffective option to avoid penalties under the employer mandate. In 2018, the Cadillac tax included in the Affordable Care Act (ACA) will affect health plans. Details are needed on how this tax will be assessed. In general, if the health- plan cost exceeds the thresholds below, the insurer or the self-funded plan will need to pay a 40 percent excise tax on the excess amount: Single: $10,200 Family: $27,500 Some employers are concerned about exceeding these thresholds in 2018. As a result, more and more employers are seriously considering ABHPs. HEALTH SAVINGS ACCOUNTS (HSAs) An HSA is one of the tax-favored accounts that can be paired with a high deductible health plan in an ABHP. HSAs are tax-favored, individually owned trust accounts. Anyone can contribute to these accounts. Employees can use an HSA to pay unreimbursed medical expenses or to save for future medical expenses. Funds are taxfavored when they are contributed and when they are used for qualified medical expenses. Funds can be withdrawn for any reason, but if they are not used for qualified medical expenses, they are taxable and in most cases subject to a 20 percent excise tax penalty as well. These highly regulated accounts must meet many requirements. First, HSAs must be paired with a qualifying high deductible health plan (HDHP). A health plan must meet all the IRS requirements to be considered a qualifying HDHP. Those requirements include the following: They must meet the following annually indexed IRS parameters. The 2015 parameters are: – Single Deductible: $1,300 – Family Deductible: $2,600 Continued on Page 3 Volume Eighteen, Issue One January 2015, Page 3 – Single maximum out-ofpocket limit: $6,450 – Family maximum out-ofpocket limit: $12,900 The deductible must apply to all expenses the plan covers including office visits and prescription drug costs. The plan can cover preventive care services before the deductible limit is reached. These services include all the services that must be covered with no member costsharing under health care reform. Finally, the contribution rules for an HSA are confusing. Accountholders with qualifying HDHP coverage and no other comprehensive medical coverage are eligible to contribute to HSAs under the following rules: Accountholders or their spouses Fourth quarter carryover deductibles can affect the maximum HSA contribution allowed. Most plans do not allow fourth quarter carryover deductible credits. Second, to receive tax-favored contributions to the HSA, accountholders must file taxes using the 1040 Form and not the E-Z Form. Third, employers sponsoring qualifying HDHPs need to consider the potential impact of telemedicine. Legal opinions on this issue differ. If an employer directly contracts with a telemedicine provider and covers telemedicine visits that require an office visit copay, the HDHP will likely be disqualified. Simply put, the plan is paying for medical services prior to satisfying the deductible. Telemedicine could be offered alongside an HDHP in this situation if the full cost of the electronic visit is applied to the deductible. Some employers are offering telemedicine programs as part of a larger discount card offering. The full cost of the telephone visit is funded as part of the discount card arrangement. The IRS does allow employers to offer discount cards along with a qualifying HDHP. The legal argument in this situation is that the telemedicine program is actually a discount program and, therefore, would be permitted. Medicare enrolled individuals cannot contribute to an HSA because Medicare coverage is comprehensive. Anyone applying for Social Security benefits is automatically enrolled in Part A of Medicare. cannot set aside funds in a comprehensive medical FSA and still contribute to an HSA because medical flexible spending accounts are considered comprehensive health coverage. A medical FSA plan with a rollover or grace period can impact an employee’s ability to contribute to an HSA. Assuming the rollover or grace period coverage is for comprehensive medical services, the impact is as follows: – Rollover: Accountholders with funds in comprehensive medical FSAs that roll into the next plan year cannot contribute to an HSA for that entire plan year. They can avoid being disqualified in a number of ways. One way is to waive their rights to the rollover before the beginning of the plan year. Another potential option is if the employer rolls over any yearend balance up to the limit into a limited scope FSA for any employee that elects a qualifying HDHP. – Grace period: Anyone with funds available during the grace period will be disqualified from contributing to the HSA until the first of the month following the end of the grace period. If no funds are available in the grace period, the accountholder can contribute to the HSA as of the first day of the plan year. Some accountholders have family coverage. In those cases, the spouse and children can have other comprehensive coverage. That coverage does not affect the accountholder’s family HSA contribution. The dual coverage restriction applies solely to accountholders, not to their dependents. For example, the Medicare eligibility of a spouse will not affect an account holder’s ability to set aside the full family contribution if the accountholder is covered under a family contract. The IRS sets annual contribution limits to HSAs. The limit for 2015 is $3,350 a year for single coverage and $6,650 a year for family coverage. These limits assume the employee is covered for the entire year. If the employee is covered for only part of a year, the limit is prorated for the appropriate number of months. Anyone covered by a qualified high deductible health plan as of the first of the month is eligible to contribute to the HSA for that Continued on Page 4 Volume Eighteen, Issue One month. In some situations people covered for only part of the year can still take the annual election. For more details on these situations please read our fifth Special Alert in 2008 at http:// www.mcgrawwentworth.com/ Special_Alert/2008/ Special_Alert_Issue_5.pdf. Employers may contribute to an employee’s HSA. Overall, employers contributing to one employee’s HSA must contribute a comparable amount to all employees’ HSAs. That is the simple concept, but there are number of reasons why employers can vary the amounts they contribute. The comparable contribution rules are complicated. These rules do not apply if the employer allows HSA contributions to be made pre-tax through a Section 125 plan. In this case, the employer must be able to pass the Section 125 non-discrimination tests to show the contributions are not discriminatory. Employers do not have a lot of control over HSAs. The IRS dictates the rules for qualifying HDHPs. Employers manage the process of deducting contributions pre-tax. They then forward the contributions to their HSA vendors. Employers also don’t get to decide which expenses the HSA will cover. The government determines the types of expenses that can be considered tax-favored. These expenses include: Section 213 (d) qualified medical expenses. Premiums for health insurance when the person is not employed, including COBRA premiums. January 2015, Page 4 Over age 65, the following are tax-favored: – Medicare premiums (Part A, B or D). – Medicare Advantage plan premiums. – Retiree contributions for employer-sponsored retiree health plans. They are not qualified if you became eligible for Medicare before age 65. – Medigap plan premiums are not tax-favored. The accountholder or a Section 152 tax dependent has to incur the expenses. Section 152 tax dependents can include same-sex spouses married in a jurisdiction that recognizes the marriage. Adult dependent children can be tricky. Health care reform requires health plans to cover children up to age 26. Plans can no longer limit eligibility based on student status, financial support issues, and so on. However, these health care reform changes do not apply to HSA dependent eligibility. Just because adult dependents can be covered under the HDHP does not mean their expenses can be reimbursed pre-tax under the HSAs. For HSAs funds to be used as tax-favored, the child must meet the Section 152 dependent definition. HSA vendors sometimes offer debit cards along with HSAs so accountholders can access funds immediately. Vendors do not track expenditures. Employees, not vendors, are responsible for proving their HSA funds were spent for qualified medical expenses if the IRS decides to audit them. State tax law can also complicate an HSA. Most states recognize the taxfavored status of HSAs. However, some states do not. Some states do not allow pre-tax deductions for HSAs. Consult your state tax advisor to determine whether your HSAs contributions and distributions can be treated as tax-favored at the state level. HSAs can be complicated. The accounts do offer people a long-term, tax-favored method of saving for health care expenses. Higher cost sharing is becoming more common. These accounts can help employees budget for expenses. HSAs are also a good way to save for future medical expenses. ABHPs paired with HSAs place a great responsibility on the accountholder. You may want to review the following IRS publication to learn more about HSAs http:// www.irs.gov/publications/p969/ ar02.html. HSAs are typically not considered an ERISA health benefit plan, even if an employer contributes to the account. Since these accounts are not considered group health plans, they are not subject to COBRA or many other federal benefit laws that affect group health plans. Continued on Page 5 Volume Eighteen, Issue One HEALTH REIMBURSEMENT ARRANGEMENTS (HRAs) HRAs are self-funded medical plans. As a result of health care reform, HRAs must be paired with a comprehensive medical plan for active employees. HRAs are much more flexible than HSAs. Employers can be flexible with plan design and covered services. HRAs must meet the following requirements: Only employers can fund HRAs. The employer contributes a specific amount to the HRA and the employee can use those funds for eligible medical expenses. Employers have full control over which expenses their HRAs can cover so long as they are Section 213(d) medical expenses. Employers can also have a subset of Section 213(d) expenses the HRA can cover. The plan document must list all covered services. Because HRAs are considered self-funded medical plans, they are subject to all federal laws affecting group health plans. For example, COBRA, ERISA requirements, and Section 105(h) non-discrimination rules apply to HRAs. Employers can be flexible with HRAs. Some employers require a front-end deductible and the HRA funds become available once the employee meets the deductible. Other employers make the HRA funds available as soon as an employee incurs an eligible expense. Once the HRA funds are exhausted, employees must January 2015, Page 5 pay any additional expenses until they meet the actual plan deductible. Employers can also decide what happens to the funds left in the account at year end. They can require unused funds be forfeited, allow year-end balances to roll over or limit the funds that can be rolled over. Employers should budget for their potential liabilities as funds roll over to the following year. They need to consider carefully their plan’s approach to rollovers. If employees must forfeit funds at year end, they may decide to use the money before they lose it. A rollover encourages employees to spend their HRA funds wisely. However, they become a potential liability when the account balances become significant. HRA funds are paid out only when eligible claims are submitted. Medical FSAs and HRAs can coexist. The employer can determine which account will pay first and must explain payment order in plan documents. Many employers require the medical FSA to pay first because FSA funds are subject to the “use it or lose it” rule. HRAs are typically paired with insured plans. Part of the savings from ABHPs comes from substantially increasing the deductible. When actuaries calculate savings, they assume the member pays a larger portion of the cost. When members have to pay more, they tend to use fewer services. This means the insured plan rates are lower for higher deductibles. However, pairing an HRA with a higher deductible plan does not always change member behavior as expected. For example, if an employer has a $1,500 deductible, but funds an HRA at $1,250, the member pays only $250 of the deductible. This does not always encourage members to use fewer services. Some insurance carriers have noticed that employees use the high deductible plans paired with HRAs much more frequently than high deductible plans not paired with HRAs. As a result, carriers may limit the plans that they will pair with HRAs. Carriers may also assess a surcharge on employers that offer HRAs paired with higher deductible plans. Employers’ potential savings with HRAs depend on usage. Employers save money on the fully insured premiums for increasing the deductible in the underlying higher deductible insured health plan. The employer would use savings to reimburse expenses under the selffunded HRA. The employer saves money if the expenses reimbursed under the HRA are less than the overall savings. Employers may end up spending more if the HRA claim expenses exceed the premium savings. Employers considering this route often do not have access to their claim experience. Employers will need to review their demographics and risk tolerance when considering an ABHP paired with an HRA. HRAs may be a cost-effective approach to offering an ABHP. Employers can build cost-sharing into the plan, instead of requiring a member to satisfy the deductible before the plan pays expenses. This approach may be more acceptable Continued on Page 6 Volume Eighteen, Issue One for lower income employees. Employers should try to choose an HRA vendor that can coordinate electronically with the insurance carrier to create a seamless claim process. Employers that sponsor self-funded HRAs must pay the Patient Centered Outcome Research fee on the average number of employees covered under the HRA. However, they are not required to pay a separate reinsurance fee or market share tax on the self-funded HRA plan. FACTORS TO CONSIDER WHEN ADOPTING AN ABHP Employers need to consider a number of factors when they decide whether an ABHP makes sense for their organization. When these plans launched nearly a decade ago, employers were wary for a number of reasons. The primary reason was the increase in financial liability to plan members. At the time, the increase in liability was significant and the tools employees could use to learn about cost, quality and alternative options were limited. It was incredibly difficult to find the cost of an office visit, any type of lab service, x-rays and even the full cost of prescriptions drugs. The cost picture was complicated. Not even doctors could advise you on the cost of services. Employers felt they were increasing financial liability but there was no member-friendly way to act as a consumer when purchasing health services. This picture has changed dramatically over the last five years. Insurance carriers and even outside January 2015, Page 6 vendors have focused on providing cost, quality and information on alternative treatments. Employers can encourage employees to use vendor tools. They can also hire outside vendors to provide more detailed cost and quality information. Patient Advocate programs are growing in popularity. These programs typically have cost estimator tools as part of their services. Nurses are also available to help patients understand their potential treatment choices. While these plans still shift more financial liability to members, there are better tools to help members become consumers. These tools help locate cost-effective treatment options. Another reason employers were reluctant to adopt these programs initially was concern that they would not control longterm cost. When insurance carriers introduced these plans, the rates were too low. Now carriers have enough claims experience and participants to rate these plan options effectively. These plans seem to affect long term cost control, although it is difficult to pinpoint definite cost savings from the different approaches employers take when structuring ABHPs. Informal results suggest these plans consistently cost 5 percent less when paired with taxfavored accounts and consumer tools. A 2012 Rand Study showed cost savings under ABHPs: Two-thirds of the savings came from initiating fewer episodes of care; one-third came from spending less for each episode. Enrollees cut back on the use of some beneficial services, including preventive care, such as cancer screenings, even though such care was fully covered under the ABHP. The 2014 Employee Benefit Research Institute (EBRI)/Greenwald & Associates Consumer Engagement in Health Care Survey indicate these plans do affect member behavior. ABHP members were more likely than traditional health plan (HMO or PPO members) to say they: Asked whether the plan would cover specific care. Asked for a generic drug instead of a brand-name drug. Talked to their doctors about prescription options and cost. Checked the price of a service before getting care. Asked their doctors about treatment options and costs. Developed a budget to manage health expenses. Used an online cost tracking tool. This survey also showed that ABHP members were more concerned with their health and thus more likely to take advantage of various wellness programs. These programs include health assessments, biometric screenings and health promotion. These plans are changing behaviors and these behavior changes do decrease cost over time. Families that switched from a traditional health plan to an ABHP spent an average of 21 percent less on health care than similar families in traditional plans in the first year after switching. Continued on Page 7 Volume Eighteen, Issue One Another employer concern is whether having to pay more will keep members from seeking necessary care. Delayed care can result in more expensive, serious complications. This concern is valid for some lower income employees. They may not be able to set aside money in tax favored accounts to help budget for potentially expensive health care services. These employees may even forgo services if they are concerned about the expense. Less educated employees may also forgo care. The mechanics of ABHPs are complicated and difficult for many members to understand. A lack of understanding can affect the decision to seek care. Most studies show that employees covered by ABHPs tend to cut back on unnecessary care and look for cost-effective care. They make fewer emergency room visits, and more visits to primary care physicians and urgent care centers. The move to ABHPs is still difficult. However, these plans are now more common. Members that have experience with these plans have learned to budget and manage health care expenses. Employers will also need to consider whether to pair an HSA or HRA with their health plan. HRAs allow more flexibility with plan design but may not deliver the cost savings. The plan has to be structured to motivate employees to make cost effective benefit choices. In addition, employers will need to consider whether to allow long-term savings options in an HRA and their liability in terms of those savings. HSAs are more complex. The IRS determines many plan parameters. Using an HSA increases employee responsibility for health plan expenses. They must certify that the distributions from the HSA are for qualifying medical expenses when they file their taxes. January 2015, Page 7 When they consider ABHPs, employers need to balance budget needs with concerns about employee issues. CONCLUDING THOUGHTS ABHPs have become common with most employers. Many offer these plans along with more traditional PPOs and HMOs. A small percentage of employers offer only ABHPs. These employers believe that employees who have a stake in the cost of their health care will focus on cost effective options. A number of market forces are prompting employers to reconsider ABHP strategies: The launch of the Marketplace. Bronze and Silver level plans offer significantly lower benefits than the benchmark employer plans. The impact of the employer mandate. Many employers will need to cover employees working 30 or more hours a week. In order to minimize potential penalties, employers are offering 60 percent value ABHPs that are affordable (cost less than 9.5 percent of employee’s household income for single coverage). The fear of the Cadillac tax. Employers are awaiting further regulations to determine what costs need to be included under the Cadillac tax. Some employers are concerned their plan costs will exceed the Cadillac tax thresholds in 2018 and result in additional tax liability. The move to ABHPs is not an easy one. These plans place more responsibility on individuals but employers have had success with them. They do seem to encourage employees to make more costeffective choices and to focus on their health. If you have any questions about ABHPs, please contact your Account Director. MMA Copyright Marsh & McLennan Agency LLC company. This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change. Marsh & McLennan Agency LLC 3331 West Big Beaver Road, Suite 200 Troy, MI 48084 Telephone: 248-822-8000 Fax: 248-822-4131 www.mma-mi.com 250 Monroe Ave. NW, Suite 400 Grand Rapids, MI 49503 Telephone: 616-717-5647 Fax: 248-822-1278 www.mma-mi.com