Download ACCOUNT BASED HEALTH PLANS (ABHPs

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