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The United States is unique among developed countries in the extent to which it ties health care financing to employment.  Fifty-six percent of Americans receive health coverage through their jobs. Some health policy experts have criticized this situation, asserting that health care could be financed much more efficiently if individuals purchased the health care coverage that best suited their needs rather than relying on their employers to purchase coverage for them.

The belief that individuals are best suited to make purchasing decisions regarding their own health care has grounded legislation establishing tax preferences for health purchasing accounts, including health savings accounts. The IRS has also established through guidance its own account-based program—the health reimbursement arrangement.

Health reimbursement arrangements (HRAs) are accounts funded entirely by employers to pay for medical expenses incurred by employees or their dependents.  HRA contributions are excluded from taxation because HRAs are considered group health plans.  As such, they must comply with Affordable Care Act group health plan restrictions and requirements, including the prohibition on annual dollar limits and the preventive services coverage requirement.

Although earlier guidance and regulations permitted the integration of dollar-limited HRAs with traditional group health plans that otherwise met ACA requirements, until now HRAs could not be used to purchase individual health coverage.  A regulation proposed by the Departments of Treasury, Labor, and Health and Human Services on October 29, 2018, however, would allow the use of tax-preferenced employer contributions through HRAs to purchase individual health coverage.

HRAs integrated with individual health insurance coverage (HRA-IIHICs) will only be tax preferenced if six conditions are met:

  • Individuals covered by the HRA must enroll in ACA-compliant individual coverage;
  • Employers may only offer HRA-IIHICs to categories of employees (full-time, part-time, seasonal, etc.) who are not otherwise offered traditional group coverage;
  • HRA-IIHICs must be offered to all employees in the same category on the same terms (with exceptions for variations based on age and family size);
  • Individuals must be allowed to opt out of HRA-IIHIC participation, for example if they would do better receiving premium tax credits through the marketplace;
  • Employers must verify individual coverage of HRA-IIHIC recipients; and
  • Employers offering HRA-IIHICs must provide notices to employees regarding the effects of employee participation.

The proposed rule provides that employees who accept HRA-IIHIC contributions cannot also receive premium tax credits through the exchange.  Employees offered HRA-IIHIC contributions are also ineligible for premium tax credits if accepting the HRA-IIHIC contributions would makes the lowest-cost silver plan for self-only individual health coverage “affordable” under ACA standards.  Large employers who offer affordable minimum value coverage through an HRA-IIHIC would satisfy the employer responsibility coverage.

The proposed rule also specifies that individual health coverage financed through an HRA-IIHIC is not subject to ERISA and provides special enrollment periods for individuals who become newly eligible for HRA-IIHIC during the course of a year.

Finally, the proposed rule would also establish a separate category of “excepted benefit HRAs” that could be used to purchase excepted benefits or short-term limited duration insurance. Excepted benefit HRAs can be offered if employees offered the HRA are also offered traditional group insurance and if the HRA is not integrated with another health plan; is limited to $1800 per year; is not used to pay for individual, group, or Medicare premiums; and is uniformly available to all similarly situated employees.  The HRA rule would generally be effective as of January 1, 2020.

The proposed rule’s lengthy regulatory analyses reveal profound uncertainty as to the potential effects of the rule.  The administration aligns itself with those who believe that individual health coverage is more efficient than employer coverage because individuals can find the coverage that best suits their needs rather than being part of a “one-size fits all” plan chosen by their employer.  It recognizes, however, that individual coverage may offer more limited provider networks and impose higher-cost sharing than group coverage, and thus may leave employees whose employers switch from traditional group coverage to an HRA-IIHIC worse off.  Employees covered by an HRA-IIHIC would also face the increased burden of shopping for their own coverage and understanding and complying with the HRA-IIHIC rules.

The agencies believe that some employers who do not currently offer coverage will do so through HRAs.  The agencies project that by 2028, 10.7 million individuals will be covered through HRA-IIHICs, including 6.8 million who would otherwise be covered by traditional group insurance, 3.2 million who would otherwise purchase individual coverage without HRA assistance, and 800,000 who would otherwise be uninsured.  The immediate effects of the rule would be much less dramatic, with only 1 million individuals covered by HRA-IIHICs in 2020.

The agencies do recognize, however, that some individuals may lose coverage as employers drop traditional group coverage and employees decide not to take up individual coverage funded through an HRA, or if the rule causes premiums to increase in the individual market. Some employees previously eligible for premium tax credits because they were not offered employer coverage will lose that eligibility and face higher costs under the HRA-IIHIC.

The agencies also recognize a real danger that employers might dump high cost individual employees (or high cost groups) into the individual market.  They believe that the nondiscrimination safeguards included in the proposed rule will reduce the risk of this happening, but that premiums in the individual market are likely to increase at least minimally.  On the other hand, it is possible, the administration contends, that as more employees enter the individual market, the risk pool might improve and premiums might even drop.

The agencies project that few employers will establish excepted benefit HRAs and that the effect of the rule change will thus be minimal.  If excepted benefit HRAs become more widely available, however, it is quite possible that healthy employees would participate in the HRA to purchase short-term coverage, undermining the risk pool for those who less healthy employees who retain group health plan coverage and possibly a continued offer of coverage.

Projections that HRA-IIHIC proposed rule will not have a negative impact are largely dependent on its “safeguards” and in particular the requirement that all individuals in the same categories be offered the same coverage. Small employers, however, may be able to create categories that include only one or a few high-cost employees, and to dump them into the individual market.  Also, the agencies request comments as to whether some of the safeguards are too stringent—for example whether it should allow an HRA-IIHIC to be used to pay for short-term limited duration coverage.

In sum, the HRA proposed rule is an experiment with uncertain consequences.  The proposed rule was issued in response to President Trump’s executive order of October 2017, which also called for rules expanding access to association health plans, short-term limited duration insurance. While the AHP and Short-term rules are likely to pull healthy individuals out of the individual market, undermining the risk pool and increasing exchange premiums, the HRA proposed rule may push high-cost enrollees into the individual market to the same effect.  It may also undermine group coverage, the bedrock of American health care financing.  As the rule preface acknowledges, whether this experiment achieves the effects the administration hopes for remains to be seen.

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