This analysis is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between the Center for Health Policy at Brookings and the University of Southern California Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings.
On October 29, 2018, the Departments of Labor, the Treasury, and Health and Human Services jointly published a proposed rule that would loosen the rules governing Health Reimbursement Arrangements (HRAs) and other account-based health benefits that employers offer to their employees. In “Evaluating the Administration’s Health Reimbursement Arrangement Proposal”, Christen Linke Young, Jason A. Levitis, and Matthew Fiedler describe the proposed rule and its likely effects on insurance markets, employers, workers, and Marketplaces.
The authors begin by addressing the proposed rule’s introduction of an “individual-market-integrated HRA,” which would allow employers to use pre-tax dollars to subsidize their employees’ purchase of health insurance in the individual market. They explain that this new option would likely be particularly appealing to large employers with sicker workforces. These employers’ cost of offering a traditional health plan reflects their workers’ above-average health care needs, so subsidizing community-rated individual market coverage could allow them to offer similar coverage at lower cost. Similarly, large employers of all varieties would have an incentive to shift just their sicker workers into the individual market; the departments do propose safeguards that would limit this type of worker-level shifting, but likely not eliminate it.
The authors further explain that while these shifts would generate savings that would be shared between employers and their workers, the influx of sicker workers into the individual market would increase premiums, thereby increasing subsidy costs for the federal government and premiums for unsubsidized enrollees. These changes in employer coverage arrangements would also create winners and losers within firms to the extent that firms do not make offsetting changes to their compensation structures, with younger and higher-income workers generally benefiting at the expense of older and lower-income workers. Furthermore, the authors argue that there is reason to doubt that the departments’ proposal is legally permissible.
The authors conclude that the negative effects of allowing firms to subsidize the purchase of individual market coverage, particularly the increase in individual market premiums and the attendant fiscal costs, are likely to outweigh the benefits to employers and their workers, and they recommend that the departments not finalize this proposal. If the departments nevertheless move ahead, they argue that it is imperative for the departments to limit employers’ ability to selectively move their sicker workers into the individual market, which could greatly magnify the negative effects of the proposed rule. The authors make specific suggestions to the departments about how to retain and strengthen the relevant features of the proposed rule.
The paper also considers the departments proposal to create a separate type of HRA that could be used to purchase short-term, limited-duration coverage. This proposal could allow employers to shift costs from their healthier workers onto their sicker workers and raises its own legal concerns, and the authors recommend that the departments decline to finalize this proposal. The authors also note that the proliferation of HRAs could also make it hard for consumers to understand their options and comply with the various sets of rules, while imposing new administrative burdens on the Marketplaces. As such, they recommend that the departments require that employers provide all workers offered an HRAs a clear notice describing what they are offered, and that the departments provide additional time for understanding and implementing the proposed policy changes.
Read the full paper here.
Jason Levitis is a Nonresident Senior Fellow at Yale Law School’s Solomon Center for Health Law and Policy. He is also a principal at Levitis Strategies LLC, where he provides technical assistance and strategic advice on the ACA’s tax provisions, state innovation waivers, tax administration, and regulatory process to state officials nationwide through his work at Princeton University’s State Health and Value Strategies project.
Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.