USC-Brookings Schaeffer on Health Policy

The Trump administration’s final HRA rule: Similar to the proposed but some notable choices

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Editor's Note:

This analysis is part of the USC-Brookings Schaeffer Initiative for Health Policy, which is a partnership between Economic Studies 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 Thursday, the Trump administration finalized a rule that will let employers pay for their workers’ health insurance by subsidizing premiums in Obamacare’s individual market.  The rule does this by expanding the use of Health Reimbursement Arrangements, or HRAs, and is generally similar to the October proposed rule.   We published a detailed assessment of the proposed rule last fall and much of that analysis remain relevant, but there are some interesting and even surprising features in this final rule.

In particular, the rule adopts a new limitation on age variation in the amounts made available through an HRA, which, in most instances, will result in older workers paying more than younger workers to obtain the same coverage.  It also makes some changes to the way employers are permitted to determine which employees will be offered an HRA.  It sticks with a January 1, 2020 effective date, which will likely cause confusion for workers and add to the rule’s fiscal cost.  Finally, the rule makes clear that employers will have to do very little to verify whether their workers are buying the comprehensive coverage required by the rule – rather than more limited coverage types that are increasingly being marketed to consumers – which could significantly worsen the rule’s impact on the individual market.

Overview of the Rule

First, it is useful to briefly summarize what the rule does. Under the rule, employers will now be allowed to provide their employees with a fixed amount of money each year in a tax-preferred “individual coverage HRA” that the employee can use to buy coverage in the individual market. Importantly, employers will generally have to make decisions about what to offer with respect to entire classes of workers (not individual workers) and will not be permitted to offer the same class of workers both an individual coverage HRA and a traditional group health plan. Nevertheless, because individual market coverage is community rated, large employers with sicker workforces will be disproportionately likely to take up these HRAs. As a result, the final rule will likely increase premiums in the individual market.

The final rule also creates an “excepted benefit” HRA that can be used for purposes like paying directly for health care services, paying for cost-sharing, or buying short-term limited-duration insurance. Whether the employer offers an individual coverage HRA, excepted benefit HRA, or some other type of account-based benefit will have important tax consequences for the employee, changing their eligibility for the ACA’s premium tax credit and affecting whether they should buy coverage through a Health Insurance Marketplace or if they must buy coverage directly from an insurance company.

Notable Features of the Final Rule

In general, the final rule would have similar effects—and raise similar concerns—as the proposed rule. However, there are a pair of notable policy changes in the final rule:

There are also two aspects of the rule that did not change from the proposed, but for various reasons, look more problematic than they did when the proposed rule was published in October:

Overall Assessment of the Final Rule

More generally, our analysis of the proposed rule largely holds.  In particular:

In sum, the final rule largely refrains from making changes that would have dramatically worsened its impact on individual market premiums, and makes a few minor changes, some of which are improvements.  But it remains, in our view, a step in the wrong direction on net.

[1] This sentence has been updated to reflect preamble language regarding legal authority to temporarily waive the repayment requirement.”