Federal Rule Creating New Health Coverage Option for Employers Could Destabilize the Individual Market
The Trump administration has finalized a rule that would allow employers to fund individual, tax-preferred accounts for employees to buy coverage on their own rather than cover them under employer-sponsored group plans. This change could shift individuals from employer-based coverage, which insures more than half of all Americans under age 65, to the state-regulated individual markets, including the Affordable Care Act (ACA) marketplaces. Health care costs for these individuals would shift, in part, from employers to taxpayers and employees, who could end up with less-comprehensive coverage.
While the administration argues that the change will strengthen the marketplaces, it could instead destabilize individual markets if they get an influx of high-cost enrollees. Ultimately, the impact will depend on how well the final rule guards against employers using health reimbursement arrangements (HRAs) to cover high-cost employees.
Changing Position on HRAs
The rule follows the administration’s 2017 executive order to expand employers’ ability to offer HRAs, as well as non-ACA-compliant short-term health plans and association health plans. An HRA is an individual account funded solely by employers to help employees pay approved medical expenses, including some premiums. Federal tax law considers HRAs to be group health plans, thereby allowing employers to make pretax contributions.
Prior to the rule change, an employer could offer an HRA only to employees who also have a traditional group health plan that meets the requirements of the ACA, with certain exceptions for small employers and some retiree health plans. Under the rule change, employers, regardless of size, can provide an HRA instead of a traditional group health plan. One option under the rule, the “integrated HRA,” would allow employees to use an HRA to buy an individual plan that meets ACA requirements. A second option, the “excepted benefit HRA,” allows employees to use an HRA funded with no more than $1,800 annually to buy a short-term plan not subject to ACA consumer protections and benefit standards.
Destabilizing State-Regulated Markets
Despite the administration’s position in Texas v. Azar challenging the ACA’s constitutionality, the rule change assumes that the ACA remains the law of the land and that employees using HRAs are guaranteed coverage and fair premiums in the individual market, regardless of health status. Although the integrated HRA option is complex and imposes new requirements on employers that offer coverage, the administration estimates that the integrated HRA proposal will insure an additional 800,000 people over 10 years. And it claims that most coverage gains will stem from employers newly choosing to offer coverage.
Yet it seems the integrated HRA may be more attractive to employers that already offer coverage. Companies with high-cost workforces could use an integrated HRA to cut costs and make those expenses more predictable. And businesses that offer skimpy coverage primarily to avoid an employer mandate penalty could switch to an integrated HRA and contribute even less to their employees’ health care while still dodging a tax penalty.
The impact is likely to vary among states, depending on employer and individual insurance markets, but it has the potential to destabilize individual markets. Because the number of people covered under employer plans (158 million) far exceeds the number enrolled in the individual market (14 million), experts predict even a small shift of high-cost people from employer to individual plans (that is, employers offering HRAs instead of a group health plan) could have a dramatic impact.
There are limits designed to deter employers from using the integrated HRA to steer sicker employees to the individual market and retain lower-cost employees in the group health plan. Employers would be able to base coverage decisions on employment characteristics like full-time status or location but could not offer employees a choice of integrated HRA or group health plan, thereby protecting against employers designing a group plan that discourages sicker employees from enrolling. The administration expects these safeguards will adequately protect against steering sicker employees to the individual market and estimates premium increases for ACA coverage will be limited to about 1 percent.
Still, state regulators, marketplace officials, attorneys general, and actuaries have raised concerns that the safeguards are inadequate. Employers could potentially use the employment categories as a proxy for health status and offer integrated HRAs instead of a group health plan to the classes composed of older, sicker workers. The final rule retains the option for employers to combine classes of employees but does require a minimum class size. This will protect against employers targeting HRAs to smaller subgroups at risk for higher costs — for instance, part-time workers at a manufacturing plant rather than those working full time at administrative headquarters. The safeguards do nothing to protect against firms with less-healthy employees dropping traditional coverage in favor of integrated HRAs for all. Under a separate administration proposal, employers would be able to meet the requirement to provide coverage with an integrated HRA.
Some Employees May Be Worse Off
While employees are increasingly paying more out-of-pocket costs under employer plans, those who use an integrated HRA to buy a marketplace plan may end up with less-comprehensive coverage. Compared to most large-employer plans, marketplace plans generally have higher deductibles and more limited provider networks.
State and insurance industry stakeholders also have concerns about allowing employees offered an excepted-benefit HRA to opt for a short-term plan. Benefit gaps and dollar limits make short-term plans far less comprehensive than most employer plans. States could limit or ban the sale of short-term plans. But the tax benefits and permitted uses of HRAs fall under federal tax law, leaving states with few options to shut off HRAs used to buy individual market coverage.
Employers have long offered health benefits to attract and retain employees, and it’s unclear whether many will see the new option as a credible alternative to traditional group health coverage. Yet in an economic downturn, fixed-dollar accounts could become attractive to employers looking to keep labor costs predictable.
Whether the change ultimately benefits marketplaces struggling to reach new enrollees, as the administration predicts, or further destabilizes ACA markets, as some fear, will depend on a number of factors. These include local insurance- and labor-market conditions and whether the final rule sufficiently protects against employers using HRAs to shift high-cost employees into the individual market. But it’s clear that states have few options to respond to a rule which, even by the administration’s admission, has “highly uncertain” effects for employers, employees, and ACA markets.