Obamacare Repeal Has Begun For Small Firms
(A version of this Health Alert was published by Forbes.)
My previous Health Alert suggested the 21st Century Cures Act, which President Obama signed on December 13 demonstrated Republicans can lead on health reform. Promoted as a pro-innovation bill, the new law will improve the Food and Drug Administration’s regulatory processes; as well as fund Vice-President Biden’s Cancer Moonshot, the National Institutes of Health, and steps to reduce the opioid epidemic.
However, the final version of the bill also included an important payment reform, which takes a small but significant bite out of Obamacare. Tacked onto the end of the bill, section 18001of the 21st Century Cures Act expands the use of Health Reimbursement Arrangements (HRAs) by small businesses. This is a win for small businesses which were harmed by Obamacare. Indeed, given the overwhelming bipartisan support for the 21st Century Cures Act, section 18001 could be defined as Democrat politicians’ first real step towards conceding Obamacare needs to be repealed and replaced.
The advantage of HRAs and similar funding vehicles is that they allow employers to give money directly to employees, which they can spend on medical care. This gets around health insurers’ bureaucracies, which add unnecessary administrative costs.
The Affordable Care Act (2010) limited employers’ use of these funding vehicles. The IRS promulgated rules levying an excise tax of up to $100 per employee per day. Although employers of fewer than 50 full-time equivalent employees were supposed to be exempt the employer mandate to offer so-called “affordable” coverage, this excise tax was effectively a penalty on small employers which had previously reimbursed employees’ medical expenses or premiums using HRAs. The 21st Century Cures Act abolishes this excise tax, restoring a valuable option to small businesses’ menu of benefits.
HRAs stand alongside Health Savings Accounts (HSAs) as ways to return control of medical spending to individuals. The primary difference is that an HRA remains the employer’s property, but an HSA is a bank account owned by the employee. Although an employer can roll funds over from one year to the next in an HRA, when the employee leaves, he abandons any remaining balance. For this and other reasons, HRAs are far from perfect. Nevertheless, they are a move in the right direction.
Obamacare was designed as a hand-out to health insurers. It did not quite work out that way. Nevertheless, the law forces as much health spending as possible through insurers’ claims processing. Not only does this add bureaucracy, but it inhibits proper price formation (which in a normal market takes place where the marginal supplier meets the marginal producer). Instead, health prices are determined administratively between insurers, governments, and providers.
Advocates of consumer-driven health care hope that an ever increasing share of medical payments will be paid by patients directly to providers. At some point, the insurers’ role in price-fixing will become so obviously absurd it will fall apart, and prices will be determined in a more properly functioning market.
The 21st Century Cures Act removes the Obamacare’s excise tax on small businesses using HRAs to fund employees’ medical spending, instead of overpriced health insurance. As an tax expert notes: “Because of the ACA, many small employers have been prohibited from using reimbursement arrangements that previously were long-standing and effective methods of providing employees with health care benefits. The new law is a welcome modification to the ACA since it gives small employers excise tax relief plus a method for providing health benefits to their employees via the QSEHRA [Qualifying Small Employer HRA].”
Like the HRA itself, the new reform is not perfect. For employees who are eligible for tax credits in Obamacare’s exchanges, there is a claw-back of those tax credits if their employers fund HRAs for them. It is hard to imagine a small business wanting to substitute its own money for federal taxpayers’ in the exchanges. Therefore, we can expect only higher-income earning workers (who are ineligible for tax credits in Obamacare’s exchanges) to take advantage of this new reform.
Nevertheless, this is a small but significant step towards reducing the control health insurers have over our medical spending. Hopefully, more such reforms will come in the next Congress.
There are numerous factual errors in this article, so many in fact that I have to question the author’s expertise in this area.
Chaz, by making a claim of numerous factual errors the reader is left in a rowboat without any oars and have to dismiss one side or the other without gaining anything from your comment. Perhaps you should list and describe the most eggregious factual errors so the reader can determine for himself what course to follow.
I think it might be robot spam, but I am not sure because most spambots comment “This is the greatest article every written,’ or words to that effect. Let’s see if we get some details in a subsequent comment.
I’m not a robot. To pick one of many errors, I’ll just say that QSEHRAs will be of limited use because, in order to use them, employers are not permitted to offer group health coverage to any employees and generally cannot vary the amounts provided (except, in general, for age and family size differences).
Hardly the beginning of any “repeal.”
Thank you. I am glad I did not throw your comment in with the ones that say this is the greatest blog.
I would argue (and I have my detractors) that an employer of fewer than 50 FTE workers would leap at the chance to get out of the health insurance business. IMHO, there is no reason for large employers to be in the health insurance business either, but that is too high a hill to climb.
WRT not being able to vary the amounts, as long as there is no underwriting of individual health insurance, I don’t see that as a big obstacle. (If the U.S. went back to underwriting it would be solved by adjustments to wages, with friction.)
I’m curious how this wage-adjustment mechanism would work. At first glance it seems impracticable.
Chaz, you’ve stated an opinion about QSEHRA’s which, at this point, is probably as good as any other opinion.
My opinion? Whatever demand emerges for QSEHRA’s won’t come mainly from small employers who do not presently offer group insurance. I think demand will mainly come from small employers who see an opportunity to cancel their group insurance and replace it with a QSEHRA. That may turn out to be small. Or large. At this point there’s no way to know what the demand will be. And regardless of the initial interest, I think the direction is significant.
(Also, I think limiting variance in QSEHRA contributions to age and family size is not a bug, it’s a feature.)
Plus there would be a difference in employers’ behavior if the Obamacare tax credits get repealed versus if there is a Republican-backed tax credit to finance individual health insurance (which is likely). The shape of that will be a factor in deciding.
A QSEHRA in place of health insurance seems like a crappy benefit package. I can’t see what social benefit this would provide that would be deserving of preferential tax treatment.
Bart, you may be correct – but then how to explain the rapid disappearance of defined-benefit pension plans in favor of plans in which the employer makes a defined contribution?
Healthcare and retirement are two different things. Aside from that, an HRA is the property of the employer. Would you want a 401-K that reverts to your employer if you leave the company before retirement?
Bart, you know that employer contributions to a 401(k) vest with employees based on plan rules, usually length of participation. And you know that employees who leave their employer keep the cumulative value of their own contributions plus any vested employer contributions. Aside from 401(k) savings plans, other qualified types of retirement savings plans exist in which the employees also keep the cumulative value of their own contributions plus any vested employer contributions. You know all that.
Anyway my point is not to start a discussion of retirement plans – except to point out employers have been successful in replacing defined benefit pension plans with defined contribution plans.
Which leads to this Q: why should employers expect to be less successful replacing defined benefits medical insurance plans with defined contribution plans?
I don’t recall whether HRAs allow for portable employee contributions. I had one briefly, but my employer was bought out (by a company that offered HSA plans) before I could do much with it.
But back to the main point, health coverage is not retirement savings. There are currently plenty of excellent investment options available for individual investors.
I don’t see the same with individual health insurance. In the current environment, it looks like this would be giving employees a chit to be spent on the nearest Obamacare exchange, or some equivalent ACA-compliant plan. Employers may like it, but good look hanging onto your employees.
And if ACA is repealed, it all depends on what exists in its place. How will this work for employees with preexisting conditions (either themselves or their dependents)?
“But back to the main point, health coverage is not retirement savings.”
Bart, with respect, that’s an observation, it’s not a point.
You do suggest one reason that employers won’t offer defined-contribution medical insurance is that it would harm recruiting and employee retention.
And maybe that’s true.
But then how to explain why similar harmful effects did not emerge as employers converted their pension plans from defined benefit to defined contribution.
I’ve already pointed out one difference, that there already exists a healthy market for investment options, without issues like pre-existing conditions or death spirals.
But as far as I can tell your question is based on a false analogy. Yes, health and retirement benefits can be either defined-benefit or defined-contribution. What other attributes do they share that would lead you to believe that they can be treated as equivalents?
I’m asking the question because I’d like to know. It’s OK if you don’t know the answer – I don’t either.
But I’m pretty sure it’s not a false analogy.
John, I did answer your question regarding why harmful effects didn’t emerge with retirement benefits, and I gave an example of where health and retirement are dissimilar.
Also, small business plans are already defined-contribution at least in one sense. Small businesses tend not to be self-insured; they purchase group policies with a known premium. They aren’t the ones who pay out when someone gets sick.
But they are still involved in securing the coverage, administering it, dealing with a broker, making plan design decisions, negotiating renewal terms, seeing that each insured person receives the required plan documents, etc. Those tasks entail both monetary and opportunity cost not related to their business.
Seems to me small employers might be strongly attracted to a better alternative to small-group insurance. Why wouldn’t a true defined contribution arrangement offer that alternative?
If you don’t want employers involved in employees health care, why do you want a defined-contribution alternative? Why not an alternative that doesn’t involve employers at all?
HRAs not portable from job to job. (They cannot be because they are not deposited in a bank a/c controlled by worker.) However, they roll over from year to year. So, better than Flexible Spending Arrangement (FSA) in that respect.
At my agency, we have small businesses lining up at the door to buy group insurance. The rates are stable, the networks are broad, there are no deadlines on when to start a plan……….
no one wants individual insurance, the market is such a mess. No one wants their employer to cancel the group plan, and give them HRA money instead to buy their own coverage.
I realize that this could change in 6 months.
Which makes me wonder: Who lobbied for this change?
Bart, we ran outta room. You ask
“Why not an alternative that doesn’t involve employers at all?”.
You mean a defined contribution plan? t wouldn’t expect many employers to set their contribution at zero, although some might. But in any defined contribution plan, wouldn’t employers finally be out of the plan-sponsor business? Couldn’t employees use their employer contribution plus their own money to buy whatever individual coverage is available – no longer hostage to what the employer chooses or what the government mandates today. And btw, I’m assuming (hoping might be a better word) the Obamacare bureaucracy will be severely curtailed, if not completely replaced by a leaner and far less intrusive program covering mainly indigent and low-income Americans. Let’s call that oh, say, “Medicaid”. Under those conditions, why wouldn’t private insurance companies respond by competing to offer lots more alternative individual policies?
I admit I’m only seeing positives to the concept. What meaningful obstacles are there? Obamacare making it illegal? The government suppressing the insurance markets? Some other reason? Yikes we’re back to the Q I’ve been asking from the beginning: why should employers expect to be less successful replacing defined benefits medical insurance plans with defined contribution plans?
John, regarding small company health plans, you said,
How is that qualitatively different from what they do when they contract with an investment company to setup a company 401-K plan, and then manage payroll withholding and employer contributions? Granted it’s probably simpler with a 401-K, but as I’ve said, retirement savings is different from health insurance.
Again, if you don’t want employers involved, why have a defined contribution plan at all? Why not let the employers pay taxable wages, and let the employees spend it on individual insurance as they see fit?
Just so we’re on the same page– by individual coverage, do you include individually underwritten plans and short-term medical? I don’t object to employees being able to purchase them, so long as it’s not with tax-advantaged dollars.
I’ve already answered this question– “there already exists a healthy market for investment options, without issues like pre-existing conditions or death spirals.”
Bart, I neglected to respond to this one; sorry: “How is that qualitatively different from what they do when they contract with an investment company to setup a company 401-K plan, and then manage payroll withholding and employer contributions?”
Yes, the 401(k) provider contracts with the employer – as does the group medical insurer. In both instances, the employer has contractual plan sponsor duties with respect to administration of their group of employees. But an individual medical insurance policy is a contract with an individual. The employer is not a party to the contract, and has no plan sponsor duties.
I think the QSEHRA concept has potential because it permits employers to cancel their group medical insurance policies, get out of the plan sponsor business, and replace the whole group insurance structure with a defined contribution plan that utilizes the HRA as the vehicle for employees to receive their employers’ contributions. The potential could be big, or not. Time will tell.
I see you’re sticking with your view that employers expect defined contribution medical insurance arrangements will be LESS successful than for retirement plans because “there already exists a healthy market for investment options, without issues like pre-existing conditions or death spirals.”
Pre-ex will always be an issue. But I’m still not persuaded to your view because I believe most employers look at this more like I do, not as you do. But – as I also said from the beginning – you may be correct.
Good discussion.
Bart, I owe you one more: “by individual coverage, do you include individually underwritten plans and short-term medical? I don’t object to employees being able to purchase them, so long as it’s not with tax-advantaged dollars.”
I mean any individual plan that a private insurance company can think up and get a state DOI to approve. My assumption is that insurers will become more creative and more competitive as Obamacare recedes. I also think any policy approved in at least one state, should be available for purchase in any state. But that’s a whole ‘nother subject.
I favor withdrawing – or broadening – tax preferences for medical insurance, because they currently treat people differently for no rational reason, So long as everyone gets the same tax treatment, i don’t object to tax preferences so much as you seem to. At the same time I wouldn’t strongly object to their withdrawal even tho that would increase net costs.
I don’t agree that current tax preferences “treat people differently for no rational reason.” Employment-based health benefits are in fact an enormous ad-hoc risk pool that covers many employees (or their dependents) who would not have qualified for individual insurance. I’ve been arguing that most of the $250 billion employer tax exclusion actually goes toward this function, and not toward giving healthy employees a special deal as many seem to believe.
Of course there are better ways of doing this, but any alternative risk pool proposal will require first claim on this $250 billion. There won’t be much left over to give away.
Bart, yes that argument was persuasive enough In the past to justify tax deductibility of group insurance premiums but not individual insurance premiums. For that matter, the same or similar argument justified certain tax exemptions for BlueCrossBlueShield group policies that were not allowed for commercial group policies.
I know from my own experience at three of the largest insurers, including a not-for-profit Blue Cross plan, that their group underwriting criteria were virtually identical. In modern times, ACA requires all insurers provide guaranteed-issue, which eliminates the social value of having no pre-ex exclusions and so ends any notional value for being “insurer of last resort” that might justify some more-favorable tax treatment. So I suspect the days of differential taxation are numbered, not only among group insurers, but between group and individual policies, too.
Anyway, as I’ve said, I have no strong feeling either way whether medical insurance premiums (or, self-funded costs) should be deductible. I feel more strongly that all policy types should be taxed using the same set of rules.
I agree that individual policies conforming to ACA rules (or at least HIPAA Title 1 rules) should receive tax treatment comparable to the employer exclusion.
So if you stipulate that “all policy types” already conform to these rules, then we aren’t that far apart.
Thanks for an honest discussion.