HRA and Health Care Reform

"Finally we have a health care plan written by a committee whose chairman says he doesn't understand it, passed by Congress that hasn't read it and exempted themselves from it, signed by a president who smokes and hasn't read it, administered by a treasury chief who didn't pay his taxes, overseen by a surgeon general who is obese, and financed by a country that's broke. What could go wrong? "......Robert Larsen

Some changes will go into effect this year. Did I mention taxes? However until the new state and federal laws/regulations are created we will not know all that we have received nor will we know exactly how this legislation will affect anyone's specific health plan.

How the Health Care Reform Law affects employers and employees alike can be seen albeit not clearly! Let’s take a look at it based upon employers. There are three groups; (1) Changes affecting all Employers and their Employees, (2) Changes Affecting only Employers with Less than 26 Full-time Employees, and (3) Changes Affecting only Employers with More than 50 Full-time Employees

(1) Changes Affecting all Employers and their Employees

New Temporary High-Risk Pool -In 90 days a temporary national high-risk pool must be established to provide health coverage to individuals with pre-existing medical conditions in 90 days. To be eligible they must have been uninsured for 6 months.

No Lifetime Maximums Allowed - In 6 months, insurance companies can no longer place lifetime limits regardless of whether a group policy or individual policy.

Increased Dependent Coverage - In 6 months, insurance companies must provide dependent coverage for children up to age 26 for individual and group health plans.

No Exclusions for Dependent Coverage Allowed - In 6 months, insurance companies can no longer place pre-existing condition exclusions on children of a policy holder.

Over the Counter Drugs Excluded from HRA/HSA/FSA - Beginning in 2011, non-prescribed over-the-counter drugs can not be reimbursed.

Health FSA Contribution Limit - Beginning in 2013, the amount of contributions to health FSAs is limited to $2,500 per year.

Health Insurance Exchanges - By 2014, each state must create an American Health Benefit Exchange and a Small Business Health Options Program Exchange. The exchanges provide a place where individuals and small businesses can purchase coverage that meets certain requirements.

Insurance Carrier Rating Rules - Beginning in 2014, age rating replaces medical underwriting and pre-existing condition exclusions for individual and small group health insurance plans will be prohibited in all states. Insurers will be prohibited from denying coverage or setting rates based on gender, health status, medical condition, claims or other health-related factors.

Employee Subsidies - Beginning in 2014, the federal government will give tax credits to individuals with incomes between 100 and 400% of the federal poverty line (FPL). Employees offered coverage by their employer will not be eligible for premium credits unless the company's plan does not meet "minimum coverage requirement".

Employee Free Choice Voucher - Beginning in 2014, employers that offer coverage to their employees will be required to provide a "free choice voucher" to employees with incomes less than 400% FPL if they choose to enroll in an exchange plan.

Employee Requirement to Purchase Insurance - Phasing in from 2014-2016, individuals will have to purchase coverage or pay a penalty of the greater of $650 per year up to a maximum of three times that amount per family or 2.5% of household income. Beginning in 2017, the penalty will be increased annually by the cost-of-living adjustment.

(2) Changes Affecting Employers with Less than 26 Full-time Employees

Employer Subsidies - Provide small employers with no more than 25 employees and average annual wages of less than $50,000 that purchase health insurance for employees with a tax credit.
Phase I : Beginning in the 2010 tax year Phase 1 of this subsidy provides a tax credit of up to 35% of the employer’s contribution toward the employee’s health insurance premium if the employer contributes 50% or more of the total premium cost (or 50% of a to-be-established benchmark premium). For employers of less than 10 employees the full credit will be available.

Phase II : Beginning in 2014 and available for 2 years, small companies that purchase coverage through the state exchanges will be eligible for a tax credit of up to 50% of the company's contribution toward an employee’s health insurance premium if the company contributes at least 50% of the total premium cost. Tax-exempt businesses are eligible for tax credits of up to 35% of the company's contribution toward the employee’s health insurance premium.

(3) Changes Affecting Employers with More than 50 Full-time Employees

Employer Penalties for Not Offering Any Coverage - Beginning in 2014, a company with more than 50 full-time employees that does not offer coverage must pay an annual penalty of $2,000 per full-time employee, excluding 30 employees from the assessment. For example, an employer with 51 full-time employees that does not offer health coverage will pay an annual penalty of $42,000 ($2,000 per employee for 21 employees).

[Blogger Note: If the average monthly health benefit cost per employee is $600 that equals $7200 per year. Let’s see! Which is the better economic decision for the employer? Paying $7200 per year for health insurance or paying a $2000 per year penalty per employee. Can you see that this will reduce group benefit plans, reducing revenue to insurance companies, which in turn will put them out of business. This will then become the basis for single payer which is the Obama goal anyway.]

Employer Penalties for Offering "Unaffordable" or "Unqualified" Coverage - Beginning in 2014, a company with more than 50 employees that offers coverage that is "unaffordable" or does not meet the "minimum coverage requirement" (i.e. the coverage is "unqualified") will pay the lesser of $3,000 per year for each employee receiving a credit or $2,000 per year for each full-time employee, excluding 30 employees from the assessment. The "minimum coverage requirement" requires a qualified plan cover 60% of the benefit costs of the plan, with an out-of-pocket limit equal to the Health Savings Account (HSA) current law limit ($5,950 for individuals and $11,900 for families in 2010.

Thank you Rick Lindquist for the analysis which I have abridged.

So What is the Bottom Line?
What I write next is self-serving however employers must research and then act on implementing an HRA, a POP, an HRA with the HSA. This week I’ll post brief discussions of each of these plans with pros and cons on my blog and website. However, please know that each employer situation is different which leads to one solution over another. My partner and I are available for consultations.

IRS Audit Alert.
If you have a Section 125 Cafeteria Plan and you have been allowing reimbursement for some health related expenses, you could be receiving a greetings and salutation letter from the IRS.

OBAMA HEALTH & HRA

Image by Steve Rhodes via Flickr

WHY
Why does President Obama want national health insurance? Well, at least why he says he wants it. The reasons touted are: Protect the Uninsured; Stop Companies Which Ration by Reneging on benefits; Reduce Costs.

UNINSURED.
The UNINSURED fall into three categories: 1. Those who lost insurance and have health issues (Portability Issue #1); 2. Those who relocated to another state for employment or domicile (Portability Issue #2); 3. Those who don't want it or can't get it due cost issues, preexisting health issues, age issues, or alternative use issues.

Portability Issue #1 Solution:
When individuals own their health insurance policies like the auto or homeowners policy then portability due to health issues is no longer a problem. Regardless of why they change employment they can go to any new job or retire and still own their policy. This is available now under the congress law signed by President Bush. It is called the Health Reimbursement Arrangement (HRA). More on this later.

Portability Issue #2 Solution:
Under an HRA where an employee owns the health insurance policy it makes no difference if the move from one state to another is do to an employment opportunity, retirement, or simply a domicile change. The policy is owned and the coverage remains in force. What may pose a difficulty would be the process of reimbursement or payment for medical services rendered. However, that situation now exists in an auto insurance policy when on is injured out of state so I don't imagine it a difficult problem with which to deal. Certainly not a deal breaker.

THOSE WHO DON'T WANT HEALTH INSURANCE:
This is quite misleading. What they really mean is that they don't want to pay for health insurance! This group can be comprised of the wealthy who desire to pay for their health needs from their own assets, or it can be those who would rather spend the premium dollars on something else thinking or gambling that they won't get sick or be injured. Regardless of their reasoning the fact remains that when a significant medical treatment has and equally significant expense other people will end up paying for the treatment.

For the wealthy a solution could be an option to purchase insurance with an extremely high deductible which would be collateralized with a bond or a CD or some other equity instrument.

For those who want to gamble or who are unable to purchase due to a citizenship issue a solution would be a requirement for a basic policy in order to obtain a job or a drivers license or automobile. I have to admit that this idea ruffles my libertarian feathers but so does the idea of having to pay for the irresponsibility of another person. Besides, it is more reasonable than debtors prison!

The Uninsurable - Preexisting Conditions
The solution for the uninsurable due to preexisting conditions again would fall under the HRA model. When a family owns its own policy their children are covered up to a certain age. If they have a preexisting condition at the age when they leave the parents policy, they could go into a pool much like the assigned risk pool for auto insurance. The pool would be funded by all insurance companies based upon a prorated share of their premium compared to the whole nationwide. Thus the cost could be determined by actuaries so a small premium would be included in every policy written.

The Uninsured due to Disability.
Another situation exists should one be sick or injured thus preventing their ability to earn a living. Well, life insurance has an answer to that which is a 'disability income endorsement or rider'. This simply provides payment for the premium should the insured become disabled and unable to pay the premium.

Companies That Renege on Claims.
Regardless of how and why insurance companies renege on claims based upon some medical history of the past, or how and why a claims adjuster attempts to get out of paying a claim with thin or nonexistent reasoning such practices could be handled with two provisions.

1. Bad Faith Laws. When a claim is denied and it is a result of bad faith then the penalty would be treble the reserves established for the particular medical procedure or situation from which they are trying to avoid payment. The amounts would go to the uninsured pool.

2. Further, like life insurance underwriters, medical insurance underwriters should have access to the Medical Information Bureau (MIB) records and the attending physician records. The underwriters must do due diligence in underwriting the case up front. Perhaps we could give them one year for discovery during which time they could change the rates or cancel their offer of insurance.

WHAT ABOUT COST SAVINGS?
Unlike what President Obama said, "cost for individuals are three times the costs for a large group", the HRA solution typically saves an employer health benefits package between 20% to 60%. Read the following to understand why.


THE HEALTH REIMBURSEMENT ARRANGEMENT (HRA)

1. An employer establishes the Health Reimbursement Arrangement (HRA) which is a legal document required by the IRS. It provides for reimbursement for specified medical expenses.
2. It provides for reimbursement for health insurance premiums.
3. Each employee reviews the options available in the health insurance policy and selects only those which apply. This provides cost savings. For example a 60 year old employee may choose to exclude maternity benefits.
4. After selecting, designing and paying for the policy the employee then submits a request for reimbursement.
5. After receiving medical services the employee submits the expenses to the insurance company. Those things not covered by the policy like co-pays or deductibles are then submitted for reimbursement.
6. After verifying the expense, the employer is instructed by a Third Party Administrator to provide the reimbursement.
7. The expense is tax deductible to the business.
8. The reimbursement to the employee is NOT taxable income.
9. The HRA can reduce an employers health care benefits program from 20% to 60%.
10. The premiums cannot be increased because of paid claims or health issues.
11. The policies cannot be cancelled except for non-payment of the premium.
12. The HRA works for large companies down to one employee.

Since early 1940's self employed persons could deduct medical expenses as long as a spouse was a formal employee. Since 2002 now insurance premiums can also be deducted. It is more than a great deal. Contact us to check it out.