Employers will be able to hand their workers a chunk of tax-sheltered health reimbursement money and send them off to buy an individual health plan under a controversial rule issued by the Trump administration Thursday.
The final rule, which takes effect Jan. 1, 2020, will prompt an estimated 800,000 large and small employers to fund individual coverage through health reimbursement accounts, or HRAs, for more than 11 million workers, nearly 800,000 of whom would be newly insured.
It includes a complex set of provisions designed to prevent employers from reducing their benefit costs by sending older and sicker workers into the Affordable Care Act individual markets, thereby driving up costs and premiums in those markets. The Trump administration acknowledged that it will have to closely watch how the changes play out and assess whether further regulation is needed.
Reversing prior policy, the 497-page rule lets employers dole out HRA funds—previously used to reimburse out-of-pocket medical expenses—to employees to buy individual-market plans.
President Donald Trump issued an executive order in October 2017 commanding HHS, the Labor Department and the Internal Revenue Service to develop the rule as part of his administration's broader effort to offer businesses and individuals cheaper, leaner health insurance options that don't necessarily comply with the ACA's consumer protection rules.
While the HRA money can be used mostly for buying plans that meet ACA requirements, employers under the rule can establish a special type of "excepted benefit" HRA for employees to use in buying cheaper short-term plans that don't comply with ACA rules such as pre-existing condition protections. These special accounts are capped at $1,800 a year.
The ACA requires that companies with more than 50 full-time workers provide their employees with health insurance. Employers can satisfy the requirement if they provide adequate HRA contributions for employees to buy individual coverage.
A wide range of groups expressed fears about negative effects on the individual market if employers offloaded their sicker, more costly workers from their employer group plans to the individual market.
There also were broad concerns about whether workers accustomed to their employer group plan would understand how to use an HRA to shop around and buy an individual health plan.
But the agencies said the coverage expansion and cost-saving benefits of the rule outweighed the risks of adverse selection and consumer confusion. They said the final rule included adequate safeguards against employer moves that could disrupt the individual market.
"The policy creates an exciting new opportunity for employers—especially small employers that might not offer coverage today—to provide employees tax-preferred funds to help buy coverage on the individual health insurance market," CMS Administrator Seema Verma said in a written statement. "Making this option available to employers will significantly increase coverage across America and reduce the number of uninsured."
Conservative groups including Americans for Prosperity and the Council for Affordable Health Coverage praised the rule, saying it will give employers and employees greater flexibility and control, and increase market competition.
Other observers said that while the rule could expand and strengthen the ACA individual markets, its impact is hard to predict, partly because no one knows how many employers will use HRA accounts to pay for workers' coverage in the individual market.
"If the administration's estimates are right, this would result in a huge influx into the ACA-regulated individual insurance market," said Larry Levitt, senior vice president for health reform at the Kaiser Family Foundation. "But these new accounts could shift employer-provided health insurance to a defined-contribution approach, leaving workers at greater risk for premium increases over time."
One of the most closely watched issues was whether the administration would allow HRA funds to purchase short-term plans that don't comply with the ACA; those plans now can last up to a year and be renewed three times in many states.
In the final rule issued Thursday, the agencies decided that an "individual coverage" HRA can only be used to buy ACA-compliant plans. But this type of HRA will only be available to workers who are not offered a traditional group plan, according to Matthew Fiedler, an economist at the Brookings Institution's Center for Health Policy.
Employers providing a traditional group plan can offer workers an "excepted benefit" HRA, capped at $1,800 a year, that they can use to buy a short-term plan but not an ACA-compliant plan.
The agencies said they chose not to allow integration of standard HRAs with short-term plans due to concerns about an adverse-selection impact on the ACA markets.
They also said nothing in the rule prevents states from regulating or even prohibiting short-term plans, which some states like California and New York have done.
More broadly, the agencies acknowledged that allowing the use of HRAs could result in "some market segmentation and health factor discrimination." But they said "the risk can be sufficiently mitigated" through the rule's various provisions to limit adverse selection.
The agencies modestly strengthened some of those guardrail provisions in response to public comments.
The final rule retained the proposed rule's provision that employers cannot offer the same class of employees the choice of either a traditional group plan or an HRA-funded individual-market plan.
To protect against employers isolating less healthy workers into separate classes and shipping them off to the individual market, the final rule added a minimum class size based on employer size. It also barred employers from creating a class of employees younger than age 25, whom employers might want to keep in their group plan because they're healthier.
But the agencies declined to include specific enforcement guidance to determine whether employers are targeting individual coverage HRAs to high-cost employees.
They noted that they may provide additional guidance if they become aware of arrangements that are inconsistent with the safeguards against adverse selection contained in the final rule.
The agencies also acknowledged the likelihood that employees will find the new HRA benefit system confusing, and that they may not understand the coverage limitations of short-term plans. The final rule requires individual coverage HRAs to provide notice to eligible participants explaining how it works.
Contrary to the agencies' finding that the rule would have a net beneficial effect, Brookings' Fiedler argued that it will increase individual-market premiums and federal premium subsidy costs by encouraging larger employers with sicker workforces to shift their workers into the individual market.
He was particularly critical of the provision allowing use of excepted-benefit HRAs, which are tax-sheltered, to buy short-term plans.
"At best, it's a poor use of federal funds," he said. "At worst, it will give firms a tool to shift costs from their healthier workers onto their sicker ones."
