Analysis: Effect of expansion of pre-tax accounts for employees to purchase insurance

Last week, the Trump administration released a rule allowing employers to make a pre-tax insurance contribution to employee Health Reimbursement Accounts (HRAs) to purchase individual coverage starting in 2020.

The contributions can be used to buy both Affordable Care Act (ACA) and non-ACA compliant coverage (in some instances).

The Wall Street Journal is reporting that the administration projects that approximately 800,000 workers will gain coverage as a result of the rule and will ultimately impact 10 million individuals with employer-based coverage.

The rule includes a provision that prohibits employers from offering employees both traditional employer-sponsored insurance and an HRA contribution.

To minimize the risk of employers segmenting their employees based on health status and putting their high-cost employees in the individual market, the rule includes a requirement that minimum class sizes will be based on the size of the employer.

Employers are also prohibited from creating a class that includes only workers younger than 25.

Takeaway

The overall effect of this shift for hospitals should be, on average, relatively small given the number of individuals with employer-sponsored insurance impacted is less than 6% of the 156 million Americans with employer-sponsored insurance.

However, the effect on hospital finances will likely be more pronounced in some markets than others.

I anticipate areas where small businesses that employ a lower-skilled/wage workforce are the predominate employer type will see more employers transition their employees into a defined- contribution model (away from a defined benefit).

Like other exchange enrollees, employees who use an employer provided HRA credit to purchase exchange coverage will select bronze or silver products to reduce their out of pocket premiums. If the deductibles and cost sharing are higher and the networks narrower in these exchange products than the deductibles that the approximately 9.2 million shifters are currently enrolled in, then hospitals can expect to see an increase in bad debt and financial assistance write offs, which would put pressure on overall margins.

For health plans offering exchange products, the results could be more significant. The 10 million people estimated to receive coverage from an exchange product as a result of this rule would almost double enrollment when compared to 2019’s finally tally of 11.4 million in the state-based and federally facilitated exchanges. Despite the increase in size, it’s unlikely this would cause payment rate compression in these products as was widely feared when the ACA was first passed.

The effect on premiums is hard to predict at this point. Although substantial growth in the market may attract new entrants, potentially putting downward pressure on premiums, rates will largely depend on health plan assumptions about whether or not employers try to use the HRA subsidy as a way to cap their liability for high-cost individuals by shifting them into the exchange.

If plans believe this will occur, we’ll see premium spikes based on assumptions of increased adverse selection risk. If they don’t, then, increases will likely be largely in line with trend (assuming no significant risk of regulatory changes that would impact premiums). Like the early exchange years, we can expect to see a wide range in actuarial assumptions and pricing approaches as exchange plans gain experience with this new segment of the market.