Employers, HSAs and the ACA

Jay Hancock at Kaiser Health News reports that significant numbers of small businesses may stop offering health insurance to their employees, sending them instead to the ACA exchanges. This could be a good thing for employees who earn little enough to qualify for strong ACA subsidies -- win-win for employer and employee at the federal government's expense.

According to the Kaiser Family Foundation, small employers in 2014 paid an average of nearly $5,000 for solo coverage and a bit more $10,000 for a family premium. What if an employer wants to compensate employees for dropping a benefit that constitutes such a large share of their compensation?  There's a problem with straight salary increases: they reduce employees' ACA subsidies and so give a portion of the extra income back. At healthinsurance.org, I examine three scenarios in which a pay hike worth about 70% of a typical employer premium contribution triggers subsidy reductions ranging roughly from about 25-- 80%.

An employer who really wants to help employees can avoid this problem by getting creative about compensation.  One striking way to do so would be to fully fund Health Savings Accounts (HSAs) that employees can use with HSA-qualified plans on the exchanges. Here's how I described the possibility in the healthinsurance.org piece:

HSAs are -tax-sheltered savings accounts that can be used to pay out-of-pocket expenses for enrollees in qualified high-deductible health plans. Employer contributions to HSAs do not count toward the employee's MAGI and so will not reduce the premium subsidies for which they qualify on ACA exchanges.

About 25% of health plans offered on ACA exchanges are HSA-qualified, according to a Manhattan Institute report by Paul Howard and Yevgeniy Feyman, and 98% of Americans have access to such plans on the ACA exchange in their state and county. Most of these are bronze plans, which carry deductibles averaging over $5,000 per person. An employer-funded HSA linked to a bronze plan could be a particularly viable arrangement for employees who earn too much to qualify for CSR subsidies, which attach only to silver plans. Contributions to an HSA are capped at $3,350 for an individual and $6,650 for a family; a fully funded HSA could make those super-high-deductible bronze plans viable.

One obstacle, according to Feyman, is that many HSA-qualified plans on the exchanges are not marked as such. In some cases, he says, "I went through all their documentation and it was nowhere indicated that the plans were HSA qualified. Often the insurer does not label the plan because they themselves are not sure whether it is in fact qualified." The report he co-authored recommends that "the current thicket of regulations surrounding HSA eligibility" be radically simplified,, and that clear labeling of HSA-qualified plans on the exchanges be mandatory.

If you earn, say, $30,000 a year, a bronze plan with a $5,000 or $6,600 deductible may not do you much good under normal circumstances. If your employer funds an HSA with $3,350, however -- or $4,350 if you're over 55 -- that plan may suddenly be a viable alternative. If you carry such a plan for a year or more in which you don't fully exhaust the contributed funds, it's even more viable -- it may effectively cover your costs and then some. The employer and the federal government are essentially splitting the cost of your coverage. 

Now personally, I think that HSAs,while they have some potential policy uses, are mainly a shibboleth of conservative ideology, The theory is that if people are on the hook for a lot of their out-of-pocket medical costs, they will become smart shoppers and generate competition among providers. That's possible to only a very limited extent in our opaque, predatory healthcare system, in which even the providers often have no idea what their services will cost. HSAs are really practical mainly for wealthy users, for whom they're one more tax-sheltered account in which funds can accumulate and eventually in which funds can accumulate and eventually serve as additional retirement income if they're not needed for healthcare costs. That is, they're one of the submerged state's undersea Big Rock Candy Mountains for the wealthy.My healthinsurance.org colleague Louise Norris, who co-owns a health insurance brokerage with her husband, tells me that the lobbies behind HSAs are forever pushing for the contribution caps to be lifted, creating an all-you-can-eat tax shelter. She has a good piece about one such effort in Colorado.

I also think it's kind of obscene to dangle health plans with per-person deductibles and out-of-pocket maximums of $5,000--$6,600, the levels typical of bronze plans, in front of poor people on the ACA exchanges. For many low income buyers, particularly older ones, bronze plans are effectively free, as a given user's premium subsidy, keyed to silver plans, can cover most or all of the cheaper bronze plan's premium.  The catch is that many bronze plans don't cover anything except the ACA's mandatory free preventive services until the deductible is reached. The deal in some cases effectively boils down to "you pretend to 'buy' a health plan, and we'll pretend to cover you.'  If your income is, say, $18,000 a year and you have no assets, six thousand dollars may as well be six million. Fortunately, relatively few low-income ACA plan buyers bought bronze plans. Most who were eligible for Cost Sharing Reduction subsidies bought silver plans, and so accessed those important secondary subsidies.

But given the U.S.'s crazy quilt of benefits-by-tax-break -- and the unavoidable distorting influence of conservative ideology on policy -- employer-funded HSAs linked to HSA-qualified exchange plans could be a relatively efficient way to get decent health coverage to a significant number of Americans.

In fact, given conservatives' love of HSAs, this hybrid employee benefit could conceivably, some day, point a way toward a political compromise that would reform the ACA in a conservative direction. Republicans have trained their fire on the employer mandate, and a lot of Democrats and progressive health policy wonks acknowledge that it's not very well-designed and is perhaps unnecessary. What if all employers -- or, say, employers with up to 200 employees -- could fulfill the mandate by fully funding HSAs -- perhaps with a raised cap? What if the requirements for getting a health plan HSA-qualified were radically simplified, , as Manhattan's Feyman and Howard suggest,  -- i.e., what if all plans with deductibles at or above the minimum allowable for HSA-qualified plans automatically qualified?  That is, what if deductibles continued to rise, but employers effectively picked them up? That is one way to make the federal government effectively a catastrophic insurer, financing medical care above the $5,000 or $6,000 mark.

That's not the way I'd design a health benefit. But in the good ol' USA, it could work.

In the good ol' USA, however, it's not going to happen, at least not any time soon. KHN's Jay Hancock, whose article (see top) inspired this line of thought, tells me that "The Treasury/IRS is concerned about companies seeming to actively manage a shift to the exchanges.  Any employer guidance on pointing people to HSA exchange plans, and certainly any acknowledgement that HSA contributions are connected to ending the company plan, could get people in trouble, their advisors are telling them."

The IRS's ire has been more directly focused on a potential use of a different form of employee benefit, Health Reimbursement Arrangements or HRAs, to steer employees to the exchanges. Via HRAs, employers have historically reimbursed employees for health insurance premiums, usually in a group health plan. The IRS has explicitly prohibited the use of HRAs to reimburse premiums spent in the individual market -- e.g., on the ACA exchanges.  The government has warned employers that they cannot give employees dollars "to purchase coverage" on the individual market. Explicitly funding an HSA linked to an exchange plan might feel too close for comfort.