Stakeholders Respond to the Proposed Health Reimbursement Arrangement Rule. Part I: State Insurance Departments and Marketplaces

In October 2018, the Trump administration proposed rules to expand the use of health reimbursement arrangements (HRAs) by loosening current federal limitations. The administration’s proposal would allow employers to offer employees the tax-advantaged accounts to assist with health care expenses, including premiums, in lieu of employer-sponsored coverage. The rule stems from President Trump’s 2017 executive order directing his administration to increase the availability of HRAs, along with coverage options that do not have to comply with the Affordable Care Act’s (ACA’s) rules. The president’s order touts HRAs as a way to give employees “more flexibility and choices regarding their health care.”

Currently, most employers can only offer HRAs as an option if an employee also has an ACA-compliant group health plan (with the exception of small employers and certain plans for retirees). The proposed rule largely abolishes this prerequisite, allowing employers of any size to offer an HRA instead of traditional group health insurance. Employers can either offer “integrated HRAs” that provide funding for employees to purchase ACA-compliant plans on the individual market, or “excepted benefit HRAs,” which provide a maximum of $1800 per year to purchase a short-term plan, which is not subject to the ACA’s rules (employers are required to offer a group health plan in addition to the latter option, but employees may choose solely the HRA). The proposal would also permit employers to differentiate between different classes of employees, allowing them to offer certain classes an HRA instead of a group health plan while continuing to provide traditional group coverage for other classes.

A more comprehensive analysis of the rule is available here.

To see how the Trump administration’s proposal would impact stakeholders, CHIR reviewed a selection of comments submitted on behalf of insurers, state officials, consumer advocates, and employer and benefit advisor groups. For the first blog in our series, we summarize comments from three state marketplaces and three state insurance departments (DOIs). These state officials play a crucial role in protecting consumers and ensuring market stability.

The following states submitted comments that were publically available: California, Colorado, the District of Columbia (D.C.), Massachusetts, Minnesota, New York, Pennsylvania, Washington State, and Vermont. We reviewed the following as a sample of state responses to the proposed rule:

State comments that we reviewed advocated for altering or withdrawing the rule, arguing that the proposed changes could lead to discrimination, negatively impact the ACA-compliant market, weaken affordability protections, and cause significant consumer confusion and administrative headaches. Concerns included:

Increased risk segmentation, leading to discrimination and adverse selection

Every comment in our sample of state officials voiced concerns about the proposal’s propensity to promote risk segmentation. State officials indicated that based on the financial incentives, employers could easily discriminate against sicker, older workers by offering them HRAs instead of traditional group health insurance as a way to ease the employer’s financial burden. The California DOI argued that employers may treat the individual market as their “very own high-risk pool,” leading to adverse selection and market instability, including higher premiums. The D.C. marketplace echoed these concerns, further advising that the excepted benefit HRAs will increase the prevalence of “junk plans,” particularly among young and healthy workers; this could result in higher premiums for the workers who are too sick to opt for the excepted benefit HRA. The Minnesota DOI advised the excepted benefit HRA could siphon healthy risk out of the small group market, causing instability and higher premiums for small employers and their workers.

The proposed rule contains provisions meant to prevent this sort of risk segmentation, but the states in our sample were skeptical of the current proposal’s effectiveness. For example, the rule requires employers to treat all workers within the same “class” (defined in the proposed rule as eight non-health-related categories) equally in regard to offering an HRA. The Washington State marketplace called this protection “necessary, but not sufficient, to ensure fair treatment of employees,” noting employers may still target various classes (e.g., those under age 25 or those in a particular geographic area) to differentiate on the basis of health status. And despite supporting the guardrails in the proposed rule, the Colorado marketplace asked that the administration “strengthen” the provisions. The Pennsylvania DOI echoed Colorado’s suggestion and further recommended requiring that workers opting for an excepted benefit HRA also enroll in the traditional group plan to tamp down on adverse selection and discrimination.

Challenges to premium subsidy calculations and affordability concerns

While one state marketplace voiced support for using pre-tax dollars to help consumers purchase comprehensive health insurance, a number of comments addressed the impact on affordability.  Several state officials discussed the potential impact of expanding HRAs on federal premium subsidies, the advanced tax credit available for consumers who aren’t eligible for Medicaid and earn between 100 and 400 percent of the federal poverty level (FPL). The Minnesota DOI noted that most lower-income workers would otherwise qualify for premium tax credits, but an offer of an HRA could cause them to lose eligibility for the federal subsidy. The D.C. marketplace pointed out that because HRAs reimburse the account holder after the fact, workers would be forced to pay 100% of their premiums upfront, which could result in workers forgoing coverage.

Other states argued that the proposed rule creates unequal affordability standards for subsidy determinations. The Washington State marketplace advised that while federal premium subsidies for marketplace coverage are determined on a sliding scale, with lower-income workers contributing a lower portion of the premium than higher-income workers, the proposed HRA rule would require all workers to pay at least 9.86 percent of their income before premium subsidies kick in. The California DOI lamented that the proposed rule perpetuates the “family glitch” in which the affordability of employer-sponsored coverage does not take the cost of covering dependents into account, recommending that the affordability test include the total cost of coverage.

Consumer confusion

Almost every comment from state officials in our sample indicated that the proposed rule would cause significant consumer confusion. The Pennsylvania DOI noted that if the proposed rule is finalized, consumers would have to differentiate between and understand four different types of HRAs, including the various participation requirements and tax implications. The Colorado marketplace urged the Trump administration to develop notices for each type of HRA, while the Washington State marketplace warned that consumer confusion about HRAs, exacerbated by current issues with health insurance literacy, could cause workers to “give up on seeking coverage altogether.”

Implementation challenges for state marketplaces and insurance departments

A number of comments brought up the impact of the proposed rules on state officials themselves, with several comments calling for a delay in the rule’s implementation. State marketplaces protested that the proposed changes would require a significant amount of time and money to adopt. Both the Colorado and D.C. marketplaces expressed that the changes to eligibility and affordability determinations and the proposed Special Enrollment Period (SEP) will entail a heavy administrative lift, pointing to the new demands for its IT systems, training for consumer assistance networks, and marketplace communications. The Colorado marketplace further indicated the potential strain on insurers, who have already begun calculating rates for the 2020 plan year. All of the state marketplaces in our sample called for the effective date of the rule to be delayed beyond the proposed implementation date of the 2020 plan year.

State officials also highlighted the potential impact on state regulation of insurance markets. The Washington marketplace indicated that the proposal to allow large employers to choose between sending their employees to the large group or individual market will result in market distortions, which the marketplace argues will be beyond the state’s regulatory authority. The Minnesota DOI cautioned that states have no means of providing regulatory oversight of HRA use, proposing that the Internal Revenue Service (IRS) adopt certain changes to tax reporting to support better regulation by state insurance departments and marketplaces.

Take Away

As proposed, the Trump administration’s HRA rule prompts numerous concerns from state insurance departments, the primary regulators of health insurance, and marketplaces, which would operationalize many of the changes. State officials cautioned the Trump administration about the potential harm to market stability and consumers’ access to affordable coverage. Comments submitted by insurance departments and marketplaces also asked for stronger guardrails on discriminatory practices, more consistent affordability standards, a reduction in the burden placed on consumers and states, and greater state oversight of HRA use.

A Note on Our Methodology

This blog is intended to provide a summary of comments submitted by a specific stakeholder group: state marketplaces and insurance departments. This is not intended to be a comprehensive report of all state comments on every element in the Health Reimbursement Arrangement proposed rule, nor does it capture every component of the reviewed comments. Additionally, a portion of submitted comments were not available for our review at the time of publication. For more stakeholder comments, visit http://regulations.gov.

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