New federal law expands health plan options for small employers
In one of his last official acts, President Obama signed the 21st Century Cures Act. As summarized by the Washington Post, the bill “boosts funding for medical research, eases the development and approval of experimental treatments and reforms federal policy on mental health care.”
Left unreported is a provision, tucked in at the very end of the bill, that allows small employers to establish a new type of health plan. Specifically, the bill allows employers to establish a “health reimbursement arrangement” to reimburse employees who buy their own health insurance in the individual health insurance market. These arrangements are more widely known as defined contribution health plans.
The bill was necessitated by the fact that Obama’s Treasury Department decreed that defined contribution health plans violated the Affordable Care Act.
No public policy organization has written more on this issue than Center of the American Experiment.
One of the main structural problems with our health care system is that most people don’t shop around for health insurance. Instead, people receive health insurance from their employer or the government. The lack of individuals shopping around undercuts competition in the health insurance market. That’s because insurers receive market signals from employers and the government, not the individual using their product.
Understanding this, one of the Center’s health care priorities has long been to develop policies that give individuals more control over their health care choices. And the main way to give individuals more control is to remove barriers to defined contribution health plans.
Despite all its obvious problems, the passage of the ACA appeared to remove the major regulatory barriers to an employer offering a defined contribution health plan.
Nonetheless, the IRS issued guidance in 2013 that holds defined contribution arrangements violate at least two insurance market reforms in the ACA.
As an attorney with a deep knowledge in the area of employee health benefits, I was immediately skeptical of the guidance and, upon close inspection, I determined there was no sound legal basis to support the holding. In my opinion, the IRS guidance was yet another example of the Obama administration making up law and, in the process, undermining the rule of law.
To expose the baselessness of this holding, I wrote an extensive paper entitled, State Strategies to Revive Defined Contribution Health Plan Options in Response to New Federal Obstacles.
As the title suggests, I didn’t just explain why the IRS was wrong. I also outlined strategies to revive defined contribution health plan options. Short of litigation, the main strategy involved passing a state law to create a new category of group coverage that merges elements of individual and group coverage. The same strategy was also outlined in a Center policy brief. A bill to implement this strategy passed through the Commerce Committee in the Minnesota House during the 2016 legislative session.
The passage of the 21st Century Cures Act does not necessarily moot the need for the sort of state action the Center proposed. Though small employers can now make pre-tax contributions to individual health insurance premiums, the federal legislation limits the arrangements to small employers and limits contributions to $4,950 for individuals and $10,000 for families. Some states may be interested in more flexibility.
Considering the turmoil in Minnesota’s individual insurance market, a defined contribution health plan might not be in high demand among the state’s small employers. Blue Cross Blue Shield—the largest insurer—dropped out of the market, other insurers set enrollment caps, and rates are set to increase from 50 to 67 percent.
Nonetheless, a defined contribution health plan may still be an attractive option to small employers that don’t offer a health plan. For their employees, it’s better than nothing.
Over the long-term, with the right policies put in place, broad adoption of defined contribution health plans among employers might be key to stabilizing the individual market and promoting a truly competitive market. As Abir Sen, CEO and founder of the Minneapolis-based health benefits company Gravie, explained in Forbes, “The fact that the employer market has been stable is proof that the employer market has that diverse risk pool. So if employer by employer starts putting their employees in the individual market, all they’re doing is expanding that individual risk pool in a diverse way. If anything, it serves to stabilize the individual market over time.”
What are the right policies? The Center is hard at work developing new strategies to navigate the dramatic changes taking place across the health policy landscape for 2017 and beyond.