The Pit & the Pendulum

With the new administration passing the 100 day mark, so much “guidance” has been introduced and so many new faces have been appointed it might seem like there’s just too much uncertainty in the marketplace right now to make any kind of strategic change. 

We think there are ways to be strategic without much investment making it easy to pivot when the winds of change blow.

We titled this post The Pit and The Pendulum for two reasons.  First, the pendulum of change has swung back to a position we saw just two to three years ago.  With the passage of the 21st Century Cures Act in December of last year and the rhetoric from Washington such as it is, many are predicting a second boom to the individual market from small group employers dropping group coverage, and sending their employees back to the individual market. Then again, many are saying employer sponsored healthcare is here to stay.  We’re going to be provocative and say that both are right. 

There will always be employers that want to provide for their employees beyond the commercial norm.  There will also be employers that either can’t or don’t want to provide rich benefits but they still want to help where they can. 

This creates two opportunities in your product portfolio.

Standalone Health Reimbursement Arrangements (HRA)  
With the passage of 21st Century Cures Act, Congress brought back a practice that had died with the passage of the Affordable Care Act (ACA). Pre-ACA, some employers had migrated to a pure defined-contribution benefits program. This is nothing new. Remember when cafeteria plans were first introduced?  What they were was a practical application of the cafeteria plan idea. Employers would provide $X to their employees on a pre-tax basis and then the employees would spend that money on whatever they wanted as long as the purchase was on a qualified medical expense. They could buy individual insurance with it or they could leave it in the HRA and self-insure by using the HRA as a monetary reserve to pay for care when it was needed.  Regardless, the individual made the decision on how they should best provide for themselves and their family. 
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Now that standalone HRAs are pre-tax eligible once again, small-group portfolio managers would be smart to pick up the phone and call their counterpart in the individual insurance department of their health plan.  By coordinating efforts between the two groups one can develop programs that capture small groups who want to “walk away” from employer sponsored plans by giving them both insurance product options and technology solutions that guide both employers and individuals to the services that best meet their needs. 

All this said, while it is now an option, because HRAs are employer funded, they don’t do as much to control over-utilization and, therefore, costs. 

Embedded Health Savings Accounts (HSA)
Also for health plans, offering plans that are HSA compliant in conjunction with HSA administration services would be a great way to provide additional member services and generate some incremental revenue.  HSAs are not just for the rich and famous, despite what you may hear from some quarters.  According to consumer research published by VISA in 2015, 81% of all HSA account holders are spenders.  A spender is someone that doesn’t use their HSA as a tax shelter but rather more like a Flexible Spending Account (FSA) – spending down most if not all of their annual election.  Furthermore, the average household income (AHI) of an HSA spender is $83,000.  While that is significantly higher than the median income of $52,000 it is far from the “rich and famous tax-shelter” folks that we keep hearing about. 

The other 19% of HSA account holders are considered savers.  They save some, and in some cases all of their annual election so that their account balance grows year over year.  What’s really interesting is that this group is slightly younger on average than the spenders  – 38.9 to 40.0 and their AHI is significantly lower - $60,200 compared to $83,000.  So if the HSA is a vehicle that only the rich use as a tax shelter, someone should tell the 19% of HSA account holders out there that are saving their money that they are, in fact, rich. 

What does all this mean?  For consumers, it’s all good – or so it might seem at least for a while.  The current insurance landscape is offering more options for them to manage their out of pocket costs. But risky product designs without proper pricing can lead to rate instability and escalating costs over time. For insurers, the current administration’s position being PRO HSAs creates significant tailwinds for those plans that have developed embedded HSA offerings already.  For those that have not, it re-enforces the need to do so and do so quickly.  Lastly, while standalone HRAs are potentially coming back into vogue, beware of the “pit”.  Plans with standalone HRAs might regain popularity in the small group market as a way for employers to offer some form of benefits without bearing the full cost of group coverage.  What they won’t do is help control healthcare costs thus leaving us in the pit of despair we’re currently in relative to increasing costs. And in the case of wrap-around options that provide first dollar coverage of money that isn’t the consumers (HRA) the mistakes can be extremely costly. Understanding how any high-deductible plan is going to be packaged for consumers is critical to warding off unintended risk. Deductible buy-down schemes which negate the intentions of the HDHP by eliminating or reducing deductibles can have dire consequences if not priced properly.  

If you’d like to know more about these or other topics related to portfolio design and optimization please send inquires to [email protected].