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Consumer Driven Healthcare


Provident Mutual - Philadelphia, PA. 5 Years Experience in Hospital Administration ... Health plan coverage while receiving unemployment compensation ... – PowerPoint PPT presentation

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Title: Consumer Driven Healthcare

Consumer Driven Healthcare
  • Hitting the high points of the emerging trends in
    healthcare financing

About the Presenter -- Kevin M. OHara
25 Years Experience in Insurance (Life and
Health) - Vice President of Corporate Synergies,
Inc., Mt. Laurel, NJ - Blue Cross system -
Wilmington, DE/Phila., PA/New Jersey - American
Society of CLU/ChFC - Bryn Mawr, PA - Provident
Mutual - Philadelphia, PA 5 Years Experience in
Hospital Administration - West Jersey Health
System - Camden, NJ - Specialized Treatment
Centers - Lawrenceville, NJ Director of Corporate
Synergies Institute Mt. Laurel,
NJ Designations RHU, PAHM, EHBA M.S.,
University of Pennsylvania, Organizational
Develop. B.A., University of Notre Dame,
Industrial Psychology
Consumerism is the New Managed Care.
  • Ron Leopold, MD, MPH
  • November 2, 2005
  • New Directions in Health

Managed Care vs. Consumerism
  • Minimize inappropriateness
  • Shifting cost liability
  • Provide external oversight of the medical
  • Sea Change
  • Timing of intervention back-end
  • Minimize inappropriateness
  • Shifting cost liability
  • Provide external oversight of the medical
  • Sea Change
  • Timing of intervention front-end

Projected Growth of CDHC
Mercer Survey, March 2005
Getting into the CDHC Pool
  • Plan Cost
  • Consumer Empowerment
  • Corporate Philosophy
  • Long-Term Trend Implications
  • Retiree Medical Funding

The Lay of the Land
  • 43 of employers HAVE or WILL HAVE a CDHC plan
    with the next two years
  • 77 of employers believe the CDHC model will
    change employee spending patterns
  • 56 of employers expect immediate cost savings
    from CDHC

Deloitte Center for Health Solutions (2006)
Satisfaction with CDHC
Senior Management
15 Dissatisfied
3 Dissatisfied
26 Neutral
51 Satisfied
33 Neutral
71 Satisfied
Human Resources
13 Dissatisfied
17 Neutral
69 Satisfied
Deloitte Center for Health Solutions (2006)
Flexible Spending Account
  • POP (Premium Only or Premium Conversion)
  • HCRA (Health Care Reimbursement Account)
  • DCRA (Dependent Care Reimbursement Account)
  • Full Flex (Cafeteria)

FSA Health Care Reimbursement Account Issues
  • Administrative Issues (including lock-in
    contribution election and annual election)
  • Use-It-or-Lose-It vs. Immediate Availability
  • 2½ Month Extension of the Grace Period
  • HSA hurdle…addressed under recent regulatory
  • Streamlining via Debit Card
  • Claim Substantiation Issues/2007 MCC Code
  • Employer/Employee Funding
  • Employer Allocation of Funds e.g., Waiver
  • No Need to Participate in a Health Plan
  • ERISA Discrimination Testing
  • Plan Documents

Medical Expense Reimbursement Program (MERP or
HRA Lite)
  • Section 105 Qualification
  • Premium Savings/Self-Funding
  • Applies to any subset of IRS 213(d)
  • Permits tax-favored distribution of general
  • Documents
  • Discrimination Testing

HRA Health Reimbursement Arrangement
  • Regulated by IRS Sections 104 and 105
  • Not new
  • MERPs are mini-HRAs
  • Employer-Only Contribution
  • Notional Account
  • No Defined Underlying Plan (or ANY Plan for that
  • Rollover Disposition Yes, No or Maybe…
  • Entire Balance, Fixed Amount, of Deductible
  • End of Employment Option
  • ERISA Testing
  • Plan Documents

HRA Issues
  • Claim Substantiation Required
  • COBRA Applies
  • Employer May Determine Extent of Reimbursable
  • Account Fees
  • Debit Card Administration
  • Non-Debit Card Reimbursement to Member
  • Non-Debit Card Reimbursement to Provider
  • Minimizes the consumer aspect of the HRA

HSA Health Savings Account
  • Just a bank account…
  • Medicare Modernization Act of 2003
  • Qualified High-Deductible Plan Only
  • Employer, Employee and Others Contribute
  • Triple Tax-Free Deposit, Growth, Withdrawal for
    Eligible Expenses
  • Employee owns the proceeds
  • Can be used for any purpose… problem?
  • Non-ERISA Program

(No Transcript)
HSA Overview
  • HSA is money put in an account owned by an
    individual/employer/other to pay for future
    medical expenses
  • Must be used in conjunction with High Deductible
    Health Plan (HDHP)
  • Insurance that does not cover first dollar
    medical expenses (except for prevention)
  • Cannot be covered by another non-qualified health
  • But dependents MAY have non-qualified coverage
  • Individual may still contribute up to the Family

Who Is Eligible for HSAs?
  • Any individual that
  • Is covered by a HDHP
  • Is not covered by other health insurance
  • Does not apply to specific injury insurance and
    accident, disability, dental care, vision care,
    long-term care
  • Is not eligible for Medicare
  • Cant be claimed as a dependent on someone elses
    tax return

What Is a High Deductible Health Plan (HDHP)?
  • Health insurance plan with minimum deductible of
  • 1,100 (self-only coverage -- 2007)
  • 2,200 (family coverage -- 2007)
  • Annual out-of-pocket (including deductibles and
    co-pays, so its a MOOP or a TROOP, not an
    standard OOP) does not exceed
  • 5,500 (self-only coverage -- 2007) in-network
  • 11,000 (family coverage -- 2007) in-network only
  • HDHPs can have
  • No Deductible for Preventive Care…hmmmm!
  • Higher Out-of-Pocket (co-pays coinsurance) for
    Non-Network services

HSA Contribution Rules
  • Contribution to HSA can be made by either the
    employer or the individual, or both
  • If made by the individual, it is an
    above-the-line deduction
  • If made by the employer, it is not taxable to the
    employee (excluded from income)
  • Can be made by others on behalf of individual and
    deducted by the individual
  • All contributions are aggregated to determine

HSA Contribution Rules
  • Maximum amount that can be contributed to an HSA
    (and deducted) Maximum specified in law
    (indexed annually by Medical CPI)
  • 2,850 (self-only coverage) - 2007
  • 5,650 (family coverage) 2007
  • Owners/Partners of Partnership, LLC or S-Corp may
    contribute post-tax only
  • Above-the-line deduction may be taken on income

Recent Change
HSA Contribution Rules
  • For individuals age 55 and older, additional
    catch-up contributions to HSA allowed
  • 2007 - 800
  • 2008 - 900
  • 2009 and after - 1,000
  • Contributions must stop once an individual is
    eligible for Medicare

Recent Change
HSA Contribution Rules
  • Contributions can be made through cafeteria plans
  • Contributions made for a mid-year entrant may be
    up to the stated annual limit
  • Employer contributions to HSA must be
    comparable for all employees participating in
    the HSA by tier and by status…no other criteria
    unless under an FSA arrangement
  • If not comparable, there will be an excise tax
    equal to 35 of the amount the employer
    contributed to employees HSAs

Recent Changes
HSA Contribution Rules
  • In order to meet the requirement that the
    employer make comparable contributions, the
    employer must make contributions
  • Which are the same amount unless lower paid…
  • or
  • Which are the same percentage of the annual
    deductible unless lower paid…
  • Count only employees who are eligible individuals
    covered by the employer and who have the same
    category of coverage (i.e., self-only or family)
  • Part-time employees are tested separately
  • Part-time means customarily employed fewer than
    30 hours per week

Recent Changes
HSA Distributions
  • Distribution is tax-free if taken for qualified
    medical expenses
  • Cannot be used to pay for other health insurance
  • COBRA coverage
  • Qualified long-term care insurance (…wonder why)
  • Health plan coverage while receiving unemployment
  • For individuals eligible for Medicare
  • Medicare (Part A, Part B, MedicareChoice, Part
  • Employee share of premiums for employer-based
  • Cannot pay Medigap premiums

HSA Distributions
Employer Alert
  • Distributions are tax-free if taken for
  • Person covered by the high deductible
  • Spouse of the individual
  • Any dependent of the individual
  • Spouse and dependents dont need to be covered by
    the HDHP
  • If not used for qualified medical expenses, then
    amount is included in income
  • 10 additional tax if taken for non-medical
    expenses, except when taken after
  • Individual dies or becomes disabled
  • Individual is eligible for Medicare

HSA Tax Implications
  • HSA custodian must report all distributions not
    required to check them for eligibility
  • Tax filer may be required to report contributions
    made and expenses paid with HSA funds via IRS
    Form 8889
  • Plan custodian will report contributions on IRS
    Form 5498 and distributions on a standard 1099
  • If the account is over-funded, there will be a
    6 excise tax on distributions

HSA Distributions
  • Should the HSA participant keep receipts?
  • YES! Need to prove that deductible was met
  • Not all medical expenses paid out of the HSA have
    to be charged against the deductible (e.g.
    prescription sunglasses)

Estate Treatment of HSAs
  • If married, the spouse is treated as the owner
  • In other cases
  • The account will no longer be treated as an HSA
    upon the death of the individual
  • The account will become taxable to the recipient
    of it (including the estate of the individual)
  • Taxable amount will be reduced by any qualified
    medical expenses incurred by the deceased
    individual before death and paid by the recipient
    of the HSA
  • The taxable amount will also be reduced by the
    amount of estate tax paid due to inclusion of the
    HSA into the deceased individuals estate

Advantages of HSAs
  • HSA accounts encourage savings for future medical
  • When employer-sponsored coverage is lost during
    periods of unemployment
  • COBRA continuation coverage
  • Other coverage
  • Insurance coverage or medical expenses after
    retirement (before Medicare eligibility)
  • Long-term care expenses
  • Out-of-pocket expenses for Medicare
  • Non-covered services under future coverage

Advantages of HSAs
  • Accounts are owned by the individual (not an
  • Individual decides
  • How much to contribute
  • How much to use for medical expenses
  • Which medical expenses to pay from the account
  • Whether to pay for medical expenses from the
    account or save the account for future use
  • Which company will hold the account…often
  • What type of investments to grow account…subject
    to administrator limitations

Advantages of HSAs
  • Accounts are completely portable, regardless of
  • Whether the individual is employed or not
  • Which employer the individual works for
  • Which state an individuals moves to
  • Age or marital status changes
  • Future medical coverage

Advantages of HSAs
  • No use it or lose it rules like Flexible
    Spending Arrangements (FSAs)
  • Unspent balances in accounts remain in the
    account and can grow through investment earnings
  • Encourages account holders to spend their funds
    more wisely on their medical care
  • Encourages account holders to shop around for the
    best value for the health care dollars

Advantages of HSAs
  • Accounts can grow through investment earnings
  • Many different investment options could be
  • Individual chooses investment option that best
    meets their needs
  • HDHP premiums should be cheaper than health
    insurance with traditional deductibles

HSA Issues
  • Prevention
  • Communication and Rollout
  • Access to Information
  • Coordination with HRAs FSAs
  • Administration
  • Barry Stokes The Consumer-Driven Guy awaits a
    May 22nd trial in Nashville 5 cents on the
  • Individual vs. Family deductibles
  • Substantiation
  • Risk Pool Shifts The Death Spiral

Coordination Issues
  • HSAs can be used in conjunction with some
    specialized HRAs and FSAs
  • Limited Purpose or Permitted HRAs and FSAs
  • Restrict benefits to narrow area such as dental
    or vision only
  • Permitted coverages include workers comp and
    fixed dollar plans
  • Post-Deductible HRAs and FSAs
  • Provide benefits only after the minimum
    deductible has been met
  • Retirement HRAs
  • Provides reimbursement only after retirement
  • Suspended HRAs
  • In which the employee elects to forgo
    reimbursements during the coverage period

The Death Spiral
Good Risk
Cost Prohibitive
Original Plan
Evolving Plan
Cleaning Up Some Open Issues
  • Prohibition on HSA and FSA simultaneity
  • Posing problem for launching new HSA programs
  • Overcame problem with special exclusion in
  • 2½ month grace period causing real difficulties
  • Exhaustion of FSA at end of prior period allows
    HSA establishment in the current period
  • Transfer of FSA remainder to HSA account
  • In the absence of this allowance, no
    contributions can be made to the HSA during the
    grace period

New Caps Established for 2007
  • 2007 High Deductible Health Plan (HDHP) Minimums
  • Individual 1,100
  • Family 2,200
  • 2007 HDHP Maximum Out-of-Pocket Limits
  • Individual 5,500
  • Family 11,000
  • 2007 Maximum HSA Contributions
  • Individual 2,850
  • Family 5,650
  • 2007 Catch-Up Contribution 800
  • Attained age 55 by end of the taxable year

No Deductible Ceiling
  • Previously, the limit on the HSA annual
    contribution was the LESSER or the stated Annual
    Limit or the HDHPs deductible
  • Beginning in 2007, contributions to the HSA may
    be for any amount up to the Stated Annual Limit
    without regard for the HDHPs annual deductible
  • This change is hoped to increase the
    participation in these tax-advantaged accounts

Mid-Year Contribution Limits
  • New enrollees under an HSA program were
    previously limited to a pro-rated maximum
    contribution -- based on the number of months in
    the plan
  • This pro-ration did not apply to the deductible
    limit, however
  • Mid-year enrollees may now contribute up to the
    full Annual Limit no matter when in the year they
    began coverage
  • The HSA plan must be retained for 12 months
    following last day of the plan year
  • Taxation 10 penalty applies for violation

One-Time IRA Transfer
  • To overcome the reluctance to having an
    under-funded first-year HSA, a one-time transfer
    from an IRA is permitted
  • The amount to be transferred is limited to the
    HSAs Annual Contribution Limit
  • Transfer must be a direct trustee-to-trustee
  • Rollover IRA dollars may be used
  • Favorable tax implications
  • IRA dollars spent on medical expenses are
    taxable HSA dollars are not

Altered Comparability Rules
  • Due to the Comparability Rules, employers could
    not provide additional incentive to lower-paid
  • Since this group would be most dramatically
    affected by the shift to a HDHP, some employers
    were reluctant to introduce the change
  • Employers may now provide a higher percentage of
    HSA dollars to this lower-paid workforce

Earlier Annual Indexing
  • Previously, annual indexing was based on a
    12-month period ending on August 31
  • The new rules change the base period to the
    12-month period ending on March 31
  • Adjusted amounts for the following year must be
    published by June 1 of the preceding year
  • This change will provide
  • Employers and health plans with more time to
    design qualifying HSA-eligible plans
  • Individuals with more time to make healthcare

FSA/HRA Rollover
  • Employers can transfer funds from a Health FSA or
    a Health Reimbursement Arrangements HRAs to an
    HSA for employees switching to coverage under an
    HSA-compatible health plan
  • The amounts rolled over from FSAs or HRAs are
    over-and-above the amounts allowed as annual
  • Maximum contribution is the lesser of the balance
    in the FSA or HRA as of September 21, 2006 or the
    balance as of the date of the transfer
  • Limited to one distribution for each Health FSA
    or HRA of the individual
  • If an individual does not remain an HSA-eligible
    individual for the 12 months following the month
    of the contribution, the transferred amount is
    included in income and subject to 10 additional

  • As ERISA benefits, Section 105 programs must be
    offered to COBRA eligibles
  • If bundled into the existing benefit structure,
    there is no premium for these programs
  • Plan documents critical here
  • If separated from the benefit program, an
    administrator may charge COBRA premium for this
  • No requirement to obtain actuarial verification
  • Must be based on the cost of providing the
    benefit across the entire population of eligible

HRA Program Example
First dollar?
FSA Pool of Pre-Tax Dollars (allocated?) Make
sure these are exhausted first through proper
wording of HRA document!
NJ Lead Poison
Subject to use-it- or-lose provision
HSA Program
Ineligible to participate but eligible for
disbursements from prior
No requirement that maximum funds need to be
available at all times
HSA Program Example
First dollar?
FSA Pool of Pre-Tax Dollars (Excepted
Medical Expenses such as dental, vision
and/or preventive care referred to as
permitted coverage)
NJ Lead Poison (until 2006)
Rx (until 2006)
2,000 Deductible
Limited Purpose HRAs (e.g., LTC and specific
Suspended HRAs following transition to HSA
Post-Deductible HRAs and FSAs
Retirement HRAs
At Issue HSAs represent a fundamental change in
the way healthcare is financed.
Consumer Driven Healthcare
  • Hitting the high points of the emerging trends in
    healthcare financing