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Brookings’ Scholars Voice Concerns With HRA Regs

DEC. 28, 2018

Brookings’ Scholars Voice Concerns With HRA Regs

DATED DEC. 28, 2018
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[Editor's Note:

For the entire letter, including attachments, see the PDF version of the document.

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December 28, 2018

The Honorable Alex M. Azar
Secretary
U.S. Department of Health & Human Services
200 Independence Avenue SW
Washington DC, 20201

The Honorable Steven Mnuchin
Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue NW
Washington DC, 20220

The Honorable R. Alexander Acosta
Secretary
U.S. Department of Labor
200 Constitution Avenue NW
Washington DC, 20210

Dear Secretary Azar, Secretary Mnuchin, and Secretary Acosta:

Thank you for the opportunity to comment on your October 29, 2018 proposed rule, Health Reimbursement Arrangements and Other Account-Based Group Health Plans (REG-136724-17). We are scholars at the Brookings Institution who study issues related to private health insurance and have published analyses of this proposed rule that examine its impact on insurance markets, employers, workers, and Marketplaces. (Please note that the views expressed in this letter are our own and do not necessarily reflect the views of officers, trustees, or other staff members of the Brookings Institution.) In the attached analyses, we offer our assessment of the proposed rule and make recommendations to the departments. We summarize our recommendations below.

We commend your staffs for a thoughtful and well-written preamble in an especially complex area of federal policy. However, we have significant concerns about the substance of the departments' proposal. Specifically, we believe the negative effects of this proposed rule, particularly the increase in individual market premiums and the attendant fiscal costs, are likely to outweigh the benefits to employers and their workers, and we also have significant legal concerns. Therefore, we recommend that the departments finalize neither their proposal to create an individual-market-integrated HRA nor their proposal to create an excepted benefits HRA.

If the departments do move forward, it is imperative to limit employers' ability to selectively move their sicker workers into the individual market. As described more fully in the attached, we have examined the impact of allowing employers to selectively shift sicker workers to the individual market, and conclude that it would lead to very large increases in individual market premiums. Under some scenarios, individual market premiums would almost double.

To prevent this outcome, the departments should:

  • Maintain the prohibition on purchasing short-term plans via an individual-market-integrated HRA.

  • Maintain the prohibition on purchasing individual market plans via an excepted benefit HRA.

  • Maintain the prohibition on offering a traditional health plan alongside an individual-market-integrated HRA.

  • Continue to require employers to verify that individuals enrolled in an individual-market-integrated HRA are actually enrolled in individual market insurance coverage.

  • Not expand the list of factors employers can use when defining the classes of employees to which they offer an individual-market-integrated HRA.

  • Allow employers to combine factors to define classes only in circumstances where the resulting group would be of a sufficient size, such as containing at least 10 percent of the employer's workforce or at least 100 employees.

  • Apply controlled-group aggregation rules when determining when entities with common ownership are considered a single employer to prevent employers from circumventing these rules through reorganization.

  • Modify the regulation to take into account all the relevant facts and circumstances in determining whether the HRA offer was targeted towards sicker workers. That is, rather than treating an offer based on the eight permitted characteristics as permissible in all cases, specify that use of the eight characteristics would be evidence of a neutral intent, but would not insulate an employer if there was other evidence of targeting.

We also recommend that the departments should:

  • Strengthen the notice requirements and apply them uniformly to not only individual-market-integrated HRAs, but also to excepted benefits HRAs, the HRAs authorized under prior regulations, and all other kinds of employer payment arrangements that could be confused by employees.

  • Delay the effective date of the proposed rule until at least the 2021 calendar year to allow all actors, especially State-based Marketplaces, time to prepare.

  • Provide additional time for states and other stakeholders to assess the proposal and provide comments.

A more detailed discussion of each of these issues appears in the attached analyses, which we submit for consideration as part of the rulemaking record.

In addition, we have identified a number of gaps in the regulatory impact analysis of the individual-market-integrated HRA portion of the proposal, which we believe the departments should address in a final rule. The appendix to this letter describes these concerns in detail. To summarize, the impact analysis in the final rule should:

  • Better model variation in expected claims risk across employers.

  • Take account of variation in individual market risk mix across areas.

  • Account for employers' ability to make different HRA offers to different groups of employees, even as circumscribed by the safeguards in the proposal.

  • Directly model coverage choices for all people below 200 percent and above 400 percent of the federal poverty line (FPL).

  • Account for increases in hassle costs under individual-market-integrated HRAs.

Thank you again for the opportunity to comment. If we can provide any additional information, please do not hesitate to contact us.

Sincerely,

Christen Linke Young, Fellow, USC-Brookings Schaeffer Initiative for Health Policy
Matthew Fiedler, Fellow, USC-Brookings Schaeffer Initiative for Health Policy
Jason A. Levitis, Nonresident Fellow, USC-Brookings Schaeffer Initiative for Health Policy

Attachments:

Appendix: Discussion of Regulatory Impact Analysis
Young, Christen Linke, Jason A. Levitis, and Matthew Fiedler. 2018. “Evaluating the Administration's Health Reimbursement Arrangement Proposal.” https://www.brookings.edu/research/evaluating-the-administrations-health-reimbursement-arrangement-proposal/

Fiedler, Matthew. 2018. “Effects of weakening safeguards in the Administration's Health Reimbursement Arrangement proposal.” https://www.brookings.edu/research/effects-of-weakening-safeguards-in-the-administrations-health-reimbursement-arrangement-proposal/


 Appendix: Discussion of the Regulatory Impact Analysis

Based on our review of the Regulatory Impact Analysis of the individual-market-integrated HRA portion of the proposed rule, we believe the final impact analysis should:

  • Better model variation in expected claims risk across employers: In the proposed rule, the departments state that Treasury constructed expected claims risk for the simulated people in its microsimulation model in two steps. First, Treasury estimated expected claims at the individual level for each person in the Medical Expenditure Panel Survey, Household Component. Second, Treasury statistically matched these estimates onto the population of individuals in Treasury's model, which was drawn from tax data.

    The shortcoming of this approach is that it cannot capture the tendency of sicker workers to work alongside other sicker workers and healthier workers to work alongside other healthier workers, except to the extent that clustering is captured by data elements used in the matching procedure. While the departments do not describe what data elements are used in the matching procedure, they presumably do not include health status since those data are not available on the tax records used to create the model population.

    Failing to allow for firm-level clustering in health status likely leads the departments to understate the variation in average expected claims risk across employers. This, in turn, likely leads the departments to understate both the number of employers who would drop a traditional health plan in favor of an individual-market-integrated HRA and the adverse effect of those transitions on the individual market risk pool. Thus, this issue has the potential to substantially change the results of the departments' analysis.

    The departments could address this shortcoming by obtaining a health care claims database that contains information on how workers are grouped together into firms (like the Marketscan database the departments cite elsewhere in their analysis). That database could be used to implement a new statistical matching procedure that preserves within-firm correlation in health status. Alternatively, the departments could use this database to directly estimate the amount of variation in average expected claims risk across employers and make an ad hoc adjustment to the existing matching procedure designed to ensure that it produces an appropriate degree of cross-employer variation.

  • Take account of variation in individual market risk mix across areas: Data on individual and small group market risk scores published by the Centers for Medicare and Medicaid Services suggest that the relative risk mix of the individual and group markets varies considerably across geographic areas.1 In areas with relatively healthy individual market risk pools, many more employers are likely to find it attractive to drop a traditional health plan in favor of individual-market-integrated HRA, and those transitions are likely to have a larger effect on the individual market risk pool.

    The departments, however, present a purely national analysis. This obviously obscures this variation in the proposal's effects across geographic areas. Conducting a national analysis may also cause the departments to understate the overall national effect of the policy to the extent that the effect of the departments' proposal varies non-linearly with the baseline risk mix in the individual market, which is plausible.

    The departments could remedy this shortcoming of their analysis by doing multiple versions of their analysis, each assuming a different baseline individual market risk mix. The results of these analyses would illustrate how the effect of the departments' proposal would vary across geographic areas. They could also then construct their national estimates by averaging across these multiple scenarios, which should ensure that the departments' national estimates appropriately reflect the consequences of variation in baseline individual market risk mix across geographic areas.

  • Account for employers' ability to make different HRA offers to different groups of employees: The departments assume that employers would make a single firm-wide decision about whether to offer an individual-market-integrated HRA. However, under the proposed rule, employers would have the ability and incentive to make finer-grained decisions about who they offer HRAs, and we expect that they would do so in practice. The first attached analysis notes several specific vulnerabilities to selective shifting under the proposed rule, including the degree to which the various factors for determining which workers are “similarly situated” can be combined, the lack of a minimum size for the resulting classes, and the lack of a requirement that firms be considered at the controlled-group level.

    We expect that firms would use this flexibility to offer HRAs to subgroups of their workforce that are relatively sick. Accounting for this behavior would likely magnify the negative impacts of the proposed rule on the individual market premiums. This flexibility might also increase the extent to which employers not currently offering any coverage elect to offer HRAs under the proposed rule since it would allow them to better target those offers to subgroups of their employees that are ineligible for Marketplace subsidies. Accounting for this behavior might increase coverage gains under the proposed rule and somewhat mitigate the proposal's adverse effects on the individual market, while also increasing its fiscal cost.

  • Directly model coverage choices for all people below 200 percent and above 400 percent of the FPL: The departments state that they place two ad hoc constraints on their microsimulation analysis. They assume: (1) no one below 200 percent of the FPL who receives a premium tax credit at baseline becomes uninsured because their employer adopts an individual-market-integrated HRA; and (2) no one above 400 percent of the FPL enrolled in a traditional health plan at baseline becomes uninsured because their employer adopts an individual-market-integrated HRA. The departments justify these constraints (primarily) on the grounds that employers will structure their HRA offers so as to avoid coverage losses in these groups and that their other assumptions about employers' responses to the proposal do not capture this behavior.

    The departments' approach has two shortcomings. First, it is unclear that all firms will structure their HRAs this way in practice. With respect to people below 200 percent of the FPL, entirely avoiding coverage losses would require employers to offer relatively small HRAs in order to avoid rendering these employees ineligible for generous Marketplace subsidies. But offering small HRAs would force higher-income employees to receive more of their compensation in a taxable form, which may make this choice unattractive to employers. With respect to people above 400 percent of the FPL, avoiding coverage losses would generally require employers to vary HRA contributions by age so as to prevent older employees' cost of coverage from significantly rising. As discussed in detail in the first attached analysis, it is plausible that some employers will vary HRA contributions in this way, but it is also plausible that some employers will not.

    Second, these HRA design choices have implications for employees outside the two groups directly affected by the constraints. For example, setting a low HRA contribution to ensure low-income workers remain eligible for Marketplace subsidies would likely also reduce take-up of the HRA among higher-income workers. Similarly, employers that elected to set higher HRA contributions for older workers would presumably also elect to contribute less for younger workers, which would reduce enrollment among younger workers. Thus, simply constraining coverage decisions in these two groups is unlikely to generate internally consistent set of coverage and fiscal outcomes.

    In light of the shortcomings of the departments' current approach, we recommend that the departments remove these constraints from their modeling and instead directly model any aspects of employer behavior that the departments believe are not captured in their base assumptions about employer responses to the proposal. We suspect that an approach like this one would tend to reduce the departments' estimate of the coverage gains under the proposed rule (and potentially the fiscal cost as well), although it is difficult to be certain of this without access to Treasury's microsimulation model.

  • Account for increases in hassle costs under individual-market-integrated HRAs: Enrolling in coverage via an individual-market-integrated HRA is likely to be more difficult than enrolling in a traditional health plan. To enroll in individual market coverage via an HRA, employees may often need to shop for coverage on their own outside the marketplace, pay for that coverage themselves, and then seek reimbursement from the employer.2 By contrast, under a traditional health plan, employees generally select a plan off of a small menu of options presented by their employer and pay for their portion of the premium via an automatic salary deduction.

    Being offered an individual-market-integrated HRA may also complicate employees' ability to determine their eligibility for Marketplace subsidies and to make related decisions about whether to accept the employer's offer. As explained in our first analysis, employees offered such an HRA may be confused about which variety of HRA they are offered and how that offer affects their eligibility for Marketplace subsidies, which may make it more difficult to navigate the Marketplace application process.

    It has been well-established in the context of retirement benefits that small increases in hassle costs can have large effects on enrollment decisions, and it is likely that hassle costs would have similar effects in the context of health benefits.3 The departments state that their analysis does not account for these types of increases in hassle costs. However, they could have significant effects on outcomes under the proposed rule. First, to the extent that employers take account of these burdens on their employees, it may make them less likely to adopt individual-market-integrated HRAs, thereby muting the overall effects of the proposal. Second, at firms that do set up individual-market-integrated HRAs, hassle costs would likely reduce take-up of individual market coverage, likely particularly among relatively healthy individuals. These changes would tend to reduce insurance coverage and increase individual market premiums (although they could also reduce federal costs to the extent that the increased revenue from lower HRA enrollment outweighs the increase in premium tax credit costs due to higher premiums).

FOOTNOTES

1The methodological appendix to the attached analysis by Fiedler describes how these data can be used to estimate the portion of the difference in average risk between the individual and small group markets that cannot be accounted for by factors that can be rated for in the individual market (primarily age). Looking across the states that use the Healthcare.gov enrollment platform, this analysis suggests that the 20th percentile state has an individual market risk pool that is 10 percent sicker than its small group market risk pool (after accounting for ratable differences in age mix), while the 80th percentile state has an individual market risk pool that is 25 percent sicker than its small group risk pool (again, after accounting for ratable differences in age mix).

2Under the assumptions adopted by the administration's regulatory impact analysis, all employees offered individual-market-integrated HRAs will have the option to pay for their share of the premium with pre-tax dollars through a salary reduction agreement. As explained in the proposed rule, such an arrangement requires employees to purchase coverage outside the marketplace.

3For a review of this evidence, see Baicker, Katherine, William J. Congdon, and Sendhil Mullainathan. 2012. “Health Insurance Coverage and Take-Up: Lessons from Behavioral Economics.” Milbank Quarterly 90(1), 107-134. Accessed at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3385021/.

END FOOTNOTES

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