Potential Issue with Individual HSAs / HDHPs and Group Health Insurance Markets

[Guest MikeMc]

I would appreciate comments regarding what I fear is a potential issue with the new HSAs / HDHPs with regards to the small group health insurance markets in most states.

In Florida we have a guaranteed-issue small group health insurance market while insurance sold directly to individuals is underwritten…I believe this is the situation in most states. In a guaranteed-issue vs. medically underwritten situation there is an inherent vulnerability on the guaranteed issue side with regards to anti-selection and typically legislation is written in an attempt to mitigate this. The anti-selection I’m referring to is the economic tendency to seek the lowest cost and in this situation the lowest cost, if you are healthy enough to pass medical underwriting is usually with individual insurance but if you’re sick you will seek a guaranteed issue small group policy. In Florida the price disparity between comparable small group and individual products has grown to the point where even with a 50% employer contribution it is becoming common for employees to find less expensive insurance on their own, that is if they are healthy. This situation is the norm for employee dependents as dependent contribution is rare in Florida’s small group market. The potential practice I describe below could significantly exacerbate this unhealthy situation.

The mitigating legislation I mentioned above seeks to prohibit small employers from following a strategy of purchasing individual insurance for their employees who are healthy and purchasing a guaranteed-issue small group policy for the remainder. This strategy, if allowed, would provide significant savings to the employer and would be very popular with the agent community, at least until the small group market imploded. The law prohibits this practice in the following way. It states that if a small employer makes a contribution towards the purchase of any health benefit policy, or even facilitates in the administration (i.e., uses payroll deduction) then the policy is subject to all of the small group reform legislation including guaranteed issue, state filing requirements, and a plethora of other requirements which, if the policy was an individual policy, creates a raft of compliance violations and everyone’s in a heap of trouble.

OK, are you still with me? If not let’s just get to the point and hopefully you’ll catch on. It would seem there is now a loophole in the law that could work as follows. A small business offers their employees $200 a month towards health insurance. To qualify an employee must obtain an individual HDHP and set up a HSA. If these two requirements are met, the employer will deposit $200 a month into the employee’s HSA. For the employees who can’t pass medical underwriting for the individual HDHP, well they’re out of luck or if necessary, the employer purchases a guaranteed-issue small group policy for them with the same contribution. Either way, I think I hear a giant sucking sound of all of the healthy risk going out of the small group market.

The breakthrough here is that the small employer is not making a contribution to or facilitating the purchase of a health benefit policy, they are simply donating to a savings account and this effectively skirts the law.

While this situation is most concerning for the small group market I think there are implications for larger businesses as well. I’m wondering is anyone has heard of this practice or has any comments?

[GBurns]

I have not heard of any such pending legislation. Can you cite it or give a link? bear in mind that most legislative bills die and do not become law.

I see many problems with your plan design with the employer contributing $200 to the employee HSA:

1. If the employee is declined for the individual plan they might not be able to get on the group plan. Timing of enrollment problems. Carrier participation requirements. Carrier restriction on other plans.

2. Employee backlash if an employee ends up with no coverage.

3. Cost effectiveness. As you reduce the size of the block for the group plan you to increase increase the cost. On renewal of the less healthy group you will have greater cost increase and these employees would not be eligible for individual coverage so they and the employer get trapped. This self destruction would occur within 2 years if not by the first renewal.

4. Employee communication. Since the employee would have to pay for the individual plan, there would be a reduction in their paycheck. The current paycheck is a primary focus of employees.

5. I doubt that on an annual basis you will be able to show savings to the employee or the employer sufficient to offset the risk or to be worth the effort.

All of this is whether or not there really is the premium differential that you stated. I have not yet looked properly but a casual glance at the major players, Humana, Humana One, BCBS, Aetna, UHC does not seem to agree with you. However, you might be using lesser known names but I still have my doubts.

Which companies wiould you use for comparison?

There are many carriers that you might want to use who would be irrelevant to any discussion of South Florida as a region, because they do not cover the whole region with any effectiveness. Look at the coverage area of say NHP, CareAccess, Total etc. Some cover South Dade County but have next to no network north of MIA and none in Broward and Palm Beach.

It would be pointless to claim a rate disparity using carriers who do not even have a provider network available in the required area even though they would issue the coverage and leave it up to the consumer to drive 70 miles in congested traffic.