Limiting Employer Contributions to "Professional Courtesy" Discounts

[401 Chaos]

This is a new one on me but wanted to see if anybody else had ever run across this or something similar. Have a doctors group with a group health plan and cafeteria plan with health FSA.

They had a prior practice of waiving group health insurance co-pays and certain co-insurance amounts on office visits / services provided to the practice group's own employees as well as the employees of some other medical groups. Maybe even for dependents of employees as well. Insurer found out about this and, not surprisingly, cried foul. (Insurer said it was concerned about practice group not passing on the co-pays / co-insurance amounts to members thus giving them free access, was concerned about medical group not applying standard rates for all patients, batted around notion of insurance fraud.)

Medical group got message that they needed to stop that practice but still wants to provide some form of similar benefit to its employees. Does not want to simply increase salary / pay bonuses to employees because that will be taxable. Similarly, grossing up employees for taxes would be too expensive.

So, they brainstormed and now want to provide a fairly significant flat dollar amount employer contribution to the cafeteria plan that can only be used to cover co-pays and co-insurance for services charged by the employer. The amounts would be restricted just to these employer group co-pays / co-insurance amounts and could not be used for any other medical expenses. If the amounts are not used during the year for co-pays and co-insurance amounts, they would be forfeited back to the employer so the practice group, in theory, is not out anything more than under their old policy

My first reaction was that this arrangement simply does indirectly what they already had gotten in trouble for doing directly. That is, it provides free use of the group health insurance benefits for their employees without the employees having to give any thought as to how much it will cost them out of pocket.

Client then asked, notwithstanding that, if there was a reason under the Section 125 rules that the employer contributions could not be restricted to such a narrow benefit. I haven't researched but that just doesn't seem appropriate although all employees would be entitled to the same dollar amount and same coverage options, presumably even if they didn't have group health insurance coverage through the group.

Anybody have thougths? Anybody have suggestions for some other form of benefit that might be provided in lieu of this sort of arrangement? Thanks

[Jacmo]

They can do exactly what they wish to do through an HRA, with no problems. Don't know why the ins. carrier is crying foul, unless maybe because it's an HMO type of health plan? Even that probably wouldn't make a difference.

An employer can set up an HRA to do whatever they choose to do that's health related, doesn't discriminate in favor of highly compensated employees, and treats all employees of a particular class of coverage equally.

[401 Chaos]

Thanks Jacmo.

I think the insurer in this case actually has a reasonable point. I believe a large part of the reason for imposing co-pays in insurance arrangements is to impose some cost or obstacle on the individual so they do not "run to the doctor" ever turn thereby running up large bills for the insurance company. If imposing a $25 office copay keeps a person from going for a doctor visit that costs the insurance company $80 every time the person gets the sniffles, it's very important to the insurance company. The insurer isn't saying the person cannot go, they are just making them think about it by requiring them to share in the cost.

If office visits become free again then there is no reason for the individual to think twice about seeing the doctor--especially if they are at the doctors office for work any way. I have not seen the group policy or contract but I suspect imposing these copays are part of the contractual arrangement between the group and the insurer and that the insurer has calculated it's premiums based on the notion that these copays and other cost-sharing features will be employed (and will have some of their intended effects of reducing use).

I do not dispute that employees could cover these copays etc. with typical flex plan dollars or using other arrangements in the normal course just like any other doctors office copay. However, if the employer contributions are limited solely to office visits for the employer's own office, that really isn't the same as covering those copays like any other. In that case, there is no opportunity cost for the employee in deciding whether to use the amounts for an office visit versus some other medical expense (over the counter medicine, new glasses, etc.). In that case, it seems the employee is right back where they were before since there ultimately will be no out-of-pocket cost to them to going to their own practice group. If the insurance company had a problem with the straight waiver / payment approach, I'm not sure this arrangement is sufficiently distinguishable that the insurance company wouldn't object to it as well.

[GBurns]

Have a look at what was done in PLR 199915054.

As for the insurance company's objections, I would request them in writing along with their legal rationale and forward the matter to the state dept of Insurance regulation and/or DoL. I bet that once they hear that you will be seeking such advice, they will drop the matter, unless there is some such prohibition in the Provider contract.

This could be a Provider issue rather than an employer/employee issue, especially where the employees of other medical practices are involved. Of course, if there is a reciprocal arrangement with the other medical practices that might also be a mitigating factor.

[Guest Stuartt]

Does anyone see a potential prohibited transaction issue here?

Benefits under this proposed provision could only be used to purchase benefits from the plan sponsor.

[leevena]

A couple of thoughts on this. I worked for a group model HMO years ago and we had the same policy in place for usage of our own providers. However, we were not reimbursed, rather, the provider group never collected the copays. HRA could be set-up, but it might be more effort/cost than it's worth, depending on the size of the group. I guess it depends on the group size and amount of transactions.

As for why the carrier is doing this, and I am not aware of which carrier is in effect, I am guessing that it has to do with the underwriting and actuarial assumptions that have gone into the rating. 401Chaos has made some good points about this in his reply. Carriers develop rates for plans based on certain assumptions, including out-of-pockets costs and usage. When you eliminate the out-of-pocket costs, you increase the usage, thus driving up the claim cost.

With the advent of consumer driven plans, carriers have seen some of their high deductible plans being used with HSA or HRA funds. BS of CA actually went so far as to eliminate commissions for brokers who did this.

Good luck.

[Guest jrodgers32]

Wouldn't a simple reimbursement policy satisfy all parties? Reimbursements of medical expenses are not taxable to the employee, and are a deductible business expense for the practice. Since the copay remains in place the contract with the insurance company would be satisfied--unless there is a clause saying the employer will in no way cover the expense of the copay. I don't think the reimbursement has to come through an FSA/HSA/HRA. The policy of reimbursing copays is a second (self)insurance plan.

[401 Chaos]

Thanks for everyone's thoughts. I am still waiting on copies of the actual contract in place so not sure exactly what that says but I find it hard to imagine that it would be so specific as to expressly prohibit any or all forms of reimbursement as long as the co-pays are getting charged. That said, I'm suspecting the insurer would still be pretty upset if they found out what was going on with reimbursements--whether through the flex plan or otherwise, especially considering the insurer has already called them on their original waiver policy. I think Stuartt put his finger on another reason for my unease here. Something just doesn't feel exactly right to me if you restrict use of funds to services provided by the employer. On the otherhand, it's the employer's funds / contribution so hard to argue they shouldn't be able to restrict the use of those particular amounts if they want to do so.

As you might imagine the employer and insurer have other network / provider relationships so they are a bit sensitive to pushing one another too much on some of these points.