To provide employers and their employees with more coverage options, the Trump administration has proposed a rule that would allow employers to fund individual, tax-preferred accounts for employees to buy coverage on their own rather than cover them under employer-sponsored group plans. This regulatory change could shift individuals from employer-based coverage, which insures more than half of all Americans under age 65, to the state-regulated individual markets, including the Affordable Care Act (ACA) marketplaces. Health care costs for these individuals would therefore shift, in part, from employers to taxpayers and employees, who could end up with less comprehensive coverage. While the administration argues that adding people to the marketplaces will strengthen them, the change could destabilize individual markets by leading to an influx of high-cost enrollees, depending on how well the final rule protects against employers using HRAs to cover high-cost employees. State regulators have few options to protect the marketplace.
Changing Position on HRAs
The proposed rule follows the administration’s 2017 executive order expanding employers’ ability to offer health reimbursement arrangements (HRAs), as well as non-ACA-compliant short-term health plans and association health plans. An HRA is a tax-advantaged account funded solely by employers to help employees pay approved medical expenses, including some premiums.
Under current rules, an employer can offer an HRA only to employees who also have a traditional group health plan that meets the requirements of the ACA, with certain exceptions for small employers and some retiree health plans. Under the proposed rule, employers, regardless of size, can provide an HRA instead of a traditional group health plan. One option under the proposed rule, the “integrated HRA,” would allow employees to use an HRA to buy an individual plan that meets ACA requirements. A second option, the “excepted benefit HRA,” would allow employees to use an HRA funded with no more than $1,800 annually to buy a short-term plan not subject to ACA consumer protections and benefit standards.
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Current HRA Rules |
Integrated HRA |
Excepted-Benefit HRA |
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Limits on offering an HRA |
Can only be offered to employees who also have a traditional group health plan that meets ACA rules |
Can be offered instead of a traditional group health plan |
Can be offered in addition to a traditional group health plan, although employee may choose to enroll in only the HRA |
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Permitted uses of HRAs |
Must be paired with traditional group health plan |
Must be paired with ACA-compliant individual market plan |
May be paired with excepted-benefit plan or short-term plan |
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Limits on employer contribution |
No limit |
No limit |
No more than $1,800 annually |
Destabilizing State-Regulated Markets
Despite the administration’s position in the Texas v. Azar case challenging the constitutionality of the ACA, the proposal assumes that the ACA remains the law of the land, and that employees using an HRA are guaranteed coverage and fair premiums in the individual market, regardless of health status. The administration estimates that the integrated HRA proposal will create 800,000 newly insured people over 10 years, mostly those who do not currently have coverage through their employer.
Yet the integrated HRA may be especially attractive to employers that currently offer coverage, including those with sicker employee risk pools that would benefit from shifting risk to the community-rated individual market and those that offer “skinny” coverage to meet the ACA’s employer mandate.
The impacts of this proposal are likely to vary among states, depending on their employer and individual insurance markets. But it has the potential to destabilize individual markets. Because the number of people covered under employer plans (158 million) far exceeds the number enrolled in the ACA marketplaces (14 million), experts predict even a small shift of high-cost people from employer to individual plans resulting from employers offering HRAs instead of a group health plan could have a dramatic impact.
The proposal includes limits designed to deter employers from using the integrated HRA to steer sicker employees to the individual market and retain lower-cost employees in the group health plan, thereby limiting premium increases for ACA coverage to less than 1 percent, by the administration’s estimate. Employers would be able to base coverage decisions on certain employment characteristics, for example, full-time status or location of work, but could not offer employees their choice of an integrated HRA or a group health plan, thereby protecting against employers designing a group health plan that discourages sicker employees from enrolling. Still, state regulators, marketplace officials, attorneys general, and actuaries have raised concerns that the safeguards are inadequate. Employers could potentially use the employment categories to sort employees based on their likely health costs and then use HRAs to encourage classes composed of older, sicker workers to buy coverage on their own. The proposal also would allow employers to combine classes of employees to target HRAs to smaller subgroups at risk for higher costs, such as part-time workers employed at a manufacturing plant rather than the full-time workers at the administrative headquarters. And the safeguards do nothing to protect against firms with less-healthy employees dropping traditional coverage in favor of integrated HRAs for all their employees. Under a separate proposal, employers would be able to meet the requirement to provide coverage with an integrated HRA.
Some Employees May Be Worse Off
While employees are increasingly paying more out-of-pocket costs under employer plans, those who use an integrated HRA to buy a marketplace plan may end up with less comprehensive coverage. Compared to most large-employer plans, marketplace plans generally have higher deductibles and more limited provider networks.
State and insurance industry stakeholders also have concerns about the proposal to allow employees offered an excepted-benefit HRA to opt for a short-term plan. Benefit gaps and dollar limits make short-term plans far less comprehensive than most employer plans. States could limit or ban the sale of short-term plans. But the tax benefits and permitted uses of HRAs fall under federal tax law, leaving states with few options to shut off HRAs used to buy individual market coverage.
Looking Forward
Employers have long offered health benefits to attract and retain employees, and it’s unclear whether many will see the new option as a credible alternative to traditional group health coverage. Yet in an economic downturn, fixed-dollar accounts could become attractive to employers looking to keep labor costs predictable. Whether the change ultimately benefits marketplaces struggling to reach new enrollees, as the administration predicts, or further destabilizes ACA markets, as some fear, will depend on a number of factors, including local insurance- and labor-market conditions and whether the final rule sufficiently protects against employers using HRAs to shift high-cost employees into the individual market. But it’s clear the rule change could have potentially negative effects on ACA markets and people with employer coverage.
