COVID-19 and Employer Health Plans
COVID-19 and Employer Health Plans Update
by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
Could the Extension of COBRA Deadlines Result In Some Perverse Incentives?
- Axios recently highlighted an issue relating to COBRA that I – and others – have been thinking about too, but I didn’t want to write about it because I thought we were being too paranoid. What’s the issue? Let me give you some background first:
- Analysis: Earlier this month, the Departments of Treasury and Labor issued guidance that “extended” various deadlines for fully-insured and self-insured health plans. For example, the guidance extended the HIPAA “special enrollment period” deadlines for a laid off or furloughed employee to enroll in their spouse’s employer health plan (assuming the spouse is still employed and also offered employer plan coverage). The most impactful change, however, is the extension of various deadlines relating to COBRA coverage. As you know, under COBRA, if an employee is laid off or furloughed, the employee can “elect” to “continue” their coverage under their current employer health plan for up to 18 months. Current law gives a laid off or furloughed employee 60 days from the date their employer health plan coverage terminates to “elect” COBRA coverage. Similar to the HIPAA “special enrollment period” deadline extension, the recently issued guidance also extends this 60-day deadline for “electing” COBRA coverage. That seems pretty straight-forward, doesn’t it? Soooo, why is this so impactful?? My answer: Because the Federal Department’s guidance gives a laid off or furloughed employee a protracted period of time over which they can “elect” COBRA coverage, which can be retroactive to the date their employer health plan coverage terminated. What is this “protracted period” I speak of? Weeelll, the COBRA deadline extension turns on when the COVID-19 National Emergency ends. Once the National Emergency ends, the guidance tacks on an additional 60 days onto this end-date. Then, at the end of this date, the 60-day period for “electing” COBRA will begin. As we all know, the COVID-19 National Emergency has NOT ended yet. AND, we do NOT know exactly when the National Emergency will end. BUT, what we do know is that there is a 60-day period that is tacked onto the end of the National Emergency date. AND, we also know that the current law deadlines are then tacked onto the end of this “magic” date. Soooo, in the context of “electing” COBRA, a laid off or furloughed employee has 120 days AFTER the end of the COVID-19 National Emergency. How would all of this work in practice? Let me give you an example:
- Let’s assume the National Emergency ends on July 4th (a patriotic day to announce that we beat COVID-19, so not out of the realm of possibility). 60 days after July 4th is September 1st. If we are talking about the COBRA “election” period, we then add another 60 days, which brings you to November 1st. If we were to use my example above, this would mean that an employee who was laid off or furloughed on March 12th – and whose employer plan ended on March 31st – can “elect” COBRA coverage on October 31st and that coverage can be retroactive to April 1st. This would mean that this laid off or furloughed employee does NOT have 60 days (i.e., 2 months) to decide to “elect” their COBRA coverage. Instead, they would have 7 MONTHS to decide to “elect” their COBRA coverage. And again, such coverage can be retroactive to April 1st. That is a loonggg – “protracted period” of – time, and while this is something that is helpful to laid off and furloughed employees (which I support), this could increase costs for fully-insured and self-insured health plans (which I – and others – are paranoid about).
Why Is The Extension of the COBRA “Election” Period a BIG Deal?
- Here is the specific issue that Axios highlighted, and one in which I thought some of us were being too paranoid about:
- Analysis: Provided-funded groups could choose to pay for the COBRA premiums of laid off or furloughed employees who are high-medical utilizers who enrolled in Medicaid after their employer plan terminated. Although the provider-funded group may have to pay 7-months worth of COBRA premiums, it may be worth-their-while if the providers who are members of the provided-funded group could increase their reimbursement rate for ALL of the medical costs that a high-medical utilizing laid off or furloughed employee was incurring prior to November 1st (using my example above). This is NOT out of the realm of possibility. As you may recall, this was a BIG problem in the ACA’s “individual” market in 2014, 2015, and 2016. This was such a problem that the Obama Administration took steps to mitigate this practice, and the Trump Administration has followed-suit in trying to snuff out this abusive behavior. The employer community also turned up the volume on this practice by shining a light on efforts undertaken by groups like the American Kidney Association who were paying premiums on behalf of employer plan participants who routinely needed dialysis. Again, the incentive for a provider-funded group to do this is to keep the high-medical utilizing participant OFF of Medicaid and ON the “private” employer plan so the providers can get higher reimbursement rates relative to the reimbursement rates the provider would otherwise get under Medicaid. How likely is this to happen now that the Federal Departments have given laid off and furloughed employees multiple months (e.g., 7 months in my example above) to wait to “elect” COBRA coverage?? I am NOT sure. On the one hand, I am inclined to believe that providers will think that paying multiple months of COBRA premiums on behalf of a laid off or furloughed worker is NOT worth-their-while, especially with ALL of the disruption COVID-19 is causing. After all, the providers are taking a HUGE hit financially as health care spending is down because people are foregoing routine medical services and other elective surgeries and procedures. Do the providers want to spend their money on COBRA premiums as opposed to other things that would help the provider shore-up their business?? Maybe not. HOWEVER, because providers have taken a HUGE hit financially, will they actually think that this is a “good investment.” That is, will providers say – on net – we will likely be better off financially if we engage in this practice (because the cost of the COBRA premiums (even multiple months’ worth of premiums) is merely a down-payment for receiving the higher reimbursement rates for incurred costs that will easily cover the COBRA premium costs and – in the end – bring in additional, much-needed revenue). Only time will tell… Last comment: Even if I – and others – are being overly paranoid here (because people out there do NOT think that providers are going to engage in this practice), wouldn’t it be advisable for the Departments of Treasury and Labor to issue some follow-up guidance that would prohibit providers from paying COBRA premiums on behalf of sick laid off and furloughed employees?? It wouldn’t be too hard to do.
Speaking of the Extension of Certain Deadlines for Employer Plans, the IRS Provided More Flexibility Too
- The IRS recently issued guidance that would allow current participants of an employer health plan to change their Section 125 cafeteria plan elections – including their salary reduction contributions to a Health Flexible Spending Account (“Health FSA”) or a Dependent Care Flexible Spending Account (“Dependent Care FSA”) – in the middle of the year. The IRS guidance would also allow an employee who decided against initially enrolling in their employer plan during “open enrollment” – but who now is given a 2nd chance to enroll in their employer’s plan – to “elect” to make pre-tax salary reduction contributions to pay for the plan premiums upon enrollment. Let me take a step back to say this:
- Analysis: Another aspect of employer-sponsored coverage that the media has failed to report on – and health policy analysts have NOT discussed in their studies – is the fact that a lot of employers are allowing their employees to enroll in their employer plan through a 2nd “open enrollment” period. Specifically, employees who decided against enrolling in their employer plan during the initial “open enrollment” period that was held last October and November have been given another opportunity to enroll in coverage. A second “bite at the apple” if you will. This – just like paying for COBRA premiums on an after-tax basis – is another way employers have been responding to the COVID-19 chaos to help their employees. Why did the IRS need to issue this guidance? Under current law, an employee enrolling in their employer plan during their initial “open enrollment” period MUST “elect” to make pre-tax salary reduction contributions (to pay for the employee’s portion of the premiums) BEFORE the beginning of the plan year. Current law does NOT allow an employee who had the opportunity to enroll in their employer plan during an initial “open enrollment” period – but who is given an opportunity to enroll in the plan mid-year – to make an “election” to make pre-tax salary reduction premium payments. As a result, the IRS needed to issue guidance to provide flexibility – during these crazy times – to allow employers to allow their employees who may be enrolling in an employer plan through a 2nd “open enrollment” period to make an “election” to make pre-tax salary reduction premium payments. It is important to emphasize that an employer is NOT required to allow their employees to enroll in their employer plan through a 2nd “open enrollment” period. As a result, an employer is NOT required to allow their employees to make an “election” to make pre-tax salary reduction premium payments mid-year. After all, why would the employer need to do this if they are NOT offering a 2nd “open enrollment” period? As stated above, the IRS guidance also allows current participants of an employer health plan to change their “elections” for their Health FSA and Dependent Care FSA. Under current law, an employer is NOT permitted to allow its employees to change their Health FSA or Dependent Care FSA “elections” mid-year (unless the employee had a kid, or a dependent aged off of coverage, or the employee experienced a divorce or death of a dependent). BUT NOW – due to COVID-19 – an employer can choose to allow their employees to change their Health FSA and/or Dependent Care FSA “elections.” Again, an employer can choose NOT to do this. In other words, the IRS guidance is NOT mandatory. If an employer chooses to do this, this is great news for Health FSA-holders who have either experienced an increase in out-of-pocket health care spending (because, for example, they are suffering from COVID-19-related symptoms) – OR – their spending is virtually ZERO (because they are NOT going to the doctor and/or they cancelled scheduled medical procedures). Here, the employees either need more tax-free dollars to cover their increased health care spending – OR – they need to cancel their salary reductions so they do NOT have to forfeit a bunch of cash that would remain unused. This is ALSO great news for Dependent Care FSA-holders. In some cases, an employee’s spending on child care has increased (because their kid(s) is (are) home from school and the employee needs the help). In other cases, an employee’s spending on child care is ZERO (because the there are NO child care services available to the employee and/or all of their summer camps have been cancelled). This way, employees that are spending on child care can increase their tax-free contributions to pay for the care. And, for employees who are NOT paying for ANY child care can pull this money back into their taxable wages. Again, because this is NOT mandatory, employers would have to do this out of the goodness of their hearts. In my opinion, most – if not all – will. The IRS guidance also allows employees to use any unused Health FSA funds from 2019 for the remainder of 2020 (instead of forfeiting those amounts if they remained unused as of March 15, 2020). In addition, the ability for HSA-eligible HDHPs to pay for costs for COVID-19 testing and treatment before the deductible is met – along with the ability to pay for telehealth services before the deductible is met – was made retroactive to January 1, 2020. Related IRS guidance increases the Health FSA carryover of unused FSA amounts from $500 to $550.
COVID-10 and the “Individual” Market
UnitedHealthCare Is Set to Re-Enter the ACA’s “Individual” Market
- UnitedHealthCare (UHC) recently announced that the carrier will start selling “individual” market plans in Maryland’s “individual” market. While this is only 1 (relatively small) State in which UHC has said it is entering into, this is still a BIG deal. Why? Because – as you know – UHC was one of the first insurance carriers to exit the ACA’s “individual” market plan at the end of 2015. BUT, now that one of the largest carriers is re-entering the ACA’s “individual” market – even in only 1 State so far – everyone is abuzz about this move.
- Analysis: Does this mean that more insurance carriers are going to “rush” back to the ACA’s “individual” market? My answer: They certainly won’t “rush,” but the “individual” market is looking better than it ever did before, so we will definitely see increased participation in specified markets. Why is the “individual” market looking better than it ever did before? Well for one, the regulatory uncertainty that has plagued the “individual” market even before the ACA came on-line in 2014 is NOT nearly as significant as a factor as it once was. In addition, the fact that the ACA was NOT “repealed and replaced” – and the fact that the Trump HHS is faithfully implementing the ACA – has given most folks a sense that all of the potential disruption is now in the rear-view-mirror. Yes, the Supreme Court will STILL be deciding whether the ACA should remain the law of the land or not – BUT – most in the insurance industry are betting that the Supreme Court UPHOLDS the law, even if the “individual mandate” is found to be unconstitutional. After all, who cares if the “individual mandate” is unconstitutional?? Repeal of the mandate has NOT resulted in exponentially high premiums and millions of people becoming uninsured, like everyone had predicted. As we are all learning, insurance carriers selling “individual” market plans are actually making a very healthy profit, even as premiums are trending downward. Yes, these higher profits have been driven by the regulatory uncertainty, which drove carriers to jack their premiums over the past few years. BUT, the fact of the matter is that the storm that has been disrupting the “individual” market for all of these years now appears to be calming a bit. NOW add in the COVID-19 pandemic, and you have hundreds of thousands – and maybe even millions – of people who may be purchasing an “individual” market plan during the course of 2020 and during the 2021 “open enrollment” period that will start this November 1st. And while an argument can be made that these new enrollees may be on the less healthy side (which is why they are enrolling in coverage), there will likely be a natural mix of less healthy and healthy individuals who are enrolling in an “individual” market plan, especially among those individuals who have lost – or will lose – their employer-sponsored plan. And if there is a relatively even mix of health risks entering the market (even if it is slightly skewed to less healthy), the more people that enter into the “individual” market, the better the market will become. Again, all due to COVID-19.
The Rise of Individual Coverage HRAs?
- In my last update, I wrote about the “rise of telehealth” in the context of the COVID-19 pandemic, and I explained how telehealth utilization has gone through the roof. I also explained that it took a long time for telehealth to really get a foot-hold in the market. As I mentioned, that was due in large part to well-funded forces that were opposed to the wide-ranging use of telehealth. BUT, due to COVID-19, policymakers were finally willing to buck-the-trend and provide more flexibility for telehealth.
- Analysis: Individual coverage HRAs (ICHRAs) are NOT telehealth, but I do see some parallels. What I mean is this: Telehealth was – and is – an innovative way of delivering medical care. While not exactly the same thing, ICHRAs are a new, innovative way for people to get health insurance coverage. Also, as stated, it took a while for there to be wide-spread take-up of telehealth. In the case of ICHRAs, I too think it will take a long time before ICHRAs get a foot-hold in the market. Heck, an argument can be made that ICHRAs will NEVER get a foot-hold. BUT, with COVID-19, are ICHRAs poised to make a jump from a little-known health care option to a health care arrangement that more employers see as a viable way of helping their employees purchase health coverage? COVID-19 certainly allowed telehealth to reach new heights, so it definitely makes you think…So what are ICHRAs? Well, you heard me talk about ICHRAs last summer when I sent out 3 different updates on the final ICHRA regs. For what it is worth, attached is a summary of the final ICHRA rules that I put together back then. Also back then, you heard me ask: Will ICHRAs become so popular so as to ultimately spell the end to the employer-sponsored system? My answer back then is the same answer I have today: NO. ICHRAs will NEVER lead to the end of the employer-sponsored system. In short, there are waaayyyy too many employers out there that want to continue to offer their own health plans. Why? Because as I have told you before, employers do NOT offer health benefits because they like it. Employers offer health benefits as a way to attract and retain talented workers and to keep their employees healthy and productive. Many employers also like the “control” that goes along with sponsoring their own health plan. They do NOT want to be beholden to other entities that are calling the shots. Sooooo, notwithstanding the availability of ICHRAs, employers are going to continue to offer their own employer-sponsored plans. HOWEVER, there is something that I have also told you: There are some employers – in, for example, industries with higher-churn lower-income workforces – who would actually like to get out the “health care game” altogether. And – in my opinion – it is these types of employers who will look at ICHRAs as a viable alternative to an employer-sponsored plan. In this case, the employer would STILL be giving their employees a contribution (e.g., compensation) for their health insurance. In other words, the employer would remain the “financier” of health coverage for their employees. BUT, the employer would NO longer be “in the game” of picking health plans for their employees. Instead, the employer would be allowing their employees to purchase their own health plan – on the “individual” market – with an employer contribution. AND, for the first time, this employer contribution is TAX-FREE. BUT, I have always said that even though these employers in industries with high-churn, low-income workforces are likely candidates to discontinue their employer plan and offer their employees ICHRAs instead, I have suggested that these employers would NOT move to ICHRAs enmasse because the “individual” market remains dysfunctional and “prohibitively expensive.” BUT, what happens if and when the “individual” market becomes more functional and is more affordable? Will more employers choose to send their employees to the “individual” market with an ICHRA? Maybe. But before we can even answer this question more definitively, we first have to ask: How could the “individual” market become more functional and more affordable?
ICHRAs, COVID-19, and a More Functional, More Affordable “Individual” Market??
- Most people in the insurance industry would agree that the more people that enter the “individual” market, the more functional the “individual” market is likely to become. Yes, it depends on the mix of the health risks that are entering the “individual” market, but generally speaking, the more lives you have in the market, the better the market will be.
- Analysis: It then follows that the more functional the “individual” market becomes, the more likely premiums will go down and then stabilize, which will in turn make “individual” market plans that much more affordable. It then follows that the more functional and more affordable the “individual” market becomes, the more attractive the “individual” market will be to employers like those in industries with high-churn, low-income workforces. This may – in turn – encourage these employers to finally flip-the-switch and discontinue their employer plan and offer ICHRAs to their employees. THEN, we enter a world where more people are entering the “individual” market. And as stated, if more people are entering the “individual” market, the more functional and affordable the “individual” market may become. In this world, even employers in other industries (not just the high-churn low-income industries) may be encouraged to flip-the-switch and continue on as the “financier” of health coverage for their employees (by offering a tax-free employer contribution (i.e., compensation) through an ICHRA). Will COVID-19 be a catalyst for the world I describe above? It very well could be. HOWEVER, even if we get to this world that I describe above (where ICHRAs will be a BIG part of it), I STILL believe that we will have a large number of employers sponsoring their own employer plan (because a large number of employers believe that offering their own plan is a superior to an “individual” market plan, and these employers further believe that offering a superior employer plan will do a better job of attracting and retaining talented workers (and do a better job of keeping their employees healthy and productive)).