by Tony Novak, CPA, MBA, MT
, revised 11/19/11
Employer-provided health plans have changed rapidly in the past few years. The trend toward consumer-driven health plans has is now expected to become the driving force behind health plans of the future. Since most Americans access their health care though employer-provided benefit plans, changes in these plan have a direct impact on the business of health care providers. The number of health plans that now provide the opportunity for full coverage for optical care has increased sharply as a result of the switch to consumer-driven health plans. At the same time, consumers now have more incentive to scrutinize charges and conserve health care funds. Most benefits professionals expect this trend to continue through the next decade, so an optical professional who understands these new consumer-driven health plans is more to likely benefit from the long term trend. Optical professionals should continue to develop positive patient relationships and adapt procedures to address the specific needs of patients who are covered by a consumer-driven health plan.
Consumer-driven health plans were born when law met technology. New liberal tax laws governing the operation of employer-provided health plans were passed in stages throughout 2002 and 2003. Meanwhile, technological advances allowed an employer to deliver health benefits directly to employees at any "point of sale" without relying exclusively on a health insurance company. These plans often use health debit cards combined with PPO provider billing contracts. Consumer-driven health care benefits are offered at almost all large employers today. These plans are slowly filtering down to smaller firms and even the health plans used by self-employed individuals. Starting is 2004, a new form of consumer-driven health plan called "Health Savings Accounts" will make this option available to even more people. While less than a quarter of Americans are covered by consumer-driven health plans today, the number could easily rise to more than 75% by the end of the decade.
There are three primary types of employer-provided health plans1 used today: 1) group health insurance plans, 2) Health Reimbursement Arrangements (HRA), and 3) Flexible Spending Accounts (FSA). The last two - HRAs and FSAs - are collectively called “consumer-driven health plans”. This article summarizes the primary benefits and drawbacks of each type of plan.
Group health insurance plans are the historic standard. This category includes HMOs, Blue Cross plans and commercial group insurance plans provided by a business to its full-time employees2. Historically, a small business employer shopped for the best health insurance plan available in the local market and left all of the other details up to the insurance company. The health insurance company determined which employees were eligible, what benefits were covered and the cost of those benefits. All too often, optical benefits were left out or provided only at minimal levels. The primary advantage is that these plans are simple for the employer. The employer’s only responsibility is paying the monthly bill. On the downside, traditional group health insurance plans have the highest overall cost and the lowest employee satisfaction ratings. Employees are no longer willing to accept a “one size fits all” health plan selected by the employer and want more coverage for out-of-pocket expenses, well-care and preventative health care expenses.
Health Reimbursement Arrangements (HRAs) allow the employer to determine the overall dollar amount of health benefits that the business will provide and then leaves all of the other purchase decisions to the individual employees. Employees may individually elect to provide 100% of optical benefits under the health plan, but this benefit may come at the expense of some other available option. Each individual employee determines what benefits to provide with the amount budgeted by the employer. Of course, some insurance is necessary to protect from catastrophic losses and an employer may require that the employee elect at least a catastrophic medical insurance coverage as a condition of eligibility in the HRA plan. HRAs make a wider range of low cost health plans available to the individual employees than were formerly available to the employer so HRA plans are more effective in reducing the cost of health coverage because employees tend to select insurance that is much less expensive than traditional group insurance plans. This leaves the balance to be allocated as the employee wants – covering out-of-pocket, preventative and well-care expenses. Another big advantage of HRA plans is that they allow unused funds to be carried from year to year. This encourages conservation of funds at the consumer level, which in turn, helps further control health costs for the business.
The disadvantage of HRAs is that employee contributions are not allowed (all benefits must be employer-paid) and so the overall level of health benefits is pre-fixed. Providing one benefit (like optical care) might come at the expense of another benefit (like dental care). Just like group health insurance, HRA plans must meet federal requirements established by the IRS and Department of Labor known as ERISA, HIPAA, and COBRA.
Flexible Spending Accounts (FSA) offer all of the flexibility features of HRA plans but also allow employees to make voluntary contributions to their health benefits. This means that the overall level of health benefits available to employees is not limited. FSAs often include benefits other than health plans that are not covered in this article4. FSAs are more likely to be available to part-time employees, since there is a tax incentive for the employer to offer tax-free health benefits in place of taxable wages. The administrative cost and requirements are about the same as an HRA plan.
The primary disadvantage of an FSA plan is that funds may not be carried over from year to year. Unlike HRAs, an FSA cannot bank funds accumulated in good years to be used in future years with higher health care costs. This is known as the “use it or lose it” requirement. This requirement tends to result in wasteful spending at year-end. Some optical professionals have likely seen patients who order more supplies than usual at the end of the year, or scheduled extra services in December. This might be a short-term boost to year-end sales, but provides no long-term advantage.
The trends in consumer-driven health care are becoming increasingly clear:
Patients in these consumer-driven health plans are increasingly likely to direct health plan dollars toward the professional providers that they like and those who make it easy to do business by providing, for example, the appropriate documentation of claims. Health care providers who are able to incorporate these trends into their operations will expand their business and connect with a growing portion of their patient base. Measures that will cater to consumer-driven health plan users include: 1) adding debit card acceptance in the office, 2) providing both printed and electronic (e-mail) invoices, 3) modifying pre-payment policies from those covered by reimbursement plans, 4) clarification of tax treatment of specific common optical procedures and products6 and 5) helping patients budget care by providing a proposed plan of treatment or maintenance for the coming year.
Over the long term, optical professionals will benefit substantially from consumer-driven health plans simply by continuing to improve patient services, communications and relationships.
1 Other types of less popular health plans are not addressed in this article. Medical Savings Accounts and Health Savings Account plans are also omitted from this discussion, but these collectively represent another category of consumer-driven health plans.
2 The IRS treats health benefits for owner/employees differently than other employees. State insurance regulations and specific health insurance plans may also apply different standards. These differences are not covered in this article. The comments in this article apply to health plans for regular employees who do not have a substantial ownership interest in the business. A separate article titled “HRA Plans Benefit Owner/Employees” at www.tonynovak.com addresses some of these issues.
3 Details of HRA plan tax treatment were clarified by IRS Revenue Ruling 2002-45 in May 2002, IRS Revenue Ruling 2003-43 in July 2003 that clarified the use of debit cards for health expenses and IRS Revenue Ruling 2003-45 that authorized coverage of over the counter medications and other health-related expenses. IRS Publication 502 issued in November 2003 details the generally more liberal treatment for 2004.
4 FSAs typically include other tax-free benefits including dependent care, life insurance, education, and retirement planning. FSAs may also include other taxable benefits offered on a group basis.
5 An article titled “Comparing Health Discount Plans” at www.tonynovak.com addresses the advantages and disadvantages of pay-as-you-go health plans that utilize existing PPO provider networks.
6 The IRS recently revised and liberalized the tax treatment of many health care expenses for 2003. See IRS Publication 502, revised November 2003.
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