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MSA Plans for retirees plus another reason to build up your Health Savings Account Fund balance

Even though over the past 11 years I have been promoting to all who will listen, the value of building up a Health Savings Account HSA reserve balance, until recently I missed an important point about how withdrawals from HSAs reduce retirement income that may avoid Medicare Part B premium surcharges. And why, with a healthy HSA balance you may choose to select a Medicare Medical Savings Account MSA plan as a retiree.

In 2003 President George W. Bush signed into law the creation of HSAs, Part D prescription coverage for retirees, along with increases in Medicare Part B and Part D premium responsibility, tiered based upon personal income two years prior. Where are those Medicare premium thresholds now? If you are single earning $87,000 or less per year then your annual Medicare Part B premium is $1,735.20. If married filing jointly with income of $174,000 or less, the premium for your spouse and you is $3,470.40; double the single amount.

Let’s say though that your single income is a penny over $87,000 because you are paying for Medicare Part B with after-tax retirement funds. Or possibly your income is $174,001 if married filing jointly. The way the law works your Medicare Part B premium cost increases an additional $840 per year if single or $1,680 for two of you. This equates to a 48% annual premium surcharge to $2,575.20 if single or $5,150.40 inclusive of your spouse.

There are three additional premium surcharge thresholds that can result in up charges for Medicare Parts B and D peaking at almost 300% more than the base premium. Annual premium climbs to as high as $5,080.80 if single and $10,161.60 for two retired spouses with very high income.

What if though you entered into retirement with $100,000 or more in your HSA? That balance is able to pay your Medicare premium costs for many years without increasing your taxable income, possibly avoiding subjecting you to a Medicare premium surcharge. This scenario exists as withdrawals from an HSA are not taxed as income if used to pay for Medicare Part B and D premiums and other qualified health care expenses.

HSA funds post-retirement can also pay for Medicare Advantage premium costs, but not Medicare supplement or Medigap premiums. And you can spend HSA funds on non premium out of pocket health care expenses that also qualify when using a Flexible Spending Account FSA. The ability to withdraw funds from your HSA this way increases non-taxed retirement spending opportunities.

In addition, with a generous balance in your HSA you have a reserve of funds allowing you to consider signing up for $0 premium Medicare Advantage plans that include higher of pocket risk. Such plans include a Medicare Medical Savings Account MSA Plan.

MSA plans for retirees are similar to HSA plans for working individuals. In 2020, Medicare will deposit $3,240 into an MSA for you and there are insurers out there offerings these plans for $0 premium per year. The rub is that the annual deductible can be as high as $9,400 per person, or $6,160 net once MSA funds are used up. And yet like an HSA, unused MSA funds rollover to the next year and are owned by the individual.

As a “reasonable risk” acceptance person, when I find my way to retirement, these positives will lessen concern about paying Medicare Part B and D surcharges, plus allow me to avoid paying much or even anything for a Medicare Advantage plan. My HSA happily sits at $85,000 now and I have up to 10 years of additional eligibility to add funds to it while allowing the HSA to grow in value by investing in mutual funds.

This is, of course, assuming I keep working full time until I am age 70, retain creditable health insurance coverage, avoid raiding the HSA along with waiting to sign up for Social Security plus Medicare Parts A, B, and D until then. And yes, we can all do this without penalty post-retirement if we keep working and have creditable health coverage.

Sounds like a good plan assuming excitement about work continues in addition to good health. Back to the elliptical!

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About Individual Coverage HRAs

Way back in 2002, rules were released creating Health Reimbursement Arrangements with tax advantages allowing employers to provide funds to help employees reduce growing out of pocket health expenses. By 2004 our firm was busy recommending high deductible health plans, not with HSAs, although recently legalized, but instead with first dollar HRAs. Why? Because the HRA is an employer promised benefit that has a loss ratio. For example, if every employee is promised $500, the global employer cost ends up being $250 – $350 per employee due to turnover and the overall health of a workforce. Traditional HRAs allow an employer to promise more and pay less.

It wasn’t until 2011 that Health Savings Accounts caught on in our region as many workers came to understand that HRA funds are “use it or lose it”, while HSAs build a portable health care reserve. Even though legal starting in 2004 and expanded in 2007, it took seven years for HSAs to be embraced with significance. I started my personal HSA in 2008, and since you are reading my blog I will proudly state that I am on track to reach $100,000 in savings in the next two years.

So what are Individual Coverage HRAs and will they take off just like original HRAs, or will it take years for them to catch on as it did with HSAs? ICHRAs is the acronym and the rules allow employers to provide funds on a tax deductible basis for employees to use to purchase their own comprehensive individual health insurance aligning with ACA standards for coverage.

Employer Advantages:

  1. Eliminating risk by establishing a defined contribution budget for health coverage that is tax favored
  2. Tiered funding amounts based upon age and number of dependents covered
  3. Allows employees to purchase health coverage they believe best suits their needs from insurers that sell individual insurance policies, including Medicare type plans
  4. Allows personal contributions above employer funding that may be paid pretax through Section 125, if coverage is not purchased from a Health Care Exchange
  5. Allows employers to continue to fund HSAs
  6. Eliminates employer COBRA coverage continuation responsibility
  7. Eliminates employer group health plan ERISA requirements

Challenges:

  1. Confirming that individual health plans available from insurers are at a competitive cost advantage versus projected employer group plan cost exposure
  2. Substantiation procedure requirements to ensure ICHRA funds are used to purchase comprehensive health insurance (short term health plans do not qualify)
  3. Employer responsibility to provide ongoing, timely notices to employees
  4. Employer obligation to be aware of the details about each individual plan selected
  5. Employee relations infrastructure to help resolve errors, denials and appeals
  6. Annual evaluation of adequate funding levels so that individual health insurance remains affordable
  7. Ability for future political administrations to change ICHRA rules
  8. Inability to offer employees an employer group plan or an ICHRA to the same class of employees

The rules offer significant flexibility in defining unique classes of employees as follows:

– full time

– part time

– seasonal

– salaried

– hourly

– temporary

– different geographic rating area

– bargained

– new hires in waiting period

– non resident aliens with no U.S. income

Minimum class size rules apply based upon number of employees. Also, the option exists to continue a group plan for current employees while offering ICHRAs to new hires.

With acronyms abounding in our world, the ICHRA is not to be confused with the EBHRA, “Excepted Benefit HRA” as they are quite different. EBHRAs can be introduced in tandem with a traditional group plan. The most an employer may offer is $1,800 annually and its purpose is to allow tax favored HRA funds to be offered to employees who decline employer provided health insurance because it is too expensive or the benefits too lien. Think about workers in the food industry who are only offered high deductible health plans, exposing them to thousands of dollars of out of pocket risk. EBHRA funds may not be used to pay for comprehensive individual health insurance, and yet monies may be spent on COBRA premiums, short term health plans, along with dental and vision care.

The EBHRA will result in limited adoption, while the ICHRA may take off like HRAs did more than a decade ago. Since it is likely that increases in health care spending will continue due to growing high cost prescription Rx exposure and other high cost claimant situations, the flexibility employers have requested is now in place beginning January 1, 2020.

Since ICHRAs are available to employers of all sizes, those who currently self insure their workforce covering fewer than 500 employees will likely take a serious look. The ICHRA protects employers from swings in losses caused by laser deductible exposure on chronically ill patients and experiencing higher than average large losses.

Eliminate health expense risk from your budget? The concept is no longer “too good to be true” with Individual Coverage Health Reimbursement Arrangements – ICHRAs.

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Will Health Cost Escalation Ever End?

An advance that came with the Affordable Care Act is the requirement that health insurance includes unlimited lifetime benefits. Stated another way, patients have an annual “out of pocket” maximum” personal cost exposure, so most of us are not going to run out of money to pay for medical and prescription coverage needs. The requirement has been enforced for five years now.
A consequence of unlimited coverage is an increase in the number of multi-million dollar patients in America. For example, individual patients can now receive prescription treatments that cost as much as $2 million annually. Concerns about Rx toxicity and drug reactions that may cause sudden death result in high monitoring expenses during the administration of these drugs, adding to the cost burden.
As we all gasp at the cost, the government supports what is charged with patent protection to allow developers and manufacturers to recover upfront research and development costs. Big questions arise about long term benefits and the impact of premium cost inflation to pay for these new therapies. Here are some of them:
A. Is spreading these costs to all Americans supportable when health insurance rates are already so high?
B. Would a single payer insurance system expend its resources to pay for these expensive therapies?
C. Will health cost escalation abate as ever more expensive therapies and services emerge?
D. Is there a better way to manage the cost of these super high cost outliers?
I attempted to answer these questions in an earlier article about the “3% Solution”. Please take a look.

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It’s 2018; What is Fair and Good Health Insurance Coverage?

True or False: Health insurance premiums used to be affordable and 100% coverage for hospitalization was common. If your immediate reaction was to respond “True” you are correct. Go back 35 years and the vast majority of employers offered health insurance plans with no payroll deductions, plus 100% hospitalization coverage. In the 1980’s this was commonplace for workers, as were bell bottoms, hair covering the ears for men (think Sonny Bono) and big hair for women (not Cher then, but Farrah Fawcett for sure).

To further promote the point that I am referring to the 1980’s as a “time long ago”, my 24 year old daughter recently dressed up to attend a 1980’s retro-party. Ouch for me as I was her age back then!

This reference about historical standards for health insurance coverage offers a baseline to review what is good and fair coverage today. Health insurance is much more expensive due to medical advances and our population living longer. That tells only part of the story though, as government mandates for what must be covered have expanded drastically.

With the ACA (Affordable Care Act), the Federal Government has decided what is good enough coverage. Surprisingly it allows annual out of pocket maximum exposure of $7,350 per person ($6,650 with an HSA qualified plan) before insurance must pay in full at 100%. From my perspective, these maximum exposure amounts are too high for many of us. Add on top that the government allows employers to legally charge almost 10% of pay for single coverage, plus more when insuring dependents, and its no wonder there is ongoing discourse about a single payer government plan solution.

What is fair today from our perspective are plans with a $4,000 to $5,000 maximum out of pocket exposure each year. Many employers offer this greater level of protection than the government allows. In addition, more an more employers are offering pre-tax plan alternatives. I am referring to FSAs (Flexible Spending Accounts), HRA (Health Reimbursement Arrangement) and HSAs (Health Savings Accounts).

Since there are rules which differentiate each one of these tax favored programs because “one size does not fit all”, we recommend that employers offer the following:

  1. One HDHP plan with the option to select HSAs or a combination of an HRA and FSAs.
  2. An HDHP as noted above and a second, higher cost plan that includes first dollar copays for covered services
  3. Offer a third plan option that is an HMO

Charging payroll contributions to cover the entire cost of the premium for more expensive plans is also becoming a standard, as it establishes a baseline expense for the employer which is non-discriminatory, versus charging the same percentage of premium for lower and higher cost plans.

Will we ever get back to a time of 100% hospitalization coverage? Not like the 1980’s, but for the people who have invested in HSAs and built up savings over time, they achieve 100% coverage, at least from a cash flow perspective. As an example, if my out of pocket exposure is $6,650 and I have $7,000 saved in my HSA, there are enough funds to pay all of my out of pocket expenses if hospitalized. And only 11% of the population is hospitalized each year.

Building an HSA balance takes accepting risk, plus a type of savings discipline that is a challenge in current times, due in part to the opportunities we have to spend money on comforts like eating out, going to concerts and movies, plus purchasing the latest mobile device.

My last blog recommends increasing payroll taxes to make premiums more affordable. If you review it you may accept the reasoning as it follows the same concept that employers in the 1930s and 1940s used when offering insurance coverage to workers in order to make the cost of hospitalization affordable.

The only thing that is not “retro” about the 1980s is the music. How about that Rock n Roll!

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The 3% Solution – Making Health Insurance More Affordable

Initiatives to fix the United States health care system will continue as our lawmakers hold on to disparate philosophies. One side of the aisle has offered proposals with “one size fits all” as the best solution. Minimal out of pocket exposure to obtain care and a future of waiting in line to receive needed services, unless life threatening, is certain to occur, similar to the government health care systems in Canada and Great Britain.

The other camp has promoted coverage customization based upon one’s anticipated need for services, along with requiring states to manage capped funds from the government to limit federal exposure to rising costs to help impoverished Americans.

Both approaches are problematic. Our culture will pay for instant results when it comes to health care, and quickly litigate if delayed access caused by rationing causes harm. Reducing premium costs by excluding health care services and capping amounts provided to states, foretells adverse selection and coverage gaps, as expensive services are excluded from insurance protection. Concerns will always exist about mismanagement of federal funds provided to states required to balance their budgets. Again, more suffering than under the Affordable Care Act as it currently exists.

When it comes to expensive, chronic health care, our country’s hospital and specialty physician infrastructure is the best in the world. It is also the most expensive. Borrowing from the passage of Medicare back in the 1960’s, a viable compromise is to adjust payroll taxes on workers and employers to pay for chronic, high cost care. Totaling 3%, split 1.5% employer and 1.5% employee, a projected $250 Billion is generated annually, stripping from private health care plans the cost of multiple chronic care needs.

The precedent for this type of consideration was part of original Medicare as treatment for Kidney Dialysis and ALS, a nervous system disorder known as Lou Gehrig’s disease, are to this day covered by Medicare for under age 65 Americans with these chronic illnesses. It was deemed then that employer plans could not afford the cost of paying for such chronic care needs. That truth exists in the 21st century for many more conditions, thanks to medical advancements over the past 50 years.

When considering costly care that includes organ transplantation, premature infant care, complex cancer diagnoses and treatments for other dreaded diseases, pooling these conditions through an increase to the current Medicare tax of 2.9% will drive down private health care premiums, making those costs more affordable for all American workers, while preserving a customized system for regular care needs such as normal child delivery, scheduled surgeries, emergency care, tests and prescriptions.

Since the federal government has a good track record negotiating Medicare discounts, this approach may be just the right compromise to balance cost and value, righting a ship that continues to take on more water. Its tax impact is also progressive, with the highly compensated paying more, something that President George W. Bush supported in 2003 when he signed the Medicare Prescription Drug, Improvement and Modernization Act, increasing the cost of Medicare Part B for higher income earning retirees.

If this concept ever becomes reality, expect the Affordable Care Act .9% additional Medicare tax for earnings over $200,000 to be revisited.

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Follow up on The 3% Solution

How should an influx of new tax revenue to pay for chronically expensive health care services be distributed and what kind of premium reductions can be anticipated?

A little known fact is that there are no massive Medicare processing facilities staffed by government workers. Medicare claims are processed by private insurers who contract with the government. Blue Cross and Blue Shield, United Healthcare, CIGNA, AETNA and Humana are all in the Medicare Advantage business, while some of these companies process traditional Medicare Part A & B claims payments to providers. And it should be no surprise that many of these companies are also in the Medicaid business.

So the infrastructure is in place to administer payments once an additional 3% in payroll taxes is collected to pay for expensive, chronic medical care needs. Since payment of claims is tied to each individual patient, that should continue with tertiary care hospitals and insurers submitting applications for acceptance of patients to government plans developed to pay for high cost chronic care needs. Why would these parties be motivated to do so? Because private insurance plans for under age 65 Americans will implement coverage limitations for specified illnesses.

One of the reasons the ACA passed was that high risk pools existed in only 35 states. And many of those programs had pre-existing condition limitations. States had lost the ability to manage health care expenses for the very ill, who ended up with no employer insurance after exhausting $500,000 or $1 million maximum benefits. In time, they filed for bankruptcy after all personal resources were expended. Those who survived that trauma were then accepted under Medicaid. A very sad reality for the physically unfortunate, and it could have happened to any of us.

Although applauded by many, a problem caused by the ACA changing benefit levels to “Unlimited Lifetime Maximum Coverage” in private plans is that many hospitals have dramatically increased their charges for high cost chronic care. These cost increases, along with many patients who were in high risk pools transitioning to private insurance plans, has added to what we all know are unaffordable insurance rate increases.

Spread this high cost care risk across working Americans, and private insurance plan premiums should decline 25% to 35%, as multiple factors come into play relieving pressure in the proper payment for chronic, high cost care needs.

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Affordable Care Act, Benefits, Flexible Spending Accounts (FSA's), Health Care, Health Insurance, Uncategorized

Scoring the Impact & Compromise for Passage

With a vote expected this week on the Republican proposal to end many Obamacare provisions, detractors have enjoyed great press about the “ills” of change. The most persuasive to leave well enough alone came surprisingly from the CBO (Congressional Budget Office) when they scored the bill. Headlines about 24 million Americans losing coverage over the next decade sounds a dire alarm.

For those who read the details though, assumptions by this non partisan group of futurists starts with 14 million dropping current coverage in 2018 because the legal mandate to be insured ends. Since there are 10 million now insured through the MarketPlace, the assumptions include Americans also dropping their Medicaid coverage. Since Medicaid requires no premium payment responsibility, the forecast for 2018 is puzzling.

While worrisome if the CBO projections come true, their track record forecasting health care change has missed the mark in the recent past as follows:

A. The CBO forecast that 26 million Americans would have health insurance through the MarketPlace by now, and the number is 10 million.
B. The CBO forecast Medicare Part D, which provides prescription coverage for senior citizens, to be 40% higher than the actual cost.

These misses show how very hard it is using assumptions to project value, cost, acceptance and rejection for insurance decisions and usage.

As mentioned in my last posting, the greatest challenge to assuage enough politicians to agree to support the bill referred to a AHCA, comes down to Medicaid funding. Another hurdle is that insurance will become more costly for seniors. Since available tax credits will be tied to age, this is likely not as major a cause for concern as postulated. And, returning to the pre-Obamacare five tier rating system will make health insurance lower in cost for younger Americans who incur fewer medical expenses.

Besides eliminating Obamacare taxes and bureaucratic obligations imposed on American businesses, the AHCA is trying to accomplish a radical new funding approach for Medicaid. Per capita block grants will place more cost pressure on states than the current percentage of expense sharing approach. Since the politicians are elected by the citizens in their state, it is not a surprise that some believe it is critical to get it “right” now. Reality is that adequate funding will continue to be a moving target, and will vary state to state.

With adequate compromise this week, expect the House of Representatives to approve the AHCA bill. It is then up to the Senate.

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