In part one of this post, I listed the 3 steps that need to be taken to transform our healthcare system from one that rations the delivery of healthcare into one that creates the funds to exceed the need so that there exists no reason for rationing. In this post, I will outline 1 of the next 5 steps that must be taken to implement a healthcare system that focuses on the management of healthcare finance.
- Reward employers who choose to self-fund healthcare for their companies rather than punishing employers who fail to insure their employees.
One of the provisions of the Affordable Care Act was a fine levied against employers that failed to purchase health insurance on behalf of their employees. This provision was enacted because our government recognizes that the purchase of health insurance by employers on behalf of employees represents a financial burden. Our government also recognizes that this burden is becoming increasingly difficult to bear as health insurance premiums continue to rise much faster than company revenue and consequently claim a larger and larger share of the corporate budget. But in enacting fines for companies that fail to provide health insurance for their employees, our government lost sight of the fact that it is always better to offer a carrot than to drive someone with a stick. Yes, you can beat a slave to perform a task but that task will always be done better and faster by a free man who is rewarded for the exercise of effort and talent.
Employers who self-fund healthcare assume some level of financial risk and expend capital that could be used in other ways to fuel their company’s success. Employers who sponsor healthcare but do not self-fund avoid the assumption of financial risk but, in doing so, expend a greater degree of capital. Those employers who do self-fund provide a valuable benefit to their employees and they deserve to be offered an incentive to accept the financial risk and the capital expenditure involved in self-funding. That incentive can and should take the shape of an amendment to Section 419 of the IRS Code exempting funds deposited and retained in an employer-owned Health Reimbursement Arrangement (HRA) from taxation. The advantages to the employer that result from this are as follow:
- The average employer who chooses to self-fund and pay healthcare claims directly through a third-party administrator (TPA) does so because it is less costly than purchasing health insurance for its employees through a commercial insurer. The average employer who self-funds spends 30% less and the employees in the self-funded plan have better benefits than those covered under a commercial plan. The cost savings that already exists is the reason that 96% of companies with 5,000 or more employees self-fund. However, if these same employers were allowed to deposit funds into an HRA identical to what would be spent on commercial health insurance premiums and thereby retain that 30% difference untaxed, it would change the game entirely. By accumulating the additional 30% per year untaxed in the HRA and getting an 8% return on investment, the HRA fund would grow to the point where the investment revenue from the fund is sufficient to replace the employer’s annual contribution. I estimate that this would take the average company no more than 15 years to accomplish. From this point forward, the employer has no further healthcare related expense to be paid out of the company’s annual revenue. Furthermore, with proper management, the HRA fund will continue to double in value every 10-15 years. Since substantial fines and penalties are levied against the employer if funds are withdrawn from an HRA account for any purpose other than paying a healthcare claim, this effectively creates a healthcare endowment for the company’s employees.
- The HRA fund is an asset owned by the employer. When the investment revenue from this asset is sufficient to replace the employer’s annual healthcare contribution, healthcare for the employer has been transformed from a liability into an asset. As this asset grows, so does the net worth of the company. If the company is privately held, this asset is factored into the sale price of the company in the event the company is sold. If the company is publicly traded, the increase in the value of this asset will help increase the price of the company’s stock.
- Exempting HRA funds from taxation levels the playing field between employers and healthcare insurers and serves to restrain rising health insurance premiums for companies that sponsor health insurance for their employees but do not self-fund. This is because, unlike individuals, companies can and will choose to self-fund healthcare if the cost of insurance premiums becomes excessive. Companies that self-fund are therefore the most significant competitor to a commercial health insurer. The larger the employer self-funded market becomes, the smaller the commercial health insurance market becomes. It is therefore in the interest of commercial insurers to not drive employers into the self-funded market. This serves to restrain increases in employer purchased health insurance premiums.
- This plan will help companies who self-fund to recruit and retain talent. As will be seen in the section covering employee HSA contribution, this plan offers very generous and extremely competitive healthcare benefits. In fact, nothing offered to date anywhere else comes even close. This will aid companies in recruiting talent. Furthermore, as the value of the HRA fund doubles every 10-15 years, these companies will be able to continue healthcare coverage into retirement for employees who have satisfied a vesting period, thus also aiding in the retention of talent.
- Happy healthy employees are more productive employees. The HRA fund will enable the company to implement preventive healthcare programs and fitness programs that will improve the health of its employees and reduce the cost of healthcare for the company as a whole. Those cost savings will accrue to the benefit of the employer’s HRA but will also accrue to the benefit of the employee Health Savings Accounts, thus increasing employee satisfaction with both their health plan and their employer.
In Part 3 of this series, I will discuss the role of the employee HSA in this plan and how this is structured to ensure that healthcare is affordable for every employee regardless of wage level.