19 Jul 2011

The San Francisco HCSO “loophole”

19 Jul 2011

After attending the Thursday, July 14 public hearing of the Government Oversight and Audit committee, I wrote the following email to Supervisor David Campos (as well as committee members Farrell and Chiu and my home district Sup. Cohen). As with my previous email, it has also gone unanswered. I blame my long-windedness.

Dear Supervisors Campos, Chiu, Farrell and Cohen:

This is a follow up to my previous email, after I attended the public hearing re: Supervisor Campos’ proposed HCSO amendment this morning. I will first say that I do in fact agree with him on two points:

– The HCSO has been good for the City — it has vastly increased the number of individuals with access to health care and health insurance.

– Any business (restaurants or otherwise) that are charging an expressly defined “pass-through” of HCSO expenses — but can be proven to not actually make those expenditures on a multi-year basis — are committing fraud and should be held accountable.

The remainder of arguments I thought were anecdotal or based on extremely questionable (or flat-out incorrect) premises. I’ll try to be clear about what I think those are. Before I do that, I just want to say that I am not at all going to argue against the HCSO, nor am I going to argue the importance of a few hundred jobs and $50M additional expenditures in the grand scheme of the local economy. Which takes me squarely outside of the positions represented by the GGRA and the Chamber of Commerce — I want you to know that there are many small business voices, and I consider myself to be one of the independent ones out there.

I am going to hit just a few points here, in hopes of contributing to your discussions with your colleagues:

The “loophole” argument. I cringed every time I heard the word “loophole” this morning. It’s a great word — everybody understands that a loophole is an accident, an unintended consequence. Big corporations take advantage of “tax loopholes” to avoid paying their fair share. Etc. And Sup. Campos stated several times, to the effect, “It was not the intent of the legislation for employers to use HRA’s to satisfy the Employer Spending Requirement.” If I am misquoting, please let me know, but I feel that this is an accurate takeaway from your statements today.

What can this position be called, other than “revisionist history?” I’ll copy the text of the relevant section of the ordinance here: (full text)

Ch. 14, Sec 14.1(b)(7) – “Health care expenditure” means any amount paid by a covered employer to its covered employees or to a third party on behalf of its covered employees for the purpose of providing health care services for covered employees or reimbursing the cost of such services for its covered employees…

Moreover, the final regulations on the ordinance, issued by the OLSE explicitly include Health Reimbursement Accounts as an example of a Qualifying Health Care Expenditure (Regulation 4.2(A)(3)):

Contributions on behalf of a covered employee to a health benefit flexible spending account, a health savings account, a health reimbursement account, a medical spending account (as defined under sections 125, 223 of the federal Internal Revenue Code and Publication 969 of the Internal Revenue Service), or to any other account having substantially the same purpose or effect without regard to whether such contributions qualify for a tax deduction or are excludable from employee income;

It is hard for me to see how using an HRA to comply with the ordinance is a “loophole,” when in fact, it was explicitly included as a legitimate expenditure that increases employee’s access to health services. Additionally, the “use it or lose it” provision of HRA’s and FSA’s is not new — it is rare for employers using this type of account to allow a rollover.

Again, from your statements today, I heard you make four primary arguments against HRA’s (or any “use it or lose it” option, such as an FSA):

HRA funds aren’t enough to pay for many medical expenses, such as a night in the hospital.
Well, that is certainly true, but the only solution to that is universal health coverage, or universal health insurance. What you appear to be objecting to here is that employers are using the required funds to reimburse employees for out of pocket expenses, rather than pay for comprehensive health insurance.

Unfortunately, the reality is that even for employees who qualify for the maximum expenditure, that monthly amount is still not enough to pay for comprehensive coverage.

Again, the ordinance explicitly states that reimbursement for medical and related services is a legitimate and intended result of the legislation. A smart combination (for both employer and employee) is for the employer to provide the HRA funds to help employees pay for copays, coinsurance, and other out of pocket expenses, while the employee enrolls in a high-deductible individual health plan, Healthy San Francisco, Medi-Cal, or other individual option.

HRA funds don’t roll over in employee accounts at the end of the plan year.

While it feels easy to get indignant at the idea of unused funds reverting to the employer at the end of the year, let’s take a short-hand look at how traditional health insurance actually works:

– Insurance company receives monthly premiums from insured (or insured’s employer).Let’s call it $3,000/year for a basic policy, nothing fancy.
– Insured is healthy all year long, and has no need for doctor, hospital, pharmacy, etc.
– Insurance company returns a portion of unused premiums (no, this doesn’t happen – just wanted to see if you are paying attention)
– Insurance company keeps year one premiums, insured starts over in year two, must pay additional premiums for coverage (right, no rollover)

So, another scenario under the HCSO is for an employer to buy a high-deductible health plan for its employees (let’s say $5,000 deductible — which would in many cases use up 100% of quarterly expenditures earned by the employee). And the employees don’t use the coverage because they stay healthy. But now, instead of the unused funds reverting to the San Francisco employer, they are now headed to pay corporate dividends at Wellpoint and United Healthcare.

In this scenario, employees do have the advantage of being covered for catastrophic expenses. But they have to pay out of pocket for up to $5,000 of expenses — those doctor visits, Rx, trip to ER, etc. add up. Wouldn’t this employee be better off paying $20 to $112/month to enroll in Healthy SF, and have their out of pocket costs (copays, etc.) paid for out of the HRA? Or maybe a $150/month high-deductible PPO that would cover them outside of SF — anywhere in the world, and again — have the small expenses reimbursed from their employer’s HRA?

Only 20% of the funds allotted to HRA’s are being used, compared to 55% of the City’s Medical Savings Account option.

Kudos to Supervisor Chiu for understanding the real problem here: the significant difference in usage is a strong indicator that some (many?) employers are doing a poor job of educating employees on their rights, on the HRA’s and how they work, and how to get reimbursed. I would not be surprised to find out that the vast majority of the 20% who are using the HRA funds speak English as a first language.

This is absolutely a problem, and I was disappointed to hear Supervisor Campos state any discussion around this issue as a “non-starter.”

I believe that there is also a problem with some employers creating overly restrictive HRA’s. However many fully insured health plans do not include dental, vision or alternative medicine such as chiropractic and acupuncture. An HRA that excludes this type of expense ought not to be considered overly restrictive.

This is a huge topic, and I apologize for the length of this email. But I strongly believe that the City, it’s employers and its employees would be far better off if we focused on improving enforcement and education, without eliminating one of the best overall solutions for financing the health care of the San Francisco workforce.

Regards,

Bradley Vaccaro

 

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  1. Bradley August 15th, 2011 1:29PM

    Erin,

    An HRA plan may or may not allow the reimbursement of individual health premiums. There are some legal concerns for employers (re: ERISA and HIPAA compliance) when this practice is allowed, so many employers do not permit reimbursement of individual premiums. To find out whether your particular HRA plan has limitations on eligible reimbursements, you should request the Summary Plan Document (SPD) from your employer or the Wageworks administrator. If there are exclusions of certain expenses which are allowed by the IRS (often, alternative care, or dental/vision may be excluded), these will be listed in the SPD — possibly in an attached Schedule or Appendix to the SPD. If you need help interpreting the SPD, please email me at brad at allpointe-is dot com

  2. Erin August 15th, 2011 1:21PM

    I’m a part time employee of a major corporation based here in SF which has given me an HRA account (through wageworks)…but I’m trying to decipher that fine line between “eligible & non-eligible expenses.” I have a personal health insurance plan to cover the big things, but am in a situation of trying to get this HRA plan to cover my premium payments…a nightmare. The corp benefits department doesn’t even know much about the HRA program….fortunately they’re willing to help learn more about it with me, but isn’t that sad???

  3. Janet Clyde July 20th, 2011 8:21AM

    Bradley,
    Great letter, very well done. Thank you for your insight and perspective.
    Janet

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