Internal Revenue Service gives OK for consumer-directed health plans

More companies are expected to offer these plans, which give patients a greater incentive to be cost-conscious about health care.

By Amy Snow Landa, amednews staff. July 29, 2002.

Washington -- If they haven't already, physicians soon may notice a shift in the type of health insurance that some of their patients are using to pay for medical care.

Consumer-directed health plans have become the choice of a small but growing number of patients as more employers have begun adding this new type of coverage to their menu of employee health benefits.

Putting patients in the driver's seat
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The trend is expected to accelerate this fall when workers will have a chance during the open enrollment period to choose their health coverage for 2003.

For physicians, this means that some patients are likely to become more cost-conscious about health care buying decisions than they were under traditional managed care. They may want to know the full price of an office visit or lab test up front because they likely will pay for it out of a personal health spending account.

This year has seen a surge in employer interest in offering consumer-directed health plans to workers -- particularly now that the Internal Revenue Service has provided clear guidelines for establishing such plans.

The IRS issued a ruling last month that details for the first time how employers may set up the employer-funded health spending accounts that are a key feature of consumer-directed plans.

Health reimbursement arrangements would let patients roll over savings annually.

The agency has given companies wide latitude in how they may design these accounts and still maintain the tax advantage provided for employer-sponsored health benefits.

"It basically gives the green light for a lot of employers to implement or explore these plans more vigorously," said Steven Wojcik, director of public policy for the Washington Business Group on Health, which represents the health care interests of 165 large employers.

During the past few years, dozens of companies have begun offering these plans, which typically combine an employer-funded account for out-of-pocket medical expenses with a high-deductible health plan. But other employers have hesitated, uncertain whether the IRS actually approved this type of health coverage.

The ruling issued in June effectively ends that confusion.

"It says to the marketplace, 'What you're doing is right, and the IRS is comfortable with it,' " said Jon Comola, executive director of the Wye River Group on Healthcare, a broad coalition of employer and health care groups that launched a major push last year urging the IRS to issue guidance in this area.

The American Medical Association sees the guidance as a welcome move. "This will allow patients to be more in control of their medical care and will allow them to make cost-conscious choices about their medical decisions," said Donald J. Palmisano, MD, AMA president-elect.

Adding advantages

The IRS ruling makes clear that employers can design their consumer-directed health benefits in two specific ways that will make employees more interested in enrolling.

The most fundamental clarification is that employer-funded health spending accounts can, in fact, be rolled over from year to year on a tax-free basis.

Newly sanctioned plans would be totally funded by employers.

The rollover feature allows workers to accumulate savings for future medical expenses -- unlike flexible spending accounts, or FSAs, that operate under a "use it or lose it" rule.

These new accounts, which the ruling calls "health reimbursement arrangements," also differ from medical savings accounts. MSAs can be funded with both employer and employee pretax dollars, but the new arrangements are funded solely by the employer.

Federal law also strictly limits the availability of tax-advantaged MSAs, mainly to employees of small companies and self-employed individuals, whereas health reimbursement arrangements can be offered by employers of all sizes.

Another key aspect of the ruling is that it allows the health spending arrangements to continue even after a worker has left or retired from the company that has funded the worker's account.

Former employees can use the savings they have accumulated to pay for out-of-pocket medical expenses or health care coverage, such as COBRA or a Medicare supplemental policy.

"The 'carry forward' is hugely valuable, and I think you're going to see a lot of employers move into this very quickly," said Charles Klippel, deputy general counsel for Aetna, which last year became the first national health plan to enter the consumer-directed health care market.

The employer community has warmly embraced the guidance provided by the IRS, which has given businesses not only clarity but also more flexibility than they generally had expected.

"It's at the most favorable end of the spectrum of the possible rulings they could have gotten," said Mark White, a senior health benefits consultant at Watson Wyatt Worldwide, a global human resources and risk management consulting firm.

White, who advises about a dozen employers on their health benefits decisions, predicts that the number of employers that offer consumer-directed plans will double in 2003.

Companies that already offer such plans are expected to encourage more of their workers to enroll in them this fall.

Kate Sullivan, director of health care policy for the U.S. Chamber of Commerce, said she expected that employers "are going to really make a big push to get people to participate, especially now that they have this clarity."