The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law on March 27, 2020 with the purpose of helping employees out with benefit-related items during the COVID-19 crisis. The CARES Act repeals the Affordable Care Act’s exclusion of over-the-counter (OTC) medications from the definition of “qualified medical expenses”. The bill is over 880 pages long, but to review the new rules regarding OTC provisions, see Sec. 3702 of the CARES Act.
The originators of the Affordable Care Act (ACA) never intended to encourage the use of Health Savings Accounts, (HSA). After all, ACA’s proponents view HSAs as a tax break for the wealthy. But they are trending upward across the general population with 16 million total accounts in 2015, (22 percent yearly increase) containing over $30 billion in assets – figures that are expected to double in the next few years.
What is driving HSA adoption? Answer: Paying for health costs with tax advantaged dollars.
Health insurance deductibles and out-of-pocket costs have skyrocketed under the ACA, leaving employees to pick up more and more of their health care costs. The politically correct term for this phenomenon is an increase in the “employee cost share,” which doesn’t make it sound so bad.
A health insurance captive is an insurance arrangement that is owned and controlled by its insureds. Mutual insurance companies, Multiple Employer Trusts and Multiple Employer Welfare Arrangements, also have a similar structure. While a captive can certainly be established and owned by one employer, and many single large employers do own and operate captives, this article will concentrate on the small and mid-size employer captive market.
With a captive the insureds are at risk and therefore can benefit from the underwriting performance and investment income generated by the captive. They are typically set-up for companies that are too small to self-insure on their own. By combining a number of employers together they achieve the critical mass to self-insure as a group. The carrot is that employers will (somehow) achieve a lower cost of providing health benefit plans to their employees than they could through other traditional market options.
Many “captive specialists” have hit the market in recent years promoting health captives as a way for small employers to beat the Affordable Care Act. These captive consultants do the necessary legal and administrative work to establish a captive on behalf of a potential pool of like-kind employers and then make money through consulting, broker or administration fees for the captive.
Looking under the hood- in a captive, each individual employer is in essence operating a self-funded plan. Employers take on additional responsibilities and administrative responsibilities in running a self-funded plan, even if the captive is taking on significant portion of the administrative burden.
The captive structure is typically:
- The employee receives a regular, ACA compliant health benefit plan
- The employer established a self-funded plan.
- The captive usually has stock documents for its insureds. The employer has specific and aggregate stop loss insurance purchased through the captive. The employer pays that actual claims costs for their employees, plus: the administration costs of the captive (which include its reinsurance costs); the stop loss insurance costs; and in the first year or any year the captive has a need, additional capital contribution to the captive (typically 10% or more the first year).
- The captive purchases reinsurance at levels determined by the size and risk of the captives pool of employers/employees
This structure can of course work, but the gamble is that the captive will have enough critical mass to be able to achieve its promise of outperforming the fully insured market.
California has recently enacted regulations to discourage small employers from sidestepping the ACA small employer pool by using self-funded plans and therefore captives. The law regulates the minimum amount of the specific and aggregate stop loss small employers (fewer than 100 employees) may purchase, ensuring, in most instances a risk too great for a small employer to assume. Specific deductibles cannot be below $40,000. Aggregate stop loss minimums are on a formula that requires a risk of at least an additional 20%, or more depending on the specifics of a group.
Upside and downside of a health captive:
The upside is potential cost savings from a number of health plan operating and performance categories. The most important piece is that claims cost of the captive, in aggregate, outperform the fully insured market in the short and long. This upside comes with an extremely high risk and is outside of the control of the captives members. Any number of expensive chronic conditions or catastrophic claims can put the captives’ members in a financial disadvantage. In addition to claims performance, captives usually state that they operate at a lower administrative cost than the fully insured market. This must be analyzed carefully because the captive has management costs, employer and the captive’s reinsurance costs, and the administrative costs of operating a health plans which have become very complex. Provider contracts, prescription drug vendors, customer service, appeals, premium billing, large case management, fraud management and many other functions all need to be managed the same as a fully insured carrier. There are also internal administrative costs and liability to the captives employers that are not incurred with a fully insured plan. And an employer can have substantial cost to leave a captive or if it is not performing or runs into financial issues.
Captives usually look good from the marketing materials and the mangers who sell them are well versed at handling the risk objections. For most small employers, particularly in California, the captive arrangement is a financial risk too great and an administrative burden that it does not have expertise in handling.
As mentioned in the first paragraph, a captive and a MEWA Trust like CalCPA Health are similar in that the aggregate a number of smaller employers together. But the MEWA model provides the participating employers a fully insured health plan, in essence, so it does not subject them to the financial risk and administrative burdens of a captive.
The Patient Protection and Affordable Care Act (ACA) was passed more than five years ago. Never has a piece of federal legislation been in the controversy spotlight for this length of time.
Typically, new federal and state laws require some tweaking before, during or after they are implemented. Fix-it bills can clarify the original intentions of lawmakers, correct mistakes and make the legislation practical to implement. In the ACA’s circumstance, be-cause of the high level of animosity surrounding the law’s fundamentals, significant fixes are not politically feasible. Read more
by Gregory M. Burke, CPA, MS (Tax)
The stated intent of the Patient Protection and Affordable Care Act (ACA) of 2010 was to increase health care insurance coverage with respect to the millions of uninsured Americans and control runaway health care costs. As part of the effort to meet these goals, the ACA enacted interrelated subsidy, penalty, and information reporting provisions. This article will focus on the information reporting provisions impacting “applicable large employers” in 2015. Read more
Four years after the passage of the Affordable care Act (ACA) there is still great debate on the law’s outcomes. How many uninsured will enroll? Will ACA create doctor shortages? Will death panels ration medical care? And the trillion dollar question: will the cost of health insurance go up, down or stay about the same?
Stay tuned to read the full article in the June issue of the CalCPA Magazine.
The Patient Protection and Affordable Care Act (ACA) is exceedingly vast. It deals with all aspects of the medical delivery system including insurance. Combine this with the numerous changes California is implementing and the result is tens of thousands of pages, comprising both federal and state regulations.
This book focuses on the key elements that affect California CPAs. Therefore, we will concentrate on those ACA regulations that are being adopted and implemented in California. And, while other states may have slightly different implementations, they will not be specifically addressed here.
Our intent is that you may use this book as a reference for the areas that are of particular interest to you, or those areas that expressly affect you. For example, if you are with a small firm and do not have any “large employer” clients, the large employer sections may be of less value to you than the information on small employers.
Ron Lang, CEO of the California Society of CPAs Group Insurance Trust, discusses how health care reform has changed the face of health care plans by covering the following topics: plan designs and pricing, network options, California Health Benefit Exchange, current and future regulatory changes and what we can expect for 2015. (Video taken at CalCPA Education Foundation’s Health Care Conference on 4/29/2014).
The Patient Protection and Affordable Care Act (ACA) drastically changes all the business rules and now many seem surprised at the displacement it is causing. Policy cancelations, and plan changes for 2014 are being widely reported in the individual and small group markets. While the ACA is providing access to coverage for folks with pre-existing conditions and premium subsidies to lower income levels; high percentages of the currently insured are being regulated into different benefit and rate structures.
The ACA and California regulations that are primarily responsible for this displacement are: Read more
Health Care Reform
- Health Care Reform Model Employer Notice (For firms offering coverage to employees)
- Health Care Reform Model Employee Notice – No Coverage (For firms NOT offering coverage to employees)
- Health Care Reform Notice
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