By Rebecca C. Williams, CPA, CLU, ChFC, LUTCF
and Richard J. Weikart, CLU, ChFC

In today’s health insurance marketplace, advisors face challenges from many directions. The legislative landscape promises no immediate relief to rising health-care costs or insurance premiums. So, businesses and individual clients confront seemingly no-win situations: Employers, especially owners of small businesses, continue to struggle with the desire to provide health benefits under the onus of a sluggish economy and the high cost of insurance. And many individuals are faced with the loss of coverage because of layoffs and downsizing.

The legislative landscape According to Michael L. Kerley, executive vice president of the Association of Health Insurance Advisors (AHIA), the debate over government intervention in the health-care arena continues. In addition to the ongoing discussion of prescription drug benefits for the elderly, talk continues about nationalizing the health-care system, allowing individuals to buy into federal health insurance plans, revisiting the issue of the cost of health insurance, requiring employers to provide health insurance coverage for their employees, and providing tax incentives for individuals and small businesses purchasing health insurance. The issues are complex, and it’s unlikely there will be legislative relief in the immediate future. That means advisors must be in the driver’s seat when it comes to addressing clients’ concerns over rising health-care premiums and the prospect of losing coverage.

The economic reality
Most Americans continue to get health-care benefits at work or as an eligible dependent of a worker covered by an employer-sponsored group health plan.

Generally, group health insurance is less expensive than individual health insurance. In most cases, employers pay some of the cost of health insurance as a part of an employee’s benefit package. With premiums rising faster than inflation, health insurance advisors have an opportunity to serve their clients and prospects by offering advice and alternatives that make the most effective use of premium dollars.

Employers need help with the administrative and regulatory demands of implementing and managing their benefit programs—help advisors can provide.

With January renewal increases ranging from 15 percent to 30 percent for his groups, Richard L. Harlow, CLU, of The Harlow Group, LLC, who services over 300 small corporate employers in the Northern Virginia area, believes the time is right for change. Harlow, who is also president of AHIA, says that most of AHIA’s members try to become an extension of the human resources department for their client employers. They become, in effect, benefit consultants.

Steve C. Shaw, CLU, president of Lafayette Square Insurance Services in Lafayette, Calif., agrees. He says that brokers need to do more than search for carriers, quote rates, and occasionally help their clients with claims. With diminished human resources staff in small to mid-sized firms, employers need help with the administrative and regulatory demands of implementing and managing their benefit programs—help advisors can provide. “We need to be able to provide value-added services,” Shaw says. Agents who can’t offer broad services should align themselves with those who can.

Cost-saving approaches
The idea that employers can, and will pay for all health insurance benefits has been under attack for years. For some time now, advisors have been recommending that employers implement changes in their plan designs and cost-sharing to manage the prices of health insurance, which are rising every year.

Changes in plan design have typically included raising deductibles, increasing co-pays and incorporating various managed-care provisions. With cost-sharing, employees often pay part of the cost of their own coverage.

Providing dependent coverage at the employer’s expense can be especially problematic. Rae Lee Olson, vice president of The Vita Companies, an employee-benefits administrator in Mountain View, Calif., believes that advisors need to help employers consider their contribution strategy for dependents as well as for their employees. As an example, she points out that when employers pay 100 percent of dependent health-insurance costs, they attract dependents who may have access to other coverage but at a cost to the family.

In other words, the family selects the coverage with the lowest cost to the family to the detriment of the employer who is paying 100 percent of the premium. Olson says, “This is a very fundamental thing, but finding parity in dependent contribution levels with other employers is one way to help employers manage their costs.”

Advisors need to help employers consider their contribution strategy for dependents as well as for their employees.

Section 125 plans
Increasingly, employees are resigned to paying some health insurance costs. “Employees want to keep health-care insurance,” says William K. McGreevy, CLU, LUTCF, president of McGreevy Associates in Sioux Falls, S.D. “They are willing to share in the cost rather than lose or reduce benefits.” McGreevy, Shaw and Harlow all suggest Section 125, premium-only plans (POP) to help mitigate the impact of passing premium costs on to employees.

With a POP, the simplest form of a Section 125 plan, employees pay their contributions for health insurance on a pretax basis. The same regulations that allow pretax premium payments require the employer to comply with disclosure and reporting requirements. These are some of the administrative and regulatory demands that Shaw talks about. Harlow and McGreevy say that some carriers—Blue Cross/Blue Shield and Anthem, for example—offer administrative services for POP plans.

Another variation of a Section 125 plan is a flexible spending account. FSAs can be thought of as a pretax budgeting tool. With an FSA, employees are allowed to set aside money on a pretax basis to pay for out-of-pocket medical expenses not covered by their health insurance plans, as well as for child and dependent care. Federal regulations do not limit contributions to an FSA, but most employers do. One catch: Money left at the end of the year cannot be rolled over to the next year or returned to the employee. Money placed in an FSA must be used in the year allocated or the employee loses it.

FSA disclosure and reporting requirements are similar to POP plans, and they are often offered in conjunction with POP plans to small and mid-sized employers.

MSAs
Medical savings accounts are another way to help ameliorate the sting of increasing employee contributions for health-care expenses. MSAs are similar to FSAs in that money is set aside in a tax-exempt trust or custodial account to pay eligible medical expenses on a tax-favored basis. But the similarity ends there.

MSAs can only be established for employees of small businesses or by self-employed individuals who maintain high-deductible health plans. For purposes of an MSA, a high-deductible plan is defined as one with an annual individual deductible of at least $1,650 and no more than $2,500, and a family deductible of at least $3,300 and no more than $4,950.

The maximum amount that can be contributed to an MSA is limited to 65 percent of the individual deductible amount and 75 percent of the family deductible amount. If funds that are set aside are not spent, however, they remain in the account and earn interest. In addition, unused funds follow an employee who changes jobs, because it’s the employee, not the employer, who owns the savings account.

MSAs are not for every client, but Harlow believes that MSAs should be a growing trend and suggests them for smaller firms and the self-employed. As a practical matter, he says that MSAs become complicated if a firm has more than a half dozen employees—administration quickly becomes burdensome. And McGreevy says that the lack of permanent legislation on MSAs makes them unattractive to some of his clients.

MSAs are not for every client, but they may be a growing trend for smaller firms and the self-employed.

The defined-contribution approach
Another way to reduce employer costs is the defined-contribution approach. Employers have been faced with spiraling premium costs for years, and cost-sharing and plan redesign strategies have had only limited success. Frustration over increasing premiums and burdensome administration may require other solutions, and this has led to talk of a defined-contribution approach for health benefits.

In the simplest form of a defined-contribution plan, the employer provides a fixed amount of money for employees to use to purchase their own health insurance coverage. This then allows employers to take themselves out of the picture, leaving employees to find health benefits on their own. Benefits are portable and not tied to employment.

There are a number of problems with this approach. The task of finding individual coverage appropriate for each employee’s need is daunting. And with the number of carriers in the individual health market decreasing, the defined-contribution approach may not offer much choice at all. But this may be changing.

Benefit-center approach
With the exception of the largest corporations offering a cafeteria approach to employee benefits, there has been little implementation of the defined-contribution approach. The October launch of the new BENU center in Washington represents a trend in consumer-directed health plan options for mid-sized employers. The arrangement brings together Group Health Options, Inc., a subsidiary of Group Health Cooperative, and CIGNA HealthCare in collaboration with BENU, a San Mateo-Calif., benefit-solution provider, to offer employees a broad menu of medical and ancillary plans under a risk-adjusted carrier agreement.

According to Peter B. Rodes, vice president of marketing at BENU, the company offers employees the type of broad health coverage choices that were previously available only to large companies. Employers with 100 to 1,000 employees set a fixed contribution, and the employees shop, choose and enroll online. BENU provides educational support and assistance to employees online or by calling customer service.

Rodes says that the benefit-center approach is evolutionary and innovative: “Our approach to affordability issues involves defined contribution, competing carrier brands and our risk-adjustment mechanism. Our benefit administration service delivers an online experience for employees, but provides a reduction in complexity for the benefit administrator—a single bill, for example.”

COBRA
As if keeping up with legislative changes and product innovations is not enough, in today’s economic climate, advisors can expect some of their clients to ask for advice about continuing health insurance coverage during periods of unemployment. “Being able to provide information about COBRA and HIPAA is just part of being a professional,” Harlow says.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is a federal law that allows employees to continue group health coverage that otherwise would be lost as a result of a reduction in hours of employment or termination for reasons other than gross misconduct. The employer is required to provide coverage for qualified beneficiaries identical to that under the group plan. A covered employee, spouse or dependent must inform the employer or the COBRA administrator in writing within 60 days of a qualifying event (see box below) if he or she wants to continue coverage and pay the initial premium within 45 days of the date of the election.

It is important to know that federal law does not require the employer or the COBRA administrator to send bills. Under COBRA provisions, timely premium payment is the sole responsibility of the person continuing coverage. Failure to remit full payments on time results in termination of COBRA coverage. Once terminated, coverage under COBRA cannot be reinstated.

COBRA coverage terminates if a qualified beneficiary obtains new group health coverage that does not exclude or limit pre-existing conditions or if he or she becomes eligible for Medicare. It also terminates if the employer no longer provides group health coverage to any of its employees.

The length of time coverage can continue under COBRA depends on the qualifying event. Coverage can be continued for up to 18 months if employment is terminated or there is a reduction in hours. Coverage can be continued for up to 36 months for all other qualifying events.

The advisor’s role
COBRA is complex and full of federally mandated requirements. In the current economy, with increasing unemployment, clients may find the need to continue benefits under COBRA and may turn to advisors for guidance. By the same token, business clients may find themselves forced to make staff reductions. Many employers, especially smaller ones, do not have the resources to stay abreast of COBRA requirements. The opportunity for professional service is clear.

It is generally advisable for an employer to work with a full-service COBRA administrator to support their employee benefits programs. Olson puts it this way, “Employers are at risk when they go it alone. Increasingly, employers need a good COBRA administrator before the first employee becomes eligible for COBRA.”

For example, an initial notice must be sent when there is a qualifying event. Olson says that the notice should be mailed to the home of a covered employee, spouse or dependent notifying the person of COBRA eligibility. She points out that if no process is in place, this important step can be and often is overlooked, leaving the employer at risk for legal action.

For eligible uninsurable individuals, COBRA may well be their only option for continuing health insurance coverage. It is also appropriate for individuals who are between jobs with group health insurance benefits because continuing coverage under COBRA can reduce or eliminate pre-existing condition limitations or waiting periods under a new group plan. In addition, continuing coverage under COBRA may be less complicated than going through the new application process with underwriting when the time between jobs is relatively short. But Olson advises her insurable clients and prospects to protect their insurability by securing individual coverage as soon as possible when the duration between jobs is unknown.

HIPAA
Unfortunately, the 18 months of COBRA eligibility may not be enough for everyone losing employer-provided health coverage. Some will find it difficult to find appropriate jobs with health benefits within the COBRA period.

For healthy people, individual coverage may be the answer. But how does the insurance professional advise those with medical problems or underwriting issues? The answer is the Health Insurance Portability and Accountability Act. But, Olson says that HIPAA may be one of the best-kept secrets around.

Eligibility for HIPAA is important because it allows an applicant to obtain individual coverage without medical underwriting or a pre-existing waiting period if specific elegibility conditions are met (see box below for elegibility requirements). Olson says that HIPAA is not a bad option for those who need it, but she adds that it is generally a more expensive option than an individually underwritten plan.

Playing a meaningful role
There are no easy answers to the health insurance issues that are facing us today. Debate of the issues at the federal level is on hold and will no doubt remain there for some time. In the meantime, medical expenses will continue to rise, driving up premiums, and the sluggish economy will have corporate America tightening belts, increasing the number of people in need of advice and counseling. These are the challenges.

However, every challenge is an opportunity, and health insurance issues enable advisors to introduce a wide range of options and sound advice to their clients, serving them through the tough times with the same creative enthusiasm they did in the good times.

Rebecca C. Williams, CPA, CLU, ChFC, LUTCF, and Richard J. Weikart, CLU, ChFC, are principals in Weikart & Williams, LLC, a training design and consulting firm in the Washington, D.C., area. You can reach them at weikartwilliams@comcast.net.

Solution strategies

Changes in plan design Cost-sharing Employer contribution strategies in line with competition Section 125 premium-only plans Section 125 flexible spending account Medical savings accounts The defined-contribution approach The benefit-center approach Guidance with COBRA and HIPAA

HIPAA eligibility

Have 18 months of credible group coverage Elected and exhausted COBRA Have no more than a 63-day break in coverage Ineligible for Medicare or Medicaid or other employer-sponsored plan Not covered by any other health insurance plan Not had previous insurance terminated because of nonpayment of premium or fraud

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