Preparing for Annual Enrollment – Part 2

Beyond Health Reform

This is the second of a two-part series.  Part 1 provided an update on Health Reform.  Many plan sponsors anticipate significant rate increases in the post-COVID-19 era – due to pent-up demand for medical services.  Here are some strategies adopted by plan sponsors that focus on cost management. 

2020 Election

Regardless of the White House occupant and Congressional leadership in 2021, forward-looking plan sponsors will want to consider a variety of design features focused on cost management.

Targeting Medical Costs

Spending on health care accounts for about 18% of America’s Gross Domestic Product.  However, spending continues to be highly concentrated in a small subset of the population – 5% of us accounted for 50+% of all spend.  Conversely, 15% of Americans had no health care spend.[i]

If your 2021 health coverage strategy focus is on cost management, you may want to consider:

  • For self-insured plans, managing charges submitted for reimbursement and eligible expenses, and
  • For all plan sponsors, managing enrollment.

Many will leverage behavioral economics tools and concepts – especially anchoring and choice architecture.  Too many employees believe their health coverage was the result of Health Reform mandates.  To disabuse them of that conclusion, and to reconfirm the superior value of coverage you offer, you may want to consider adding a new coverage choice, perhaps naming it the “Health Reform Option” – coverage designed to meet/comply with Health Reform’s mandates.  A minimum compliance option that provides “affordable”, “minimum essential coverage” of “minimum value” would use only two tiers (self-only and non-self-only), a sizeable, integrated (medical and Rx) deductible of $5,750 self-only, $11,500 non-self-only, plus 80%/20% coinsurance up to an out-of-pocket expense maximum of $6,500 self-only, $13,000 non-self-only.  Employee contributions for self-only coverage would be set at 9.83% of salary (on an after-tax basis)[ii] or 100% of costs when electing the non-self-only coverage tier.

Such a side by side comparison on your Summary of Benefits and Coverage (including the differences in employee contributions, and examples that compare costs, after-taxes, would likely be eye opening.  It will confirm that you already offer coverage that is clearly superior to Health Reform requirements.

You’ll want to present this and other information within a comprehensive education and communication strategy.  In 2020, uncertainty abounds.  Communication builds trust.  Focus on what impacts them now, today – near-term decision-making.  Reconfirm that your present intention is to continue to offer coverage regardless of the outcome of the election, and that you have a strategy for managing ever increasing costs.  Confirm priorities include both employee health and well-being as well as the health and well-being of the organization.  In our COVID-19 environment, continuing employment with a successful organization is, or should be, a top priority for everyone. (

Manage Charges Submitted for Reimbursement

Health Reform added limits on point of purchase cost sharing and removed cost management features that minimized anti-selection (pre-existing condition exclusion) and limited risk (maximum benefit).  So, there are only two alternatives for managing expense if you offer comprehensive medical coverage:

  1. Significant point of purchase cost sharing (deductibles, copayments, coinsurance, out-of-pocket expense maximums) along with administrative limits on covered charges, and/or
  2. In self-insured plans, excluding certain high cost items.

Savvy designs incorporate both point-of-purchase cost sharing (deductibles, copays, out of pocket expense maximums) and point-of-enrollment cost sharing (contributions) to discourage utilization and enrollment.

Offering the “Health Reform Option” shown earlier to 95+% of your full-time employees will ensure avoidance of the employer mandate penalty taxes – even if no one enrolls in that option.  That opens the door for increases in point of purchase cost sharing for other coverage.  So, for example, you could offer an option with point of purchase cost sharing (deductible, copayments and/or coinsurance) up to the 2021 permitted out of pocket expense maximums –  $8,550 self-only, $17,100 non-self-only, with more competitive, pre-tax employee contributions.[iii]  And, of course, Health Reform doesn’t limit out-of-pocket expenses for non-network providers.

More plan sponsors have adopted designs that manage the amount of covered charges – using a  combination of reference-based pricing and participant protections for balance billing.  In a well-designed, well-communicated program, most providers will accept reference-based pricing payments – because many reference-based prices are based, in part, on Medicare reimbursement rates that they have already accepted.[iv]  Fewer than 10% of reference-based claims lead to a balance bill.  It starts with advocacy – employee education and outreach, perhaps coupled with a focus on consumerism, reaching participants before they or a covered family member becomes a patient.  It is important to confirm that price ≠ quality and that reference-based pricing reduces participant’s out of pocket costs.  Plan sponsor commitment includes balance bill defense against collection practices by providers and agencies.  Note that reference- based pricing and balance billing features help to limit participant and plan expense when applied to non-network providers.

Finally, because of shifts in treatment patterns, more Americans have increased their use of prescription drugs, including specialty drugs.  A specialty drug is one that is prescribed for a person with a complex or chronic medical condition, a rare or orphan disease, and/or it has a high monthly cost.  Prescription drug spend in America is approximately 11.6% of total medical spending – approximately ~$1,200 per capita.[v]  During a recent five-year period, brand name specialty drug spending increased an average of 57%[vi] – one study showed the 2017 average annual cost for specialty drugs as $78,781![vii]  Unsurprisingly, an increased number of plans have excluded specialty prescriptions from coverage, while continuing to comply with the Essential Health Benefits requirements.

Managing Enrollment

As noted above, designs that increase point of purchase cost sharing may be more expensive for those employees (and/or their family members) who incur significant medical expenses.  A concurrent feature of such designs is that they also help manage enrollment.  Specifically, if an individual anticipates he will have significant out of pocket costs, he may avail himself of any other available, lower cost option (his own employer’s plan (dependent up to age 26), a parent’s plan, a spouse’s employer’s plan, a former employer’s plan (as a retiree), public exchange coverage, veterans, etc.)

Plan sponsors have increasingly incorporated other features designed to manage enrollment, including these point of enrollment (employee contribution) cost sharing features:

  • Offering an opt out incentive through the cafeteria plan,
  • Requiring greater cost sharing for tiers of coverage that include a spouse or dependents, and
  • Adding a spousal surcharge where a spouse has access to coverage through his own employer.

Some observations:

  • Be careful that the combination of your employee contribution for the self-only tier of coverage, plus the opt out incentive, does not exceed the affordability threshold[viii] (unless you only offer the opt out incentive after verifying the individual has “minimum essential coverage”, or if you are willing to accept the appropriate employer-mandate “B” penalty for those who receive taxpayer-subsidized exchange coverage – $338.33/month, $4,060/year).
  • If you offer an opt-out incentive, be sure to avoid limiting it to Medicare-eligible workers.[ix]
  • A spousal surcharge is generally preferred over a spousal exclusion from coverage because spousal exclusions are not permitted under certain state insurance laws.

There are many other alternatives and designs that have, on occasion, been shown to be effective at managing costs – bundled payments, centers of excellence, direct contracting, and chronic care management.

Next month, we’ll focus on one other successful cost management alternative – Health Savings Account capable coverage.  We’ll confirm why you should offer access to an HSA-capable coverage option starting  December 1, 2020 (no, not January 1, 2021)![x]   The HSA is America’s most tax preferred benefit.

aequum LLC and Koehler Fitzgerald, LLC resources includes over 40 years of plan design and compliance expertise – including best practices specialization in reference-based pricing with balance billing support.


[i] Agency for Healthcare Research and Quality, Concentration of Healthcare Expenditures and Selected Characteristics of High Spenders, U.S. Civilian Noninstitutionalized Population, 2017, 2/20/20, Accessed 10/5/20 at:

[ii] 26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability.  Rev. Proc. 2020-36, 7/20/20, Accessed 10/5/20 at:   For 2021, the Federal Poverty Level (FPL) affordability safe harbor for the mainland US is: ($12,760 x 9.83%) / 12 = $104.53.  For 2021 Health Savings Accounts limits, see:  Rev. Proc. 2020-32, 5/21/20, Accessed 10/5/20 at:

[iii] Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2021, 85 Fed. Reg. 29164, 5/14/20, Accessed 10/5/20 at:

[iv] Christopher M. Whaley, Brian Briscombe, Rose Kerber, Brenna O’Neill, Aaron Kofner, Nationwide Evaluation of Health Care Prices Paid by Private Health Plans, 9/18/20. In 2016, hospitals charged private health plans 224% of Medicare reimbursement levels; in 2018, they charged 246% of Medicare. Relative to Medicare rates, commercial rates rose by 10% in just two years.  As the number of individuals covered under government plans increases, the reimbursement limits imposed by the government prompt greater cost shifting to the private sector.  Medicaid enrollment has grown from ~53MM in 2010 to 75MM in 2020 (3.5% per year).  Medicare enrollment has grown from ~46MM in 2010 to ~68MM (3.9% per year).  RAND researchers found there was almost no relationship between the amount of Medicare business a hospital has and the amount they charge commercial payers. Reading between the lines, one would conclude that hospitals are charging whatever the market will bear.  And, using CMS star ratings and Leapfrog grades to categorize hospitals according to quality, there were slightly more hospitals with 4- and 5-star ratings in the high-cost bucket, but, over a third of the hospitals in the low-cost bucket had high quality ratings, and there was little difference between the low- and high-cost buckets in the percentage of hospitals with low quality ratings. Accessed 10/5/20 at:

[v] OECD, Pharmaceutical Spending, 2019, Accessed 10/5/20 at:

[vi] Express Scripts Specialty Prescription Price Index, 2014 – 2018, Accessed 10/5/20 at:

[vii] AARP, Specialty Drug Prices Soar to Nearly $79,000 a Year, 6/25/19,these%20specialty%20medications%20was%20%2478%2C781

[viii] Treasury Regulation §1.36B-5, 7/25/16, Accessed 10/5/20 at:

[ix] Informal guidance provided via the ABA Joint Committee on Employee Benefits, Questions and Answers for CMS/HHS (May 8, 2002), Q&A #3, included comments from CMS/HHS that an opt-out arrangement run through a cafeteria plan, whether available to all who waive or to all who show proof of other coverage and not just to those who are Medicare-eligible, would not violate the Medicare Secondary Payor rules. However, CMS appears to take a different view in its MSP Manual, in which now indicates that the prohibition applies “even if the payments or benefits are offered to all other individuals who are eligible for coverage under the plan.” Medicare Secondary Payor Manual, 70.1 – Financial Incentives, Accessed 10/5/20 at:  .

[x] N. Adams, J. Towarnicky, ‘Learning’ Objectives: What’s Holding Back HSAs?,, Accessed 10/5/20 at: