February 2010

Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) health benefit provisions in 1986. The law was enacted to allow continuity of Health insurance coverage for qualified employees and their dependents if they lost coverage due to such events as termination, resignation, reduction in work hours, divorce, or death. Through COBRA, employees and their dependents have the right to continue coverage under a former employer’s group health plan for up to 18 months (36 months in the case of death, divorce, or Medicare entitlement of the former employee), so long as the employee pays the total cost for the coverage and up to a 2% administrative fee.

Although COBRA has worked well for employees, it has always presented employers with a number of difficulties. Maintaining detailed records, notifying eligible beneficiaries, and collecting premium payments make administration complicated and time-consuming. Employers make mistakes, and this can result in large fines, including:

• IRS excise taxes of $100 – $200 daily for each notice, up to 10% of the cost of the health plan, or $500,000 per year
• Department of Labor fines of $110 daily for each notice

In addition, an employer or plan administrator might have to pay medical expenses and litigation costs if a case goes to court.

The compliance issues and the cost involved in maintaining COBRA plans have led many companies to outsource this function. Some of the benefits of outsourcing include:

• Controlling Costs – HR personnel who are unsure of statutory requirements regarding eligibility will minimize risk exposure by providing COBRA benefits to employees who are not technically eligible. Third party administrators have the legal expertise to know which employees are truly eligible and which are not, which can mean a substantial savings in claim costs.
• Eliminating the need to train staff in plan administration – Not only will your HR staff need initial COBRA administration training, they will require ongoing training to keep up with all statutory, regulatory, and case law developments.
• More efficient use of HR staff’s time – Utilizing HR personnel for COBRA administration lessens their ability to make a more positive impact on the company’s overall operation, like recruiting good employees or arbitrating disputes between line/department managers and their staff.
• Equitable treatment for all qualified beneficiaries – Third party administrators aren’t swayed by emotion, or subject to potential conflicts of interest when they determine eligibility. They base their decisions exclusively on the statutory and regulatory requirements, which ensures fair treatment for all qualified beneficiaries.

Poor adherence to prescribed medication regimens increases the incidence of hospitalization, especially among individuals with chronic medical conditions, and consequently adds significantly to health care costs. This failure together with less-than-optimal prescribing, drug administration, and diagnoses — creates as much as $290 billion each year in avoidable health care spending, or 13% of total health care expenses. A research brief from the New England Healthcare Institute reports these figures, together with suggested interventions to stem such unnecessary spending. Employers can consider these suggested interventions in designing prescription benefit programs, to help employees improve compliance with their prescription drug regimens.

Poor medication compliance includes behaviors such as failing to pick up or renew a prescription, not taking medications in the prescribed dosage level or at prescribed intervals, stopping a prescription before it has been completed, or abandoning a prescription regimen altogether. The report cites a number of barriers to medication compliance, including cost, side effects, difficulties in managing multiple prescriptions, forgetfulness, and a lack of understanding about the medical condition being treated or the urgency for treatment when a medical condition is asymptomatic.

Individuals with chronic conditions generally demonstrate lower adherence to a prescribed medication course of treatment than those with acute conditions, and adherence drops even lower with the passage of time. And, among chronic patients, those not following a prescribed drug regimen have higher hospitalization rates and higher mortality rates. Higher hospitalization rates lead, of course, to increased medical costs.

Because individuals with chronic conditions seem to do worse following prescription drug treatment regimens, one strategy for employers to use to increase compliance is disease management and condition management programs. These programs target individuals with chronic conditions and actively work with them to help them manage their diseases. Services can include monitoring prescription drug compliance, sending refill reminders and educating members on their chronic condition, thus addressing some of the reasons cited above for prescription noncompliance.

The research brief suggests three broad strategies to improve prescription medication compliance:

1. Reduce the cost barriers to obtaining prescribed medications. Out-of-pocket prescription drug costs can, of course, influence the extent to which a patient follows a prescribed course of treatment, with higher costs leading to lower compliance. A prescription benefit plan’s employee copayment requirements determine an employee’s out-of-pocket costs. Designing the copayment requirement to encourage filling appropriate prescriptions is key. The research brief cites “Value-Based Insurance Design (VBID)” plans with lower employee contributions and out-of-pocket costs for cost-effective medications for chronic conditions, saying this can be linked to improved medication possession ratios.
2. Address the behaviors and preferences of individual patients. Employees will vary across a wide spectrum as to how well they understand their medical condition, how engaged they are in their overall health care management, how willing they are to ask questions of physicians and pharmacists, etc. Reaching employees with a chronic condition on an individual basis — such as can be achieved through the personal contact that is part of a disease or condition management program — can involve them more intimately with their course of treatment and enhance the probability of prescription medication compliance.
3. Design the right medication regimen for the individual patient. According to the research brief, getting the drug regimen right in the first place could reduce prescription medication noncompliance dramatically. Poor prescribing is a particular problem for individuals taking multiple medications. Again, disease and condition management programs can help. The individual contact such programs feature helps to ensure that the patient’s medications are not contra-indicated, that the patient understands the prescribing instructions, and that the patient is, indeed, staying on top of the regimen.

In considering prescription benefit plan strategy and design, keeping these ideas in mind can help to promote appropriate employee use of prescription drugs, and with it, improved health outcomes and better managed health care costs.

Consider that you will need to:

• Review health plan documents (and the documents for any other plans for which the audit is being conducted) to determine the definitions for all possible eligible dependents.
• Determine the documentation you will require for substantiating eligibility. For example, in the case of a spouse, this might be not only a marriage license or certificate, but also a recently filed joint income tax return to show that the marriage continues to the present day.
• Establish a time line for informing employees about the audit and a deadline for submitting the required documentation, and develop communications materials accordingly.
• Determine the process by which employees can submit their documentation, and set up a mechanism to receive materials.
• Review submitted documentation to determine whether they meet the requirements for establishing eligibility, and establish a notification and grace period process for employees who fail to submit materials properly and/or on time. Inform employees of the audit results.
• Since these audits generate a large amount of paper, arrange for secure storage and/or disposal of the materials employees have submitted.
• Since the audit will likely generate questions from employees, a knowledgeable person or persons must be assigned to field employee inquiries.

Some companies choose to outsource dependent eligibility audits instead of conducting them in-house. Audit service providers cite the potential cost savings that can be achieved and the amount of work involved in a thorough, well-designed audit to argue that contracting for such services delivers a good return on investment. If you decide to use an outside resource, you’ll likely have a choice of vendors. With more and more employers conducting dependent eligibility audits, an industry specializing in this particular employee benefit plan service has developed.

Other design considerations can impact the workload an audit generates. For example, in order to make the process more manageable, some companies audit only a particular dependent group, or a single company division or location at a time, instead of requiring all employees enrolling dependents to submit dependent documentation. If you’re considering homing in on particular dependent groups, data from HRAdvance’s client audit shows the distribution of ineligible dependents to be 43% children under age 19, 29% children over age 19, and 28% spouses. Another consideration that can impact the manageability of the audit is whether to conduct it retrospectively (and try to recover claims that shouldn’t have been paid) or on a forward-looking basis only. Many employers also choose to precede the audit with an amnesty period during which employees can voluntarily remove dependents from the plan with no penalty.

Since most companies traditionally have run on an honor system when covering dependents — basically taking an employee’s word for it that those dependents enrolled for coverage indeed meet a definition of eligible dependent — advance communications to alert employees of the audit, and the reasons for it, are critical to employee cooperation and, ultimately, how successful the audit will be. Use all available media, and stress that removing individuals who are not eligible for coverage will benefit not only the company, but all employees who are paying to have themselves, and family members, covered by the plan.

Discussions of consumer-directed health plans frequently focus on high-deductible health plans coupled with Health Savings Accounts (HSAs). Sometimes overlooked are Health Reimbursement Arrangements (HRAs), employer-funded accounts that can be a solid first step in transitioning to a consumer-directed approach to health care.

In some ways, HRAs work like other kinds of account-type health care plans. Employees can use an HRA to pay for their qualified medical expenses, together with those of a spouse and children. Such expenses could include deductibles, copayment and coinsurance amounts, and any type of expenses that fall under the Internal Revenue Code definition of a qualified medical expense. Funds withdrawn to pay for qualified medical expenses are not taxable to the employee.

From an employer’s perspective, one of the great advantages of HRAs is that they have tremendous design flexibility. Unlike HSAs, they do not need to be tied to a high-deductible health plan. Their design, however, can complement the company health care plan. For example, if you have had to make changes to your company health plan to make it more affordable — such as increasing deductible or copayment amounts — you can offset the impact of such changes on employees by setting up HRAs and letting employees know that they have access to HRA funds to pay for these increased costs. The employer can also, by plan design, limit the expenses that can be paid for through the HRA (such as only for those increased deductibles or copayments); change or enlarge the scope of reimbursable expenses year to year; and change the contribution it makes to the plan each year.

For employers unable to sponsor a comprehensive type of medical plan, an HRA can be a way to provide some health care benefit to employees. The cost of the plan would be predictable — whatever amount the employer chooses to contribute to employees’ accounts — and could vary year to year. Employees could use their HRA funds to pay for medical expenses, or apply them toward the premium of a health plan they purchase on their own.

As noted above, HRAs are employer-funded accounts; no employee contributions are permitted. However, as with any type of health plan contributions, the contributions an employer makes to an HRA are deductible. Though funding HRAs entails some expense for employers, strategic implementation can sometimes be used to offset these costs to some degree. For example, if the HRA is implemented together with health plan design changes that help control plan costs — such as an increase in deductibles or copayments — the employer can use any premium cost savings to help fund the HRA.

HRAs also have the advantage of helping employees develop more awareness of the cost of health care. Just as when withdrawing funds from any type of savings account, each time employees contemplate using the HRA to pay for a medical expense they’re faced with considering whether they’re meeting the medical expense in the most cost-effective way possible. Such thinking is an incentive to take the steps necessary to make informed, cost-conscious health care spending decisions. And, since HRA funds carry over year to year (and are not forfeited, such as are unused amounts left in Health Care Flexible Spending Accounts), employees have additional reasons to be careful about how they spend HRA money. By design, however, an employer can limit the carry-over feature of the HRA and decide whether to make unused funds available for retirees to use.

HRAs offer the opportunity to provide a cost-defined, tax-advantaged health benefit that can help employees become more informed, savvy health care consumers. Of the many options employers have to choose from in providing health benefits to employees, HRAs are an attractive one to consider. Call our office today to find out in HRAs make sense for your organization.