A final rule on health reimbursement arrangements set to take effect in August could expand opportunities for American workers and their families to attain affordable health care, increase access to health care for employees of small businesses, and create new competitive market forces that will increase coverage charges for all.

The rule, which would loosen many of the restrictions that have limited the scope and utility of health reimbursement arrangements, represents a large step in shifting the rigid defined-benefits insurance structure toward a defined-contributions structure that allows patients to direct their health care spending.

“We want more decision-making and power in the hands of the consumer and worker over how to finance their health care,” said Brian Blase of the National Economic Council in summarizing the goal of the rule change.

A health reimbursement arrangement is an employer-based, tax-advantaged account that allows employees to pay for their health care needs using funds deposited by their employer. Employees can then use the funds to pay for health care expenses as agreed upon with the employer in the terms of the arrangement.

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Funds deposited by the employer will not be taxed, and funds used by employees will not be taxed as income. Furthermore, funds in the account may roll over year to year depending on the terms set by the employer.

This rule change will create two new health reimbursement arrangements—the individual coverage HRA and the excepted benefits HRA—and allow funds in a health reimbursement arrangement to be applied to purchasing health insurance plans.

Small employers who cannot afford a traditional group plan, or employees dissatisfied with their employer’s group health plan, instead can be offered a health reimbursement arrangement to purchase a plan from the individual market.

Health reimbursement arrangements, which don’t have the administrative expenses of normal health insurance plans, can be much less costly than traditional employer-based group health insurance, an important consideration for small businesses.

Blase said a quarter of small businesses in 2010 stopped offering health insurance, and he expects changes in this rule will reverse that trend. In fact, he expects that in five years, 800,000 businesses will take advantage of these new plans, and 90% will be small businesses, covering 90 million workers and their dependents.

The administration expects that with hundreds of thousands of new consumers shopping for individual plans, the individual market will expand and grow robust competition in favor of the consumer.

Excepted benefits HRAs, capped at $1,800 annually, can be used for benefits that are exempted from the Affordable Care Act and Health Insurance Portability and Accountability Act provisions and, importantly, can be used to purchase limited-duration health insurance plans.

Because they are exempted from minimum essential coverage requirements, these plans can be offered at low prices with high deductibles but broad networks.

Excepted benefits arrangements must be offered along with traditional group plans. An employee who turns down an employer’s traditional group plan would be able to use tax-advantaged funds in an excepted benefits plan to purchase a short-term limited-duration plan.

Blase noted 27% of employees of small businesses choose to turn down their employer’s group health plan because it was a bad fit for their individual needs.

With an excepted benefits plan, employers still will be able to contribute to employee health even if they turn down the employer’s group health plan, giving both employee and employer increased flexibility in their health care choices.

In August 2018, the administration finalized changes to rules governing short-term limited-duration plans to make them less cumbersome to use, lengthening their maximum duration to one year, renewable up to three years. The previous administration had limited these plans to no longer than three months.

Individual Coverage HRAs, in contrast to excepted benefits plans, have no limits on tax-advantaged contributions. They can be used to cover out-of-pocket expenses or services not otherwise covered by an existing health insurance plan. The new rule should make them much more practical and easy to use.

The Affordable Care Act added certain provisions to the Public Health Service Act that were nearly impossible for health reimbursement arrangement to comply with, including a ban on annual and lifetime limits on spending, and the requirement to cover a large selection of preventative health services without cost sharing.

These plans also were not previously integrated with individual market plans, so they would be ineligible even if used to purchase a fully compliant health plan on the individual market.

As long as health reimbursement arrangement funds are used to purchase a compliant plan on the individual market, it will satisfy the requirements of the Public Health Service Act under the new rule.

According to Blase, compliant plans “can be grandfathered coverage … on Obamacare exchange coverage, or off Obamacare exchange coverage.”

He said the administration expected “the vast majority of people” would “use the individual coverage HRA to purchase an Obamacare plan off the exchange.”

Blase said the rules could do for health coverage what 401(k) and 403(b) did for retirement planning. This rule change greatly expands the potential uses of these accounts and makes it much more affordable for small businesses to offer their employees health care coverage.

If Blase’s expectations pan out, Americans will be directing a large part of their own health care spending, shifting the market power away from the insurance companies to patients, where it belongs.