The Users' Guide to the Health Reform Galaxy

Health Reformer's Lexicon: Flexible Spending Accounts

The Health Reformer's Lexicon is a weekly feature that will examine key words, terms and phrases in health reform and explore their meaning and orbit.

Today’s term: Flexible spending accounts (FSAs)

Sometimes called flexible spending arrangements, FSAs are employer-established benefit plans that allow employees to pay for qualifying health care expenses with pre-tax earnings.

Employees elect to set aside a portion of their incomes to pay for medical expenses not covered by insurance—such as deductibles, copayments, dental or vision expenses, or drugs. Employees can draw on the accounts using FSA debit cards, known as Flexcards.

FSAs are “use it or lose it” accounts: Any balance left in an employee’s account at the end of a coverage period—typically a calendar year—is forfeited back to the plan administrator.

Why it matters: As the IRS enumerates, FSAs offer several benefits to health care consumers:

• Contributions made by your employer can be excluded from your gross income.
• No employment or federal income taxes are deducted from the contributions.
• Withdrawals may be tax free if you pay qualified medical expenses.
• You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.

But some health care policy analysts have scrutinized FSAs and concluded that they encourage excess utilization of health care, because they can be used to purchase things that may not be medically necessary, cost-effective or provide meaningful health value. Moreover, their “use it or lose it” structure may encourage wasteful spending at the end of coverage periods.

Roots: Flexible spending accounts were first authorized in the Revenue Act of 1978 under section 125 of the federal tax code. For that reason, they are sometimes called “125 plans.” (They are sometimes called “cafeteria plans,” too, because they are a means by which an employer can offer employees a choice between taxable and nontaxable benefits—not just for health care, but also for dependent care or certain other purposes.)

Where the term appears: The recently passed health care reform law limits the amount that employees and companies can contribute to FSAs to $2,500 per year starting in 2013, with annual cost-of-living adjustments in following years. (Unlike FSAs for dependent care, there was previously no federal cap on the amount that could be contributed to FSAs for health care.) Recent news reports have examined the impact of this for consumers, suggesting that people may want to plan costly elective treatments such as braces before the new limit takes effect. Coverage also has delved into the rationale for the policy change—which some portray as a way to reduce wasteful spending and others portray as a way to raise revenue to pay for other aspects of health reform.

Previous Lexicon entries include:
- Patient Centered Medical Home
- Individual Mandate
- Uncompensated Care

How Maine Used Its Clout to Press for Higher-Value Health Care

Bruce Siegel, director of the Robert Wood Johnson Foundation’s Aligning Forces for Quality initiative and the RWJF legacy program, Expecting Success: Excellence in Cardiac Care, recounts how a big health care purchaser applied its considerable leverage to insist on public reports about hospital performance. This post is part of our continuing effort to shine a light on local laboratories of health care reform.

What does a heavyweight look like in the fight for high-value health care? Take a look at how the state of Maine has used its muscle as the administrator of health plans for 34,000 employees, retirees and their families. It is an especially noteworthy story since the health care reform bills before Congress include a number of provisions to encourage the use of quality measures and value-based purchasing.
 
Maine’s State Employee Health Commission, responding to a call from the state legislature to contain health care expenses, developed a new health-benefits plan in 2006. No ordinary plan, its goals included engaging employees and retirees in the health care process, improving quality of care and encouraging providers to publicly report their performance information.

The upshot has been a value-based purchasing strategy based on public reports developed by the employer-led Maine Health Management Coalition, which works closely with the Robert Wood Johnson Foundation’s Aligning Forces for Quality grantee, Quality Counts, and the state government’s quality-improvement initiative, called the Maine Quality Forum.

Making health care quality information easier for patients to grasp

Chris Queram, president and CEO of the Wisconsin Collaborative for Healthcare Quality, describes an "all-or-none" measure for reporting on the quality of diabetes care. This post is part of our continuing effort to shine a light on local laboratories of health care reform.

Last year alone, the number of people with diabetes in Wisconsin jumped by a quarter, to more than 400,000. The Wisconsin Collaborative for Healthcare Quality, where I work, is taking a new approach to fighting this epidemic.

Managing a chronic disease like diabetes can be tough for patients — besides taking steps to live a healthy lifestyle, there are the regular medical tests for blood sugar and cholesterol, not to mention feet exams and other important checkups.

The Collaborative, which the Robert Wood Johnson Foundation supports as part of its Aligning Forces for Quality initiative, decided to simplify matters by developing an “all-or-none” measure for diabetes. This method has been catching on as reporting on quality has become more extensive and more complicated.

Consider the Joint Commission, which accredits and certifies more than 17,000 hospitals and other health care organizations:  It measures care for acute heart-attack patients nine ways. It has five measures for pneumonia.

Measurement experts started asking whether it wouldn’t be far better to simply tell patients if a clinic or hospital meets a specific set of quality measures rather than making the patient sort through a long list of measures, some of which their doctor or clinic may meet and some of which they may not.  Hence the “all-or-none” name for this innovative and patient-centered approach.

Health reform: A holiday gift for every consumer?

Steven Findlay, senior health policy analyst with Consumers Union, explains why health reform would benefit everyone, even if it is initially disorienting.

The great health reform debate of 2009 has moved into a new phase this month with the full Senate now debating the legislation. I can’t imagine a more profound Christmas, Hanukkah, and Kwanzaa present for the nation than a Senate bill by December 24. The redeemed Scrooge himself would be proud.

Though initial Senate passage won’t seal the deal, it would create momentum that could be tough to stop.

Misinformation about how this legislation will affect consumers has abounded amid the hyper-partisan debate and the complexity of the bills. So let’s be very clear on this critical point: This legislation will benefit every American in the long run. Every single one of us. And we are not talking about some vague social good, or an indirect trickle-down effect. The legislation will directly impact our lives for the better by expanding health insurance coverage and making it more secure, by making the health system fairer and more consumer-friendly, by taking solid steps to improve the quality and safety of care, and, over time, by constraining health care costs and premiums.

To be sure, if it becomes law, the legislation will also create anxiety and confusion. Change always does. New choices and new rules would bring initial stresses. And, of course, the legislation creates a new and far-reaching demand — the requirement to have health insurance. There’s no way around it: That requirement will trigger some tough moments for millions of currently uninsured families. They will have to choose whether to adjust their budgets and obtain coverage or pay a tax penalty (and remain uninsured) because they decide they simply can’t afford the coverage even with the government subsidies that will be available.

Imagining the pain of such decisions already makes us sad. But we at Consumers Union believe that the “individual mandate” or “shared responsibility” requirement will provide people with something of significant value. First and foremost, it could spare your family from severe financial strain or even bankruptcy if serious illness strikes or an accident occurs. Health insurance also lowers the barrier to ongoing care with coverage of routine doctor visits and preventive health services.

Regulators need to step up enforcement to protect consumers

Peter Harbage, of the DC-based health policy firm that bears his name, writes that federal and state regulators must do more to enforce the law, if proposed new consumer protections are to be effective. We published another post on this topic, by Hilary Haycock of Harbage Consulting, which can be found here.

In the current health reform debate, President Barack Obama as well as many Senators and Members of Congress have repeatedly promised to end rescissions, the practice of insurance companies cancelling coverage for policyholders who get sick.  While this is a line guaranteed to generate applause from audiences fired up about insurance company bad acts, little attention has been paid to the federal law that should have been protecting consumers from such practices since 1996.  A recent report we released with the support of the Robert Wood Johnson Foundation aims to understand why that law has failed to change the individual insurance market, and what lawmakers can do to ensure that any new regulations created by health reform are more effective.

Rescissions occur because private health insurers have a strong financial incentive to sell their product to a healthy population.  The better the risk pool, the better the profit.  This leads insurers to underwrite their products—that is to evaluate the risk of the person or family purchasing insurance and issue or price the product accordingly.  In the case of a high risk applicant, the insurer will likely refuse sale of the product.  Once covered, if an individual subsequently becomes sick, the insurer may re-review the original application to find any preexisting conditions that may have been missed during underwriting.  If this process of post-claims underwriting finds new information, the insurer can rescind—or take back—coverage leaving the individual uninsured.  While it is believed that rescission happens on a limited basis, it can be financially and physically devastating to those who lose their coverage.   

Rhetoric of consumer choice may be a double-edged sword

1. Jessie Gruman is the founder and president of the Center for Advancing Health, an independent, nonpartisan Washington-based non-profit policy organization that seeks to increase people's engagement in their health and health care. She writes here about the long-term impact of the rhetoric of consumer choice that has dominated discussions of health reform.

For all the heated debate about “consumer choice” in the health reform debate, the bill that emerges will be unlikely to result in more or better options for most of us: as of the end of last week, it appeared that a maximum of 6 million people will have a shot at coverage by a public option.

But the aftereffects of this hot rhetoric fuel our sense that we are both entitled and obligated to make choices about our health care in much the same we are entitled and obligated to exercise our prerogatives about our kids’ breakfast cereal.

Even before the debate over health reform, we were importuned by our employers, our health plans and the government to be informed and responsible consumers of health care. For years, they have worked to instill the idea that some choices are best made by us: for example, decisions about treatments where the outcomes may be indistinguishable but the side effects differ, decisions about which hospital to use, and decisions about reducing risks to our health.  

We are urged to make these choices based on the belief that we will generally act in accordance with scientific evidence and in our own interest: we’ll go to the hospital with the highest ranking; we’ll quit smoking, get a colonoscopy every ten years, choose watchful waiting over surgery when a test shows a high PSA level and become parsimonious in our doughnut consumption.