The seventh annual MullinTBG/PLANSPONSOR Executive Benefits Survey shows a vast majority of companies (91%) are now offering NQDCPs. Higher tax rates and historically low interest rates present potentially greater challenges for highly compensated employees trying to save for retirement and meet other financial goals, making deferring compensation into a nonqualified plan especially attractive.

The survey also highlights that more companies are offering executives financial planners to help create effective retirement planning strategies. In 2012, 52.7% of firms offered financial planning benefits, compared with 34% in 2009.

“This year’s survey results have once again confirmed the enduring appeal of nonqualified plans in both helping high income earners achieve a secure retirement and meeting an important need in the marketplace,” said George Castineiras, Prudential Retirement’s senior vice president of Total Retirement Solutions. “I believe that NQDCPs have the potential to become even more relevant for high-income earners looking to increase their savings power and lessen tax impacts in the coming years.”

Health spending by state via Federal Bureau of Economics

One of the interesting features of the Affordable Care Act is that reform basically takes place at the state level. Yet the states are very different. Some spend more than twice as much on health care as others, as a percent of state income.

For example, health care spending in three states — Maine, West Virginia and Mississippi — accounts for one out of every five dollars of state GDP. Conversely, Wyoming spends less than 9 percent. (See the table at the end of this post.) If every state were like Wyoming, the United States as a whole would be spending less of its income on health care than about three-fourths of the other developed countries.

But the other states are not like Wyoming and the United States spends considerably more on health care than other countries, at least by conventional measures (although these measures have been challenged). Many believe that the key to why the U.S. spends more lies in the way private sector medicine is practiced across the different states. Among the fifty states, however, a study by the National Center for Policy Analysis finds that the public sector exhibits much more variability from state to state than the private sector;  public sector medicine, rather than private sector medicine, may be the culprit.

For example, over a 40-year period:
.

• The variation in Medicaid spending across the 50 states, as a percent of state domestic product, was from two to three times greater than the variation in private sector spending.
• The variation in Medicare spending was from one and a half to two times greater that the variation in private sector spending.

In general, private sector spending is much more similar from state to state than government spending. Overall:
.

• Medicare spending ranges from $11,903 per enrollee in New Jersey to $7,576 in Arizona.
• Medicaid spending ranges from $11,569 per enrollee in Alaska to $4,569 in California.

The two programs also operate very differently from state to state. For example:
.

• While 43 percent of beneficiaries are in Medicare Advantage plans (mainly managed care) in Minnesota, the figure is less than 10 percent in Alaska, Delaware, Vermont, Wyoming and New Hampshire.
• While South Carolina and Tennessee have 100 percent of their Medicaid enrollees in managed care programs, Alaska, New Hampshire and Wyoming have no Medicaid managed care enrollment.

The Limitations Of Generalizing From Medicare Data

Another issue raised by the study is the tendency on the part of some policy analysts to generalize from Medicare data. Researchers at Dartmouth find widespread variation in per capita Medicare reimbursements across the country. Atul Gwande made a similar observation in a New Yorker article, comparing high Medicare spending in McAllen, Texas with lower Medicare spending in El Paso. In both cases, commentators used these facts to infer that we could save an enormous amount of money if doctors in the high-spending areas practiced medicine the same way as doctors in the low-spending areas.

The NCPA study, however, suggests that different types of spending may substitute for each other. In states where there are more uninsured and therefore more unpaid bills, for example, Medicare spending per enrollee is higher. In some states where Medicare spending is high, private sector spending is low and vice versa. For example,Texas is fifth from the top in Medicare spending per enrollee,but the state is fourth from the bottom in per capita private health care spending. On the other hand,Wyoming is seventh from the bottom in Medicare spending per enrollee,but the state is twelfth from the top in per-capita private sector spending.

As for McAllen Texas, part of the reason for its high Medicare spending is that it has almost four times the national average in “disproportionate share” spending (to compensate for a high volume of uninsured and Medicaid patients). In the private sector, McAllen actually spends less per person than El Paso does.

Challenging An Article Of Faith

For some time, an article of faith among many health reformers has been the idea that we can substantially reduce health care spending by having providers in high-spending areas practice medicine the way it is practiced in low-spending areas. The evidence reviewed here suggests that if we want the high-spending states to emulate the low-spending states, the place to start is with the public sector, not the private sector.

But it’s more likely that the entire idea is misdirected. Another NCPA study found that 80 percent of the variation in Medicare spending per enrollee could be explained by demographics (age, race, sex, etc.), income, and the uninsured rate. After making adjustments for these variables, the study asked how much money Medicare could save if every state matched the performance of the five lowest-spending states? The answer: about 10 percent. For all health care spending, how much could be saved if every state matched the performance of the five lowest-spending states? Answer: about 5 percent.

And remember, you don’t even get the five percent unless you copy perfectly.

This finding is consistent with other research. A new paper by Louise Sheiner, an economist at the Board of Governors of the Federal Reserve System, concludes that health and socioeconomic factors — e.g., the prevalence of smoking, obesity and diabetes — best explain why health spending in some regions of the country is higher. This is also the view of  Richard “Buz” Cooper of the University of Pennsylvania.

According to the survey, 83% of employers now offer their employees incentives for participating in programs that help employees become more aware of their health status. These actions may include taking a health risk questionnaire or participating in biometric screenings.

This 83% of employers offer:

• Incentives in the form of a reward (79%);
• Incentives in the form of a consequence (5%); or
• A mix of both rewards and consequences (16%).

“Questionnaires and biometric screenings are the key tools in providing that important information and serve as the foundation that links behaviors to actions,” said Jim Winkler, chief innovation officer for health and benefits at Aon Hewitt. “Motivating people to participate through the use of incentives is a best practice in the industry and these strategies will continue to be a critical part of employers’ health care strategies in the future.”

More from Plansponsor.com

Employees and dependents enrolled in one of Bloomfield, Conn.-based Cigna Corp.’s “Choice Fund” CDHPs reported an average 7% decrease in medical costs during their first year of enrollment, compared with an average 7% one-year increase among HMO and PPO enrollees, according to Cigna’s seventh annual Choice Fund Experience Study.

Cigna’s study, released last week, examined claim experiences among 1,900 client group plans covering more than 2.5 million individuals. Overall, Cigna said combined enrollment in its Health Reimbursement Arrangement and Health Savings Account CDHP programs grew by 26% in 2012.

Thousands in savings

Cumulatively, Cigna’s group CDHP clients saved approximately $1,300 per employee in the first year, the study found. Per-employee savings compounded among CDHP clients in each subsequent plan year, totaling $7,800 by the fifth year.

In a statement accompanying the study, Cigna President and CEO David Cordani said the lower medical costs reported by CDHP enrollees are attributable in part to that group’s higher rate of participation in health and disease management programs, as well as more frequent use of online pricing and quality-of-care rating indices.

Thirty-one percent of CDHP enrollees completed a health risk assessment in 2012, compared with 15% of HMO and PPO enrollees. Almost three-quarters of CDHP participants registered to use Cigna’s online health care pricing directories and decision-making tools, compared with 47% of HMO and PPO plan members.

Read more from Business Insurance.

It’s already happening across the country at fast-food restaurants, as employers try to avoid being punished by the Affordable Care Act. In some cases we’ve heard about, a local McDonalds has hired employees to operate the cash register or flip burgers for 20 hours a week and then the workers head to the nearby Burger King BKW -1.11% or Wendy’s to log another 20 hours. Other employees take the opposite shifts.

Welcome to the strange new world of small-business hiring under ObamaCare. The law requires firms with 50 or more “full-time equivalent workers” to offer health plans to employees who work more than 30 hours a week. (The law says “equivalent” because two 15 hour a week workers equal one full-time worker.) Employers that pass the 50-employee threshold and don’t offer insurance face a $2,000 penalty for each uncovered worker beyond 30 employees. So by hiring the 50th worker, the firm pays a penalty on the previous 20 as well.

These employment cliffs are especially perverse economic incentives. Thousands of employers will face a $40,000 penalty if they dare expand and hire a 50th worker. The law is effectively a $2,000 tax on each additional hire after that, so to move to 60 workers costs $60,000.

A 2011 Hudson Institute study estimates that this insurance mandate will cost the franchise industry $6.4 billion and put 3.2 million jobs “at risk.” The insurance mandate is so onerous for small firms that Stephen Caldeira, president of the International Franchise Association, predicts that “Many stores will have to cut worker hours out of necessity. It could be the difference between staying in business or going out of business.” The franchise association says the average fast-food restaurant has profits of only about $50,000 to $100,000 and a margin of about 3.5%.

Because other federal employment regulations also kick in when a firm crosses the 50 worker threshold, employers are starting to cap payrolls at 49 full-time workers. These firms have come to be known as “49ers.” Businesses that hire young and lower-skilled workers are also starting to put a ceiling on the work week of below 30 hours. These firms are the new “29ers.” Part-time workers don’t have to be offered insurance under ObamaCare.

The mandate to offer health insurance doesn’t take effect until 2014, but the “measurement period” used by the feds to determine a firm’s average number of full-time employees started last month. So the cutbacks and employment dodges are underway.

The savings from restricting hours worked can be enormous. If a company with 50 employees hires a new worker for $12 an hour for 29 hours a week, there is no health insurance requirement. But suppose that worker moves to 30 hours a week. This triggers the $2,000 federal penalty. So to get 50 more hours of work a year from that employee, the extra cost to the employer rises to about $52 an hour—the $12 salary and the ObamaCare tax of what works out to be $40 an hour.

Moving to 33 hours a week costs the employer about $10 an hour more in ObamaCare tax. Look for fewer 30-35 hour-a-week jobs. The law that was sold as a way to help business and workers is thus yanking a few more rungs from the ladder of economic upward mobility.

Many franchisees of Burger King, McDonalds, Red Lobster, KFC, Dunkin’ Donuts and Taco Bell have started to cut back on full-time employment, though many are terrified to talk on the record. Activist groups have organized boycotts against Darden Restaurants, DRI -2.12% which owns Olive Garden and Red Lobster, for daring to publicly criticize ObamaCare. It’s safer to quietly dodge the new costs and avoid becoming a political target.

But the damage won’t be limited to franchisees or restaurants. A 2012 survey of employers by the Mercer consulting firm found that 67% of retail and wholesale firms that don’t offer insurance coverage today “are more inclined to change their workforce strategy so that fewer employees meet that [30 hour a week] threshold.” This week Nigel Travis, the CEO of Dunkin’ Donuts, asked Congress to change the health law’s definition of full-time to 40 hours a week from 30 hours so worker hours won’t have to be cut.

The timing of all this couldn’t be worse. Involuntary part-time U.S. employment is already near a record high. The latest Department of Labor employment survey counts roughly eight million Americans who want a full-time job but are stuck in a part-time holding pattern. That number is down only 520,000 since January 2010 and it is 309,000 higher than last March. (See the nearby chart.) And now comes ObamaCare to increase the incentive for employers to hire only part-time workers.

Democrats who thought they were doing workers a favor by mandating health coverage can’t seem to understand that it doesn’t help workers to give them health care if they can’t get a full-time job that pays the rest of their bills.

A version of this article appeared February 23, 2013, on page A12 in the U.S. edition of The Wall Street Journal, with the headline: ObamaCare and the ’29ers’.

Executive Summary
Federal authorities have postponed a March 1 deadline for employers to distribute a notice to employees explaining the public health insurance exchanges.

Recently proposed regulations from the Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS) appear to allow any employer-based health plan more robust than a dental plan, vision plan or health flexible spending account, to satisfy the health reform law’s “individual mandate,” opening up legitimate and aggressive planning opportunities for some employers.

The HHS regulations also outline how the public health insurance exchanges will determine whether a person qualifies for a federal subsidy toward the purchase of individual insurance coverage through an exchange. The issue is important because in many cases such subsidies will trigger presumptive penalties against the person’s employer.

The recently proposed regulations also spell out how an employer may appeal a determination that one of its full-time employees is entitled to subsidies through an exchange. Employers will want to understand the appeal process in order to reverse erroneous penalty assessments under the reforms law’s play or pay mandate.

The IRS has also clarified that an offer of qualifying and affordable employee-only coverage disqualifies the employee’s dependents from receiving federally-subsidized coverage through a public insurance exchange. This might make it more difficult for employers to eliminate dependent coverage, or to substantially scale back the portion of dependent coverage paid by the employer.

Other new guidance prohibits employers’ use of health reimbursement arrangements (HRAs) to help employees buy individual insurance policies (on a tax-favored basis) through a public health insurance exchange or otherwise, calling into question the viability of some employers’ hopes to utilize private health insurance exchanges after 2013.

The federal agencies implementing 2010′s federal health reform law, the Patient Protection and Affordable Care Act (PPACA), continue to turn the crank on guidance related to implementation of the health reform law, including the interaction of federal subsides for health insurance exchange-based coverage and the employer “play or pay” mandate. The new guidance is a mix of formal guidance (proposed and final regulations) and informal guidance, in the form of Frequently Asked Questions (FAQs). While the latest burst of agency activity answers some lingering questions, the results are a mix of good news and news that could cause concern for employers. Being optimists, we’ll start with the good news.

Delay for Employer Obligation to Notify Employees about Insurance Exchanges

The health reform law requires that employers provide current and new employees a written notice, not later than March 1, 2013, regarding the existence of the public, state-based health insurance exchanges and the availability there of federal subsidies toward the purchase of individual insurance policies if the employer does not offer qualifying and affordable coverage to its employees.

Noting that the federal agencies are committed to a “smooth implementation process,” the Department of Labor (DOL) will not require distribution of the notice by March 1. Instead, the agency will issue guidance later this year that will likely require distribution of the notice to coordinate with the public exchanges’ enrollment period that will take place beginning this October.

“Minimum Essential Coverage” Continues to Look Potentially Skinny

The notion of “minimum essential coverage” is an important one under the PPACA. Individuals must have minimum essential coverage, beginning in January 2014, to satisfy the PPACA’s individual mandate. If they fail to have such coverage they are subject to a relatively modest tax penalty that the IRS may collect by offsetting any federal income tax refund due the individual. A taxpayer owes the penalty not only himself or herself, but also on any federal tax dependent in the household who does not have minimum essential coverage.

Larger employers, for their part, must offer minimum essential coverage to at least 95 percent of their full-time employees (and the employees’ biological, step, adopted and foster children, up to age 26), or risk a nondeductible penalty of up to $2,000 per year for each full-time employee under the employer’s taxpayer identification number. The employer, however, receives a free pass on its first 30 full-time employees, in the penalty calculation.

So precisely how good must this minimum essential coverage be? Recently proposed regulations say that Medicaid (with certain exceptions for some limited types of Medicaid-based coverage), Medicare and a host of other government-supplied health insurance (including the Children’s Health Insurance Program (CHIP), TRICARE, and most Veterans Administration coverage) amount to “minimum essential coverage.” Self-insured student health coverage, and coverage provided in the United States to foreign nationals by their home country, also make the grade. Coverage under state high risk pools does, too.

In addition, it appears any employer-based healthcare plan more robust than a dental or vision plan, or health flexible spending account, amounts to “minimum essential coverage.” However, on-site clinics are not minimum essential coverage, nor is disability or long-term care insurance, hospital or other fixed indemnity insurance, or coverage for specified diseases or illnesses (e.g., a “cancer policy”).
Lockton Comment: The proposed regulations, if finalized without significant change, are important because some employers have contemplated offering very skinny employer-based medical insurance, at very inexpensive rates, as a means for an employee to satisfy his or her individual mandate. It appears this remains a viable strategy. It may work particularly well when offered alongside a plan that barely satisfies the secondary employer obligation to offer coverage that satisfies minimum actuarial value and affordability requirements.

HHS Outlines Process for Verifying Individuals’ Eligibility for Exchange-Based Insurance Subsidies…and How Employers May Appeal Penalty Assessments

The proposed regulations from HHS include voluminous guidance on the process it will use in 2014 and 2015 to determine whether an individual qualifies for a federal subsidy when he or she purchases insurance coverage through a public health insurance exchange. In some cases, when an employee qualifies for subsidies, that determination will trigger penalties against his or her employer. Therefore, HHS has also outlined the process by which employers may appeal an exchange’s determination that an employee qualifies for subsidies.
Beginning in 2014, an employer’s full-time employees (FTEs) will qualify for federally-subsidized coverage through an exchange only if the employee satisfies several conditions. First, the employer must have failed to offer health coverage with a minimum actuarial value of 60 percent (we’ve called this “qualifying coverage”) that is “affordable” to the employee.
Lockton Comment: Federal authorities will shortly issue an actuarial calculator to help plans determine whether they meet the minimum value requirement. Recent guidance gives employers three “safe harbors” for satisfying the affordability requirement.
Second, the employee must not be enrolled in employer-based minimum essential coverage (whether or not it’s qualifying and affordable). Third, the employee must not be eligible for Medicare, Medicaid or other government-supplied health insurance. Fourth, the employee’s household income must not exceed 400 percent of the federal poverty level.
Lockton Comment: Recent guidance from the IRS has confirmed that an offer of qualifying and affordable employee-only coverage disqualifies the employee’s family members from receiving federally-subsidizd coverage through an exchange. Stated differently, the cost of family coverage, no matter how expensive, will not render the dependents eligible for subsidized, exchange-based coverage if the offer of employee-only coverage is considered qualifying and affordable.

This may lead some employers to think twice about notions of offering qualifying and affordable coverage to the employee, but dropping or significantly raising the cost of family coverage, if the notions were based on an assumption that the family members could obtain subsidized, exchange-based coverage.
Also included in the guidance are the proposed mechanics of an appeal process individuals and employers may use to dispute an exchange’s determination that a federal subsidy is or is not available to the individual. We won’t discuss the appeal process for individuals.
Federal authorities intend to build a massive federal “data hub” that is supposed to pull together information about an individual’s employment, coverage offerings by his or her employer, the individual’s tax filings, and his or her coverage–or eligibility for coverage–under programs like Medicare, Medicaid, CHIP, TRICARE, etc. Accurate information about the individual is critical, to allow the exchanges to make accurate decisions regarding the individual’s eligibility for subsidized exchange-based coverage, and the amount of those subsidies.
Until this data hub is operational and running smoothly, an exchange’s process for determining whether a person gets a subsidy (and hence whether his or her employer is penalized) appears to rely a great deal on assertions by the individual, and thus appears to be fraught with peril for employers.

Verification Process for Individuals
Before an exchange will provide an individual with a federal subsidy for coverage, it is supposed to verify information, including:

The person’s household income,
Whether or not the person has access to qualifying and affordable employment-based coverage (either as an employee, or spouse or child of an employee), and
Whether or not the person is eligible for or enrolled in Medicare or Medicaid, etc.

In order to qualify for a subsidy, the person’s household income must be below four times the federal poverty level ($92,200 for a family of four in 2013). The size of the subsidy also depends on household income, which is basically adjusted gross income with some modifications.

The exchange will use tax information obtained from the Social Security Administration and IRS as the starting point for this determination. However, the individual is allowed to simply attest to either increases or decreases in household income, and changes not reflected in other data available to HHS. The exchange is tasked with attempting to resolve any inconsistencies before making a final determination of household income for purposes of the subsidies.

Part two of the equation is whether the person is a full-time employee (or spouse or child of a full-time employee) and has access to qualifying and affordable employer coverage. Here, at least for now, the exchange will simply accept an individual’s attestation as to full-time status and the cost and design of the employer coverage. The exchange is supposed to investigate any apparent inconsistencies in the individual’s attestation (for example, by contacting his or her employer to verify access to employment-based coverage, and the actuarial value and cost of that coverage). HHS has asked for comments regarding how best to streamline this process, such as a template employers could use to provide information about available coverage.

Appeal Process for Employers

If an employee is determined to qualify for federal subsidies toward the purchase of exchange-based health insurance (because, for example, the employee attests that he or she is not offered qualifying and affordable coverage by his or her employer), the exchange will notify the employer of that fact. Although the exchange won’t literally penalize the employer, it appears the exchange’s determination will serve as the basis for a subsequent excise tax assessment upon the employer by the IRS. The HHS proposed rules provide an appeals process for employers whose employees are determined to qualify for federal subsidies.

Within 90 days of the determination, the employer may submit plan design, cost-sharing and other information to dispute the exchange’s determination. A government official will determine whether to rescind the employee’s subsidy award. If the award is not rescinded, HHS is contemplating a couple of possibilities regarding what happens next. Under one possibility, the official’s decision is simply final, and the employer must live with it or pursue challenges–through IRS channels–once the IRS levies the consequent excise tax penalty.

Lockton Comment: This is not a particularly appealing proposition (pun intended) to some employers. Employers who have suffered at the whims of unemployment compensation determinations may justifiably be a bit cynical about the fair shake they can expect in these appeals to the health insurance exchanges.

More Guidance on HRAs

In a series of FAQs, federal agencies addressed how the health reform law’s prohibition on annual and lifetime dollar limits applies to health reimbursement arrangements (HRAs). HRAs are problematic under the PPACA’s prohibition on dollar limits because by their nature they provide benefits limited to a specific dollar amount. Previously, the agencies indicated that an HRA that is integrated with group medical coverage would satisfy the requirement if the group coverage contained no prohibited dollar limits.

What the agencies meant by “integrated” was not entirely clear, but it appeared that an HRA made available to an enrollee in a medical plan, and which could be used to offset out-of-pocket expenses under the plan (e.g., deductibles, co-payments and co-insurance) would be considered “integrated” with the medical plan. “Stand-alone” HRAs, such as HRAs offered to individuals not enrolled in the employer’s group medical plan, would be prohibited, at least after 2013.

The new guidance indicates that an employer-sponsored HRA cannot be considered “integrated” with coverage purchased on the individual market or even with individual policies offered through an employer.

Lockton Comment: The agency guidance closes the door on the notion of an employer using an HRA to provide tax-free dollars to an employee for the purchase of individual coverage though a public health insurance exchange, or even a private exchange. Consequently, an employer will have to provide its employees with additional taxable cash compensation if it wants to facilitate employees’ purchase of individual policies.

The FAQs also preclude the use of a tax-free “opt out” credit in an HRA if an employee waives medical coverage through its employer. Presumably, at least for now, an employer may continue to supply additional taxable cash to employees who opt-out of the employer’s group coverage.

The FAQs permit residual balances (as of January 1, 2014) in non-integrated HRAs to be used until the funds are exhausted, with certain limitations to prevent employers from abusing this accommodation.

Lockton Comment: Note that these prohibitions on HRAs do not apply to HRAs that cover only retirees.

Mark Holloway, J.D.
Health Reform Advisory Practice

Not Legal Advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton’s Compliance Services group are not privileged under the attorney-client privilege.

Circular 230 Disclosure: To comply with regulations issued by the IRS concerning the provision of written advice regarding issues that concern or relate to federal tax liability, we are required to provide to you the following disclosure: Unless otherwise expressly reflected herein, any advice contained in this document (or any attachment to this document) that concerns federal tax issues is not written, offered or intended to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the IRS.

One of the biggest bones of contention is what to do about entitlement spending, particularly Medicare. Many Republicans want to raise the age of Medicare eligibility to 67. President Obama and congressional Democrats do not.

It will be difficult, if not impossible to meet a reasonable fiscal target without addressing federal health care spending. However, the current fight is misplaced. The health care “entitlement” we need to reform is the notion that America’s health care system is entitled to an ever-growing share of America’s wealth.

Consider the facts:

• In 1950, health care accounted for 4.5 percent of GDP. Today, it claims nearly 18 percent.  This is a bigger share of our economy than all U.S. manufacturing, or wholesale and retail trade, or finance and insurance.
• According to the nonpartisan Center on Budget and Policy Priorities, the U.S. government spends more on health care than national defense and international security assistance.
• Between 1999 and 2011, rising health care spending wiped out the modest income gains of the middle-class. If health care costs had risen at the rate as other goods and services, a median-income family of four would have had an extra $6,000 to spend on other priorities in 2011. Imagine what that might have meant for the struggling U.S. economy.

Spending More, But Losing Ground

Worst of all, this extra spending didn’t buy us better health. In fact, as a nation, America lost ground relative to other countries.

Over the past 20 years, the life expectancy of U.S. women has dropped from 22^nd in the world to 36^th. According to a newly released report by the Institute of Medicine, Americans die sooner and experience higher rates of disease and injury than citizens of other high-income countries. Even those of us who are well off—with health insurance, a college education, higher incomes, and healthy behavior—tend to be sicker than our peers in other rich nations.

If we can’t do better than this, why is American health care so expensive? One reason is that fee-for-service payments encourage providers to do more in order to bill more. Some try too hard.  Last December, 60 Minutes aired a story about a for-profit hospital chain that was so determined to fill its beds; it pressured its ER doctors to hospitalize patients who didn’t need to be there.

Although health care spending has slowed along with the rest of the economy for the past three years, it could still reach $2.9 trillion this year. The Institute of Medicine estimates as much as one quarter of this—some $750 billion—will be wasted on “unnecessary or inefficient health care services, excessive administrative costs, high prices, medical fraud, and missed opportunities for prevention.”

Think about it. In the midst of a budget crisis, why are we wasting three-quarters of a trillion dollars a year on stuff that doesn’t help people get well?

The Path Forward

The best way to lower costs is to make American health care a more functional marketplace than it is today.

One option we have already embarked upon is to shift from fee-for-service reimbursement to payment models that reward efficiency and value. Another is to empower patients to think like consumers, rather than passive recipients of treatment that “somebody else” will pay for. A third is to encourage—through incentives and regulatory reforms—innovators to create drugs, devices and information technology that improve care at lower cost, rather than driving costs higher.

Can America meet this challenge? You bet. When U.S. manufacturing fell into decline, it reengineered itself with remarkable speed. American ingenuity sparked the information age. We have the most productive agriculture on earth. Surely the nation that accomplished these things can fix the world’s most expensive healthcare system.

Rather than fight over seniors’ Medicare benefits, Congress and the White House should work together to craft incentives that reward health care providers who embrace efficiency, accountability and value. If they do that, American ingenuity and competition will take care of the rest.

This commentary was first published on February 27, 2013 on Health Affairs Blog. Copyright ©2013 Health Affairs by Project HOPE — The People-to-People Health Foundation, Inc.

Adding a hardship withdrawal provision.

Adding a qualified Roth provision.

Adopting a Safe Harbor 3% non-elective contribution if made no later than 30 days before the end of the plan year when the proper annual and supplemental notice requirements are met (i.e., the “wait and see” approach). Using the wait and see approach allows the employer to provide an annual Safe Harbor notice that tells participants the employer may make the 3% non-elective contribution, and will communicate their decision before the end of the plan year. If the employer decides to make the contribution, the plan must be amended to permit the contribution.

Suspending or reducing a Safe Harbor matching contribution formula provided the employer:

• amends the plan,
• issues a supplemental notice at least 30 days before the suspension to all eligible employees explaining the amendment and the procedure for changing a deferral election,
• gives all eligible employees the chance to change their deferral election, and
• amends the plan to provide the ADP/ACP test will be used for the entire plan year using the current year testing method.

Suspending or reducing the Safe Harbor non-elective contribution if the employer completes the steps above for suspending or reducing the Safe Harbor matching contribution and demonstrates a substantial business hardship under the IRS rules (operating at a loss, industry downturn, anticipated termination of the plan without the amendment).

Expanding eligibility, for instance, an amendment to allow participation of salaried workers in a plan currently set up for hourly workers only.

Making a required regulatory amendment in order to comply with a law, for example, the Pension Protection Act of 2006.