A MERP by any other name would save as much in health care costs - or would it? Michael McKenna of Partners Benefit Group doesn't think so.

As president of the Massachusetts-based third-party administrator, he and others have rebranded the MERP (Medical Expense Reimbursement Plan) as a PFA (Participating Funding Arrangement) because, as he says, "it's sexier."

Although the plans have been around since 1954 under Section 105 of the Internal Revenue Code, Partners Benefit Group is trying to breathe new life into the products with the more modern name.

"Whenever you're approaching the market in a unique fashion, you want to brand the methodology. A MERP sounds like something bad that you're having for dinner," says McKenna. He goes on to explain that a PFA "is actually partnering the employer and employee into the funding strategy, whereas an HRA [by contrast] is completely employer-funded, and the reimbursement formula is pretty vanilla."

Tier the deductible

In a health reimbursement arrangement, employees cannot contribute to the fund. However, in a PFA, plan sponsors can tier the deductible and aggregate the risk by calculating that reimbursement into the single and family premiums.

In other words, though both owe their existence to Section 105 of the tax code, the HRA is a standard reimbursement formula, whereas a PFA is a more complex setup.

"Anything that you can do with an HRA, from my perspective, you can do that and more with a PFA," says Bob Delaney, COO of New England Credit Union Services, LLC.

"Everyone shares in the cost of that reimbursement," which makes the PFA "the purest form of insurance," McKenna asserts. "If an employer is going to obligate themselves to take up this deductible exposure, that's pure self-insurance of that deductible. The employees participate in some of that cost because the employer is going to average that into their single and family rates. That's the very definition of insurance."

For example, a large construction company in New England introduced a $3,000 deductible two years ago. In the first year, the company paid it at 100%, which "taught them a lesson," says McKenna.

The company discovered that 70% of its employees had less than $1,000 in claims, with an average of $220, and 20% had between $1,000 and $2,000, with an average claim of $1,800. With this information they learned "how to strategize with their employee population," McKenna explains.

Now the company pays the first $1,000 of the deductible to keep low utilizers in the plan in order to level the risk. The second $1,000 is paid by the employee, and the third $1,000 is paid for by the employer.

Though 30% of the population will exceed the first tier of the deductible, they can pay toward that amount with a company-offered FSA, in which they had a 65% participation rate. In the end, this employer is now 15% below HMO pricing by employing this strategy, says McKenna.

Across all his clientele, for which there are approximately 300 clients, they run 10% to 15% below the fully insured alternative, according to McKenna. "When increases are going up by 10%, 15%, 20% a year, and we're tracking 15% below the closest fully insured alternative, that's a good deal for the employer," he says.

Another option for employers is offering a gamut of options to employees on how they want their insurance to look and feel.

Delaney explains that some credit unions structure their plan so that employees can choose the plan that best fits their particular circumstances. These will be different for young singles versus those that have families and/or more complex health care needs.

"Ideally, we like to have gold, silver and bronze [levels] of our health insurance plan that would be reflective of that. The amount that the credit union would contribute to the plan would be predicated upon where the employee buys in," he explains.

Versatility

A PFA can be used for specific reimbursement, such as exclusively for dental, for example, with significant results, proponents claim.

McKenna recommends that employers give their workers a dental budget instead of giving free preventive treatment. Under such a plan, the employee can visit any dentist of their choice and are reimbursed for $1,000 a year, for example.

The employer may first pay $200 in total, while the next $1,000 will be paid 80% by the employer. Since the average amount individuals pay at the dentist is between $240 and $280, the employer isn't losing much money. This works because no one is going to abuse going to the dentist - more often than not, the opposite is true.

"The employee is going to spend their budget based on their dialogue and their needs direct with their dentist. Employers will self-insure their dental, and they'll just give the employee a budget. That is true consumerism, and that is the purest form of insurance," says McKenna. Many plan sponsors are increasingly combining this strategy, also known as direct reimbursement, with the deductible reimbursement into a single PFA reimbursement formula.

In the end, McKenna says his employer groups are running 25% to 40% below a fully insured dental plan equivalent.

"We're basically cutting the fat out of dental insurance," he says.

Of course these plans aren't recommended for every company or every situation. Delaney doesn't recommend it for groups under 20 employees, as they're not spreading the risk adequately.

Further, an employer who wishes to put a PFA plan in place will also need to consider whether this is the right arrangement for individuals who are partners, self-employed or are more than 2% owners of the company, as these individuals may not be able to enjoy all of the tax benefits of this arrangement.

Also keep in mind that "once you put in place self-funded arrangements that complement an insured program, it makes you fully subject to HIPAA," says Norbert Kugele, a partner at Warner Norcross & Judd LLP in Michigan.

He also points out that self-funded arrangements are subject to nondiscrimination rules that do not apply to fully insured programs.An employer that puts a self-funded program in place will have to do testing to demonstrate that the arrangement does not disproportionately benefit highly compensated employees.

Despite these caveats, supporters argue that a PFA plan may be just what the doctor ordered to save both the employer and employee some much needed cash in a strapped economy.

After a recent post on EBN's blog, the Daily Diversion, readers commented with their thoughts. Here is a sampling of the comments received:

•  A PFA is actually a MERP. The difference is that more creative uses are being used with the explosion of high-deductible plans. I have purchased this for my own compny as well as represent over 300 companies. Many of these companies have averaged low-single-digit increases for eight years running. Very good strategy to consider with medical and dental.
•  "Purest form of insurance?" Pleeeease.
•  It sounds as if it is an HRA in PFA clothing - pure and simple.
•  My TPA has administered these plans for over 25 yrs. I call them Supplemental Health Insurance Plans (SHIP). I have cases in the six NE states, NY and Ohio. There is nothing new here. Section 105 pre dates ERISA so these plans are at least 40 years old. The IRS does not restrict an HSA-qualified plan to spending accounts, Therefore, it is OK to use one of these fully-insured plans as the base under the medical reimbursement plan.

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