Allowing employers to provide tax-free reimbursement for health-care expenditures, as a new proposed rule from the Department of Labor promises to do, could go a long way to improving access to affordable health insurance for people employed in small businesses.

However, it will not save the U.S. individual health insurance market or revolutionize consumer-driven health care. Just as money in your pocket won’t help you prepare for a hurricane if the store shelves are empty, this savings scheme will be dependent on supplier actions.

{mosads}Health plans will need to stock those market shelves with products people value and trust: affordable and comprehensive coverage. Or the newly reimagined Health Reimbursement Arrangements (HRAs) will leave individuals much like the last-minute hurricane preparer: without good options.

HRAs could help a portion of the new underserved in American health care: small business employees and people bearing enormous deductibles even in large-employer-sponsored plans.

By expanding HRAs, the new rule would allow employees to buy individual health insurance on the marketplaces and pay for certain medical expenses with employer contributions. In effect, the proposed rule aims to give workers more control of their health insurance selection and offset rising costs.

Will it work?

The HRA rule is part of a package of regulations prompted by last year’s executive order promoting health-care choice and competition. Its companion rules to ease restrictions on non-ACA-compliant association health plans and to expand access to short-term, skinny health plans were finalized earlier this year. Together, these rules could make it easier to purchase lower-cost health plans, but without requirements to cover essential health benefits or protect people with pre-existing conditions, those plans should carry warning labels: Buyer Beware.

The arguments Secretaries Alexander Acosta, Steven Mnuchin and Alex Azar put forth in their recent Wall Street Journal commentary may have limited success in stabilizing the individual insurance market and leveling the playing field across types of workers and ignores the headwinds created by the administration’s own policy initiatives. 

For starters, it won’t do much for the self-employed, who represent 31 percent of people purchasing insurance in the individual market. Further, giving workers more options is useless if the options are not good. In our study on consumer behavior in health-care purchasing, we rarely heard complaints about lack of insurance choice. We expected to, but didn’t. Rather, consumers cited frustration over lack of high-value options. They did not care how many choices they had, so long as they had decent coverage they could afford and which they could afford to use. They didn’t want cheaper options that would ultimately leave them more exposed and almost no one wanted more choice for its own sake.  

The real value of consumer choice is in having good choices. The scale of the individual market — 13 million under the ACA and likely to shrink by as many as four million next year absent the individual mandate — has not catalyzed product innovation beyond the ACA minimum requirements. It’s not clear that the 10 million new HRA users projected by the U.S. Treasury will inspire insurers to rise to the opportunity of serving more people by offering more good products.

For consumers to effectively shop and find best-fit health plans, the plans themselves need to be clearer and higher value, lessening the brutal cost-sharing that has led many people to question the value of buying insurance at all. Under-utilization driven by cost sharing is well documented even in comprehensive health plans and likely to get worse if skinny plans pervade the market.

Suboptimal choices across insurance markets are a longstanding phenomenon, largely market-driven. Before the ACA created curated insurance marketplaces, few options existed for people buying their own insurance and fewer still for those with pre-existing conditions. Options that did exist were cumbersome to find and compare and extremely expensive.

Only older or sick people were willing to pay because the alternative out-of-pocket costs would be even worse. High costs discouraged younger, healthier people from signing up, keeping rates high. Double-digit rate increases were common and created hardships for small business owners. Despite the assertions of the secretaries, the ACA did the opposite of undermining the individual health insurance market; it brought a semblance of functionality to a previously failed market.

In employer markets, insurers purposefully design employer offerings to curtail employee choice to maximize group size. For small employers, nothing has been in the way of offering stipends to allow employees to buy their own insurance on the exchange. We spoke to a few small business owners and employees who are party to such arrangements. But lackluster adoption of the broader trend towards defined contributions — whether for lack of employer incentive or consumer competency in health insurance shopping — might portend HRA uptake and impact.

Any effort to increase fairness and access to comprehensive coverage for people not employed by large companies is positive. But, HRAs should be only one piece of a more cohesive puzzle. To truly improve Americans’ health-care choices the new HRA rule should be a starting point, with the following additional elements:

1. Require HRA dollars be used for fully ACA-compliant marketplace plans that protect consumers with pre-existing conditions and offer comprehensive coverage.
2. Do more for the self-employed in the form of tax deductions or credits for all health insurance premiums paid on the individual market without an employer HRA.
3. Foster a thriving individual market by encouraging enrollments and funding the consumer cost-sharing reductions
4. Recognize how short-term, association plan rules that siphon younger, healthier people away from the exchanges are at odds with the HRA rule’s stated goals of lowering costs and expanding consumer choice

HRAs could very well give employees more choices and opportunities to save money. But, as tandem administrative rules work to destabilize the individual insurance market for consumer protected plans, we can only remain cautiously optimistic.

Deborah Gordon is a senior fellow and Anna Ford is a research assistant at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School. Follow Deboarah on Twitter @gordondeb.