How Carve-Outs Lower Health Plan Costs
A carve-out allows self-insuring employers to isolate specific risks within the scope of health insurance coverages they provide. The third-party vendor assumes financial risk for the carve-outs for which it receives a flat fee from the employer. A carve-out can include the majority of a plan or just a single benefit such as pharmacy or addiction services.
In addition to reducing the costs of providing employee health coverage, employers also use carve-outs to:
- Ensure consistent access to medical care
- Provide comprehensive health care, and
- Minimize bureaucracy.
Carve-out areas typically include products that may be considered too costly under a regular group policy, such as:
- Prescription drug benefits
- Drug and alcohol addiction services
- Mental illness screening, diagnosis and treatment benefits
- Burn units
- Cardiac care
- Visual services
- Dental services
- Neonatal intensive care
- Organ transplant
Carve-outs are often a good fit for large, self-funded employers. These entities, because of their large group size, can access a wider selection of vendors and leverage their size to negotiate better rates. Large employers also usually have the internal resources to manage multiple insurance vendors and to educate employees on which vendor to use. Mid-sized employers typically rely on an experienced insurance broker for assistance or an outside administrator to provide risk management services.
The most obvious advantage of a carve out is the ability to offer better options and manage costs better through experienced vendors. For instance, the cost of drugs is a major expense and a company acting alone can incur serious financial debt if an employee is prescribed an expensive drug. With a carve-out, a third-party vendor may assume the financial risk to provide the coverage in exchange for a negotiated flat fee.
Carve-outs are appealing because they lock in a fixed price, enabling managers to better predict plan expenses. They also remove volatile areas of care from the plan.
Employees often appreciate carve-outs because it means their plan provides high quality care for people with specialty pharmacy requirements, behavioral health challenges and chronic illnesses.
The administration of your group health plan can be challenging to coordinate — depending on how many vendors you add. For instance, you will need to draft multiple pharmacy and medical contracts since you will often be dealing with more than one vendor for different products. This can place an additional administrative burden on your human resources department.
Other risks include:
- Problems with legal recourse and first-loss coverage. When filing a claim, the issue of first loss must often be dealt with. “First loss” is when someone carries multiple policies for an illness or injury. Who is responsible for “first loss” must be determined and paid by one or the other providers or apportioned among multiple parties (it can get complicated).
- The possibility that the health insurance company will fail to meet its obligations.
- Third-party provider’s performance may not meet your requirements.
Carve-outs also require more employee education since participants may need to go to different vendors for different services.
And, while carve-outs can reduce specific risks, they never will reduce the overall risk to the company’s plan.
IRS Waives Taxes on Donated PTO
If you have a leave sharing program your employees will not have to pay taxes on any paid time off (PTO) they give to fellow employees during the COVID-19 pandemic. The U.S. Internal Revenue Service (IRS) has special rules for leave-sharing during natural disasters. The IRS considers COVID-19 as a major disaster. It posted a set of frequently asked questions (IRS Notice 2006-59) regarding the tax treatment of leave-sharing plans maintained by an employer to help its COVID-19 affected employees.
Leave-sharing programs allow employees to donate their PTO (vacation or sick leave) to a general pool to be used by other employees. Employees who qualify for using donated PTO have experienced medical emergencies or were affected by major disasters causing them to exhaust all paid leave available to them.
Usually, when an employee donates leave time, the IRS treats it as W-2 compensation and employees must pay income and employment tax on the donated leave time.
The IRS allows exceptions for major disasters, however, such as a hurricane or virus. In such cases, employees who donate leave will not be taxed on the donated leave time.
For employees to take advantage of this exception, employers must sponsor and make available a “major disaster leave-sharing plan”. The main requirements of the plan:
- Donations are to be made to a “bank” for those who have been adversely affected by a major disaster and not to a specific recipient.
- Donors can’t donate more time than they have accrued.
- A time limit for donating and using the time must be established.
- Recipients may not convert leave into cash.
- Recipients may use leave to eliminate a negative leave balance they accrued because of the disaster.
- The employer will determine how much leave each recipient may receive.
Employers do not have to submit reports to the IRS since this plan is not subject to ERISA regulations.
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