A Time to Kill (HSAs)

Author’s note: Since our last post, the IRS has issued the 2017 figures for statutory minimum annual deductible, statutory maximum out-of-pocket and HSA contributions limits. The only change from 2016 is an increase in the self-only HSA contribution limit from $3,350 to $3,400. For more information, please click here.

By William G. (Bill) Stuart

Director of Strategy and Compliance

Benefit Strategies, LLC

May 12, 2016

Have you read recently that the Obama administration is on a mission to kill HSAs? A lot has been written during the past month about new regulations and their impact on HSAs, like articles here and here. Let’s put political considerations aside for a moment to look at what the new regulations say and what their practical impact will be on the segment of the population to which they apply.

We’ll start with a little history. Prior to enactment of the Affordable Care Act (ACA), each state controlled the individual (nongroup) insurance market within its jurisdiction. States took very different approaches to this market with respect to rating, products, benefits and eligibility. With passage of the ACA, the federal government began to dictate what the market would look like.

Under the ACA:

  • All nongroup purchasers have access to a public marketplace facilitated by either the state or federal government. About one-third of the states (including Massachusetts, Connecticut, Rhode Island and Vermont) built (or in the case of Massachusetts, modified an existing marketplace to accommodate the ACA requirements) state-facilitated marketplaces, while New Hampshire and Maine chose instead to default to the federal-facilitated nongroup marketplace (HealthCare.gov).
  • States must use community rating to price products and can’t use medical underwriting. In other words, health insurers can’t set rates based on each applicant’s risk factors, as auto, homeowners and life insurers do. Every applicant is subject to the same rates, with variations allowed for geographic location (to reflect different costs of care) and age (because the average cost of care varies by age, though by differences far greater than the ACA allows).
  • All products must include an out-of-pocket maximum, contain certain Essential Health Benefits and fit into narrow metallic bands reflecting a plan’s actuarial value, or AV (the percent of total claims paid by the insurer with average utilization). Plans that fall outside these AV bands can’t be sold in the nongroup market, no matter how popular their design might be with potential purchasers. The tiers are:

Platinum: AV Target:   90%   AV Range: 92% to 88%

Silver: AV Target:   70%  AV Range: 72% to 68%

Bronze: AV Target:   60%   AV Range:   62% to 58%

Gold: AV Target:   80%   AV Range:   82% to 78%

New regulations released March 8, 2016, by the US Department of Health and Human Services, or HHS, change federal regulators’ approach to product design. No longer do insurers have flexibility in varying out-of-pocket costs (deductibles, coinsurance and out-of-pocket maximums) to fit within actuarial value bands. The new regulations are now prescriptive. For example, they require an individual deductible of $6,850 for a Bronze plan – a figure $300 above the 2016 statutory out-of-pocket maximum for an HSA-qualified plan. Silver plans can’t have individual deductibles greater than $1,250 under the new regulations – exactly $50 less than the statutory minimum annual deductible for self-only plans under current HSA plan rules.[1]

In addition, the regulations require that a certain number of physician visits for non-preventive services be covered outside the deductible (with minimal or no cost-sharing). Current regulations require that HSA-qualified plans cover all non-preventive services, including diagnostic visits to PCPs, retail clinics and urgent care centers, subject to the deductible.

Each of these three factors – minimum deductible, maximum out-of-pocket and certain non-preventive visits not subject to the deductible – by itself represents a violation of the rules for an HSA-qualified plan and thus ensures that no HSA-qualified plans can be sold in the nongroup market.

The regulations are optional in 2017 and mandatory beginning in 2018.

What is the upshot of this regulatory change?

These new regulations will have a dramatic effect on individuals’ health plan choices. The number of Americans enrolled in HSA-qualified plans now approaches 20 million, an increase of 22% during the past year. Those accounts hold more than $30 billion, a 25% increase. While these figures include both nongroup and employer-sponsored membership, it’s interesting to note that 36% of individuals new to the health insurance market (a figure that includes many nongroup buyers) choose HSA-qualified plans.

The new regulations as written impact nongroup members in three distinct ways.

First, HSA-qualified plans, which generally have the lowest premiums in the nongroup market, won’t be offered in the nongroup market by 2018 (and in many cases as early as 2017). For consumers, this will represent a premium increase. The Kaiser Family Foundation reports that average premiums on for HSA-qualified plans in 2015 were $5,312 for individual coverage and $15,579 for family coverage – savings of 14% ($700) and 10% ($1,500) vs. non-HSA-qualified plans.[2] And the benefits don’t stop there, as enrollees are more likely to receive preventive care and generally incur lower costs.[3]

The increased premium will disproportionately impact nongroup insurance purchasers with lower incomes. These buyers receive advance premium tax credits (premium subsidies) based on their income and the cost of the second most expensive Silver plan. Today, these buyers can minimize their net premium by applying the subsidy to the lower-premium Bronze plans, including HSA-qualified plans. Under the new regulations, these HSA-qualified plan options disappear and may or may not be replaced.

Nongroup purchasers who buy a plan with a lower AV are disproportionately those who don’t anticipate high medical costs (since their increased responsibility would eat up any premium savings if they incur high claims). These are the very buyers whom the nongroup market has not attracted under the ACA.

Nongroup markets are in financial crisis in many states (insurers pulling out of the market, product options being scaled back to narrow networks and HMO platforms, double-digit premium increases) because high utilizers are purchasing insurance at premiums lower than their claims costs. At the same time, healthier potential buyers aren’t buying insurance because they don’t perceive their benefits to justify the premium costs. Eliminating the lowest-premium products won’t make purchasing coverage a more attractive to these lower utilizers.

Second, unable to contribute to the tax-advantaged HSAs that their neighbors who have group insurance coverage enjoy, these nongroup purchasers will face steep tax increases. HSAs are the only tax-advantaged reimbursement accounts to which they have access, since Health FSAs and HRAs are employer-based programs. These individuals won’t be able to contribute funds into an HSA to pay their out-of-pocket expenses with pre-tax dollars.

The result: A family with $4,000 of out-of-pocket costs loses tax savings of between $800 and about $1,700, depending on their tax bracket. That’s a tax increase of $800 or more – an increase that falls most heavily on families with a sick infant, parents with an adult disabled child and older couples dealing with one or more chronic conditions or terminal illness.

Third, families that can’t access HSAs any longer lose more than just the tax advantages of paying their out-of-pocket expenses with pre-tax dollars. They also must report a higher taxable income (because they don’t have HSA contributions to deduct). Their higher taxable income reduces their premium subsidies, which further increases their net premiums.

Who in the name of compassion would propose increasing premiums and taxes sharply on families facing substantial out-of-pocket costs (and dealing with the emotional pain that these medical conditions bring)?

Unfortunately, the “who” in this case are career employees who never face election and don’t change from administration to administration. They take orders from an elected president and his political appointees assigned to carry out his agenda. Presidents rarely face backlash for these kinds of actions by voters most impacted by them, and a president ineligible to run for the office again faces no political pressure in issuing such regulations.

Why is this happening?

It depends on whom you ask. Many ACA critics have felt from the beginning that the president and his supporters never liked HSAs because HSAs empower individuals rather than government to make treatment decisions. They couldn’t kill the law (HSAs were introduced via legislation passed by Congress and signed into law by President George W. Bush). The only strategy available to HSA opponents is to disable the program incrementally, and regulation of the nongroup market is one means of achieving this goal. It follows excluding OTC drugs and medicine from the list of eligible expenses absent a prescription, increasing the penalty for distributions for non-eligible expenses and including employer and employee pre-tax HSA payroll contributions in the calculation of premiums subject to the excise tax on high-cost health plans (the Cadillac tax). In other words, death by a thousand cuts.

Others assign less devious motives to the regulations. They hypothesize that two different regulatory agencies – the IRS which sets the minimum deductibles and out-of-pocket maximums for HSA-qualified plans, and HHS, which issues regulations related to the ACA – simply aren’t coordinated in their dollar figures. For several years, HHS has issued out-of-pocket maximums for health plans that exceed IRS-imposed out-of-pocket maximums for HSA-qualified plans. These different figures don’t impact HSA-qualified plans as long as insurers have the option of designing plans whose out-of-pocket maximums don’t exceed the IRS limits. The new HHS regulations, though, deny that flexibility and require that all nongroup plans require patients to continue to pay up to a higher out-of-pocket maximum.

Will the election result in a change in policy?

Quite possibly, but we’re getting ahead of ourselves. Republicans in the House of Representatives are drafting comprehensive legislation to replace the ACA. They are sensitive to these new regulations, which they can overturn with new legislation. Such legislation faces a certain veto by the president, but a comprehensive view of a health care system without the flaws of the ACA may be a campaign issue in the presidential and congressional races this fall.

Former Sen. Clinton, the likely Democratic nominee, has pledged to correct some flaws in the ACA. Those “flaws” include reducing out-of-pocket medical and prescription drug costs that Americans are facing, though such reductions will come at the expense of higher premiums (as insurers absorb costs that patients now pay) or higher federal spending (if the government steps in to offer subsidies or other forms of payment). Sen. Sanders proposes Medicare for all – and the current Medicare program has no HSA option. Neither candidate appears to be a friend of HSAs and is unlikely to overturn the new regulations. A Clinton presidency and Republican Congress offers hope of fundamental changes in the ACA as written and regulated – changes that could include a place for HSAs through legislation, which preempts executive branch regulations.

Donald Trump, the likely Republican nomine, has a seven-point health care plan that includes HSAs, though it’s not clear that he understands that these accounts have been offered since 2004. He is much more likely than a Democrat to preside over an administration friendly to market solutions that, among other results, would allow HSAs in the nongroup market. A Republican president and Republican Congress would have carte blanche to pass a legislative solution that the next administration that doesn’t support HSAs can’t rewrite through regulation. If a Republican wins the presidency and the Democrats control the Senate, the executive branch can issue new regulations to include HSAs in nongroup markets without congressional approval (as President Obama did in early March).

The Bottom Line

Purchasers of nongroup insurance, who already face a financial disadvantage vs. employees who purchase employer-based health insurance that comes with special tax benefits for employer and employee, will lose access to plans with the lowest premiums in the nongroup market. They then must absorb the entire premium increase themselves or reduce the financial burden by choosing a less attractive health plan. They don’t have an employer contribution and won’t have a larger premium subsidy to offset their increased premium costs.

Under these regulations, nongroup purchasers won’t have access to any of the programs that employees enjoy to reduce their taxable income and pay growing out-of-pocket costs with pre-tax dollars. HSAs are the only option among the “Big Three” (Health FSAs, HRAs and HSAs) available outside of employment.

HHS may be setting the stage to pursue additional regulations to end participation in HSA programs altogether – a trend that, we’ve already seen, has begun with previous changes to the law resulting from the passage of the ACA. The current administration has more than eight months remaining in office to draft additional regulations and fulfill the president’s promise to make effect change by executive fiat without the cooperation of congress.

Individual markets under the heavy regulatory hand of the ACA aren’t working – a topic for an upcoming blog. In fact, they’re collapsing. Only 40% of individuals eligible to purchase insurance through public marketplaces are doing so – despite generous premium subsidies and penalties for failure to purchase a policy. One can reasonably surmise that a good percentage of the 60% not participating in the market don’t like the shrinking menu of options available each year under the ACA. Reducing product choices further and eliminating the one family of products that actually provides tax relief for families with high out-of-pocket expenses hardly seems like a strategy to attract additional consumers to the market.

Notes:

[1] “Why Is Obamacare Regulating Health Savings Accounts Out of Existence?”; Ramthun, Roy J., National Review, April 5, 2016, available here.

[2] “2015 Employer Health Benefits Survey”; Kaiser Family Foundation, Sept. 22, 2015, available here.

 [3] “HSAs under attack in Obamacare Exchanges”; Turner, Grace-Marie; Forbes, April 22, 2016, available here.

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