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Expanding HSAs

“Giving more Americans with high medical, dental, and vision expenses more opportunities to pay less for these services should be a priority that every American, and member of Congress, can support.”

William G. (Bill) Stuart

Director of Strategy and Compliance

June 7, 2018

The Health Savings Account industry, represented by the American Bankers Association HSA Council, has been busy this week testifying before congressional committees to expand HSAs to more Americans. The goal is to jump-start legislative efforts to make medical coverage more accessible and more affordable.

In two separate congressional hearings this week, industry representatives unveiled their vision of an enhanced HSA landscape that would help achieve these goals. Below are the four primary policy aims.

Increase Contribution Limits

This item has been on the agenda for several years. When HSAs were introduced in 2004, the contribution limit was the lower of the specific plan deductible or the statutory limit. This provision limited HSAs as savings accounts in which to accumulate balances to reimburse future medical expenses tax-free. It also meant that HSA owners who had high deductible expenses had no opportunity to make additional contributions to cover routine dental work and vision expenses.

In 2008, the contribution maximum increased to the statutory limit, regardless of the plan deductible. This change was a godsend to HSA owners, who can now contribute more to cover other expenses like dental and vision and also begin to save for future medical costs, whether they incur those costs next year or in retirement.

As a result of this change, HSA assets are approaching $50 billion (or about an average $2,000 balance per account). That figure includes about $8 billion in equity investments like mutual funds, balances that owners don’t need right now and are building for future tax-free distributions.

In recent years, the industry has asked Congress to increase the statutory contribution limit, which is indexed annually for inflation and is $3,450 for self only coverage and $6,900 for family coverage in 2018, to the statutory out-of-pocket maximum of $6,650 and $13,300. This provision was included in the American Health Care Act of 2017, the House-approved amendments to federal medical-insurance law that died in the Senate late last summer.

Why this change?

First, since HSAs were introduced in 2004, out-of-pocket expenses have risen sharply. Then, a plan with a $1,000 self-only deductible was considered a “high deductible health plan.” And that plan had limited cost sharing after the deductible, often modest office-visit and prescription-drug copays and perhaps a higher copay for day surgery or inpatient services.

Today, the landscape is far different. Plans with $2,000, $2,500 and $3,000 self-only deductibles (with family deductibles at twice these figures) are common. And many plans now impose in-network coinsurance after the deductible. Suddenly, a two-day hospital stay that may have set a person back $2,000 ($1,500 deductible and perhaps a $500 inpatient copay) a decade ago now has the individual responsible for $6,650 ($3,000 deductible and $3,350 coinsurance).

HSA contribution limits simply haven’t kept pace with this increased out-of-pocket financial responsibility. Allowing HSA owners to contribute to the out-of-pocket maximum helps them manage their increased financial responsibility by allowing them to pay their bills with pre-tax dollars.

Second, higher contribution limits allow individuals to build their balances for future expenses. This provision is especially important for young people, who on average have lower medical costs than their older colleagues, neighbors and relatives. Building their balances when they’re young and healthy will help them pay their expenses later in life, when they have families of their own and age into higher medical expenses.

The harshest criticism of this proposal is that it benefits only the wealthy. These critics, including Sen. Martin Heinrich of New Mexico, contend that this provision isn’t helpful to lower-income Americans because they have no money to contribute to their HSAs to offset higher medical expenses.

These critics miss the point. HSAs are not, and never were intended to be, magical money-generating machines. They are simply a tool, like a Health FSA, the mortgage-interest deduction and 401(k) plans, to help Americans pay with pre-tax dollars for things that Congress deems important. These individuals with high medical costs must find funds to pay their bills. By finding that money and routing it through an HSA, they can enjoy a discount of between 20% and 35% on their bills.

No elected official criticizes the mortgage-interest deduction because some Americans who want to buy a home don’t have the financial resources to do so. Instead, they see the deduction as a benefit to help more people afford home ownership. The same should hold true for HSAs.

Giving more Americans with high medical, dental, and vision expenses more opportunities to pay less for these services should be a priority that every American, and member of Congress can support.

Chronic Care

High-deductible plans represent the type of trade-off that Americans make every day when they buy a variety of insurance products. They can choose coverage with a certain lower premium in exchange for potential higher out-of-pocket costs. Or they can choose to pay a certain higher premium in exchange for lower out-of-pocket costs when they file a claim. Whether the coverage is medical, homeowners, auto, or disability, the trade-off options are the same.

And most consumers are guided by their (1) estimate of the cost and likelihood of filing a claim and (2) tolerance for risk. A bad driver probably pays the extra $400 in premium to reduce his collision deductible from $1,000 to $500, whereas a non-smoker living in a home with smoke detectors and located two lots from a fire station is inclined to save $700 annually by raising her homeowner’s insurance deductible from $1,000 to $2,000. And people who want to avoid high out-of-pocket costs when they file a claim are willing to pay more in certain premiums to minimize the financial impact of a claim.

Medical-insurance consumers make the same mental trade-offs. The difference is that for some people, claims aren’t a random event. They have a chronic condition, like hypertension, diabetes, depression, and coronary heart disease, that requires regular care. Under an HSA-qualified plan, those services are subject to the deductible. For most such patients, a $5,000 family deductible means that they must pay $5,000 out of their own pockets for care in a given year. By contrast, a family without a chronic condition has less than a one-in-two change of incurring $5,000 of claims.

The rigid design requirements of an HSA, that all services except select preventive services be subject to the deductible, discourages any family with a chronic condition to enroll in HSA-qualified coverage when they have an option. And when their employer offers only one plan, they must enroll and budget for high expenses every year.

The HSA Council is asking Congress to allow an HSA-qualified plan to cover certain treatments for chronic conditions outside the deductible. In other words, a diabetic could receive annual podiatric and ophthalmic visits at no cost, while receiving care for a musculoskeletal injury subject to the deductible.

This one change would make HSAs a more attractive option to individuals and families with a chronic condition. It would allow them to receive care for that specific condition outside the deductible, while they face the same probability of incurring other deductible expenses as other enrollees.

A key provision is that this requirement must not be mandatory. Insurers should have the option to design HSA-qualified plans that cover chronic care outside the deducible. And employers (and individuals who purchase coverage on their own) should have the option of purchasing or not purchasing this coverage. Since a plan that covers more services outside the deductible carries a higher premium, buyers would balance premiums and out-of-pocket exposure as they do today.

This approach is not difficult for willing insurers to implement. It follows closely the concept of Value-Based Insurance Design (VBID, or V-BID). Insurers have been reviewing this option for years, and some have introduced such plans. The services covered outside the deductible are based on simple provider coding.

This change would allow individuals with chronic conditions to enjoy the benefits of an HSA-qualified plan, especially the opportunity to pay current and future medical expenses with pre-tax dollars. It also would allow employers who are reluctant to consolidate medical plans to offer a single HSA-qualified plan that doesn’t disproportionately impact employees with a chronic condition in their families.

Medicare for Seniors

We’ve explored this topic before. And we probably will again.

Today, more and more of the 10,000 Americans who turn 65 daily are continuing to work. For some, it’s a financial necessity. For others, it’s a choice that they make to remain actively engaged in intellectual and meaningful work. Regardless of the motivation, most remain eligible to enroll in their employer-sponsored medical plan. And nearly all are eligible to enroll in Medicare.

The formula used to be simple: Remain covered on your employer’s plan (particularly if you have a younger spouse whom you cover). Enroll in Medicare Part A at age 65 if you’re not collecting Social Security benefits because you prepaid your entire premium through your FICA taxes. If you’re collecting Social Security benefits, you’re automatically enrolled in Part A (and Part B, which you typically waive to avoid the premium while your employer plan covers these same services).

And if your company has fewer than 20 employees and Medicare becomes your primary coverage at age 65 (with the employer-sponsored plan secondary), your employer’s insurer may require that you enroll in Medicare Part A (primarily inpatient services) and Part B (outpatient services) or you assume personal financial responsibility as the primary payer.

These rules adversely affect active HSA participants. And in what is undoubtedly an unintended consequence, they also adversely impact US taxpayers.

Let’s say you’re about to celebrate your 65th birthday and continue to work. If you’re like more than half the population, you’re already receiving Social Security benefits. You’re auto-enrolled in Medicare Part A and Part B (you can waive Part B) as if the first day of the month of your 65th birthday.

Then, you learn that Medicare is disqualifying coverage. You can’t contribute to your HSA for any month that you’re covered by Medicare. So, what do you do? If you’re like most people facing a high deductible with no opportunity to contribute to an HSA, you drop your employer-sponsored plan and enroll in Medicare Part B and Part D (prescription-drug coverage), and probably a Medicare Supplement plan as well to limit your out-of-pocket exposure.

The impact of your decision? If your company has 20 or more employees, you’ve just shifted responsibility for claims from your employer plan (with Medicare as secondary coverage, with very limited claims exposure) to Medicare. Yes, Medicare is now responsible for 100% of your claims (less cost-sharing). The responsibility shifts from a private insurer to US taxpayers.

I’ve been involved this winter and spring with HSA Council efforts through both Congress and the White House to change this rule. We want to allow working seniors who are enrolled in an employer-sponsored HSA-qualified plan (and otherwise meet HSA eligibility requirements) and also Part A or Part B (or both) to remain eligible to open and contribute to their HSAs.

If the company has 20 or more employees, the employer’s insurance remains the primary coverage and Medicare pays a portion of claims only infrequently as the secondary payer. If the company has 19 or fewer employees, Medicare is still primary, but the employee is responsible for all claims up to the employer plan’s deductible.

This proposal saves the government money by shifting claims responsibility from Medicare to the employer-sponsored plan. Even after considering the loss of potential government tax revenue with participants’ tax-free HSA contributions, it’s still a huge money-saver for the government.

Actuarial Value

The final proposal that the industry supports is creating a second path to creating HSA-qualified plans. Today, a plan must cover all services except select preventive care subject to the deductible. The proposed second option is to define any plan that falls below a certain actuarial value (AV) to be considered HSA-qualified coverage.

Actuarial value is simply the amount of the average enrollee’s claims that the plan pays. For example, if a plan has an actuarial value of 80% (a Gold plan on the ACA exchanges), the plan pays on average 80% of claims, while the patient pays 20%.

Here’s why this approach is important, as we’ve discussed before:

First, it allows somewhere between 10 million and 40 million Americans covered by high-deductible plans that aren’t HSA-qualified to open and contribute to an HSA. This is important. Imagine that your employer offers only a plan with a $5,000 family deductible. That plan covers generic drugs subject to a $5 copay. You don’t take generic drugs, but you have an active family of three kids that fall off their bikes, play lacrosse and horse around on the playground. You often satisfy your $5,000 deductible.

You can’t contribute to an HSA to help you offset these expenses, however, because your plan isn’t HSA-qualified. The generic-drug copays disqualify the plan. So, you’re responsible for $5,000 of medical bills without an account to help you manage those costs. If only your plan didn’t cover those generic drugs that you don’t use below the deductible, you’d be able to save perhaps $1,250 in taxes on your $5,000 of expenses.

Second, it eliminates the need for some additional guidance that the industry seeks from the IRS around HSA-qualified benefits. What constitutes an HSA-qualified telemedicine benefit? Is enrollment in direct primary care disqualifying? What about workplace onsite clinics that provide simple treatments for injuries or illnesses at work?

And what about state mandates that sometimes disqualify a plan. Maryland’s passage of a bill in 2017 that required all fully-insured plans to cover vasectomies in full meant that all Maryland residents (including women) covered by fully-insured plans couldn’t contribute to an HSA beginning in 2018. Fortunately, Maryland legislators revised the law and the IRS granted lawmakers in four (or more) other states additional time to fix similar laws.

Under an AV-based approach, these benefits wouldn’t impact HSA eligibility, as long as the plan’s AV was at or below the maximum permitted under federal tax law.

This approach would also make the chronic-care effort irrelevant. Insurers could offer V-BID options under an HSA-qualified plan, as long as the actuarial value of the plan fell below the maximum.


Will we see action on any of these provisions? It’s difficult to read the tea leaves. History and pronouncements by Republican leaders in Congress suggest that nothing will happen before the mid-term elections in November. GOP leaders were burned in their attempts to amend the ACA last year when the American Health Care Act barely passed in the House. The Senate never considered the bill. Senate Republicans crafted their own bill that they then couldn’t pass.

On the other hand, a number of DC-based advocacy organization and think tanks are working feverishly to draft and promote legislation. They see how the ACA’s inherent flaws are affecting the nongroup market and want to offer meaningful solutions. It will be interesting to see who wins this sumo wrestling match. With any luck, it will be American taxpayers and patients.

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