Hatching a Better HSA

During the past three years, we’ve seen a dramatic change, as a growing number of plans impose coinsurance after the deductible. This change increases members’ potential financial responsibility to as much as $6,550 for self-only coverage and $13,100 for family coverage – figures far above the $3,400 (self-only) and $6,750 (family) HSA contribution limits.

William G. (Bill) Stuart

Director of Strategy and Compliance

April 13, 2017

US Sen. Orrin Hatch (R-UT) has been one of health care consumerism’s greatest friends on Capitol Hill for more than a decade. In February, Hatch introduced a bill, S403, cosponsored by Sen. Marco Rubio (R-FL) to strengthen Health Savings Accounts. US Rep. Erik Paulsen (R-MN) introduced the same legislation, HR1175, in the House of Representatives. Hatch and Paulsen have introduced similar legislation previously.

Some of these provisions were incorporated into the American Health Care Act (AHCA), the ACA-replacement bill that failed to pass in late March. Look for them to to appear again if Republicans can pass that bill or again later this summer when Congress debates tax reform.

Here are the highlights of some provisions in the legislation:

Increase HSA contribution limits to the medical plan’s out-of-pocket maximum. When HSAs were introduced 13 years ago, most plans had a deductible of $2,000 or less for individual coverage and then limited cost-sharing (perhaps copays for prescription drugs and office visits) or in-network services. During the past three years, we’ve seen a dramatic change, as deductibles have soared (up to an average of $3,117 and $6,480 for self-only and family coverage for silver plans and $5,731 and $11,601 on bronze plans on public exchanges) and a growing number of plans impose coinsurance after the deductible. This change increases members’ potential financial responsibility to as much as $6,550 for self-only coverage and $13,100 for family coverage – figures far above the $3,400 (self-only) and $6,750 (family) HSA contribution limits.

The Hatch bill recognizes this dramatic increase in financial responsibility and helps patients manage those costs by allowing individuals to contribute up to the out-of-pocket maximum.

The downside to this provision is that the Congressional Budget Office (CBO) “scores” all legislation by determining the impact on the federal budget. This provision doesn’t score well. In the past, when determining the impact of lost tax revenue due to HSA contributions, CBO has assumed that every HSA owner contributes to the maximum allowed under the law (even though fewer than 5% of account owners actually contribute to the current statutory maximum). Thus, CBO is likely to dramatically overestimate the financial impact of this change.

Clarify preventive prescription drug coverage under HSA-qualified medical plans. A leading obstacle to enrollment in HSA-qualified plans is the requirement that treatment for chronic conditions, particularly prescription drugs, is subject to the deductible. Some insurers have created preventive prescription drug riders, although the IRS has given only informal and nonbinding guidance on what constitutes a preventive prescription drug.

Under this provision, “prescription and over-the-counter drugs and medicines which have the primary purpose of preventing the onset of, further deterioration from, or complications associated with chronic conditions, illnesses or diseases” can be covered outside the deductible (either covered in full or subject to partial cost-sharing, such as copays or coinsurance).

This provision could have a major impact on HSA adoption by codifying a broad definition of preventive prescriptions. It liberates small employers who fear moving to a total replacement strategy with an HSA-qualified plan because of concerns about one employee’s or an employee’s dependent’s chronic condition. It may prompt more employees with chronic conditions to opt to enroll in an HSA-qualified plan. In both cases, we would see greater enrollment in lower-premium plans in which individuals are incented to become more astute consumers of medical services. That sounds like a win-win.

While the overall effect on medical costs probably is positive (patients spending their own money will do so more prudently than they spend their employer’s/insurer’s funds) this provision will score negatively in the CBO calculation because more enrollment in HSA-qualified plans means more reductions in taxable income.

Classify over-the-counter drugs and medicine as eligible expenses without requiring a prescription. This provision, which applies to both HSAs and Health FSAs, returns the law to the pre-ACA and enjoys broad support among politicians, participants and providers. And it makes sense, since self-medication for simple ailments like sore throats, headaches, minor muscle and joint injuries, seasonal allergies and minor gastrointestinal conditions saves billions of dollars annually in physician visits and helps to reduce the impact of primary care shortages in many areas. Sensible self-medication saves money by reducing patients’ accessing care from a medical professional.

It scores negatively with CBO, however, because it encourages additional pre-tax HSA contributions and Health FSA elections to cover these items.

 Allow individuals enrolled in Medicare Part A to remain HSA-eligible. Too many Americans who remain employed at age 65 and covered on their employers’ HSA-qualified group medical insurance don’t understand that enrolling in Medicare Part A makes them ineligible to continue to contribute to an HSA. They see a benefit (additional coverage) with no premium attached (assuming that they’ve worked and paid federal payroll taxes for 40 quarters, or 10 years).

This provision makes sense because the Part A deductible is $1,316 per benefit period (a Medicare enrollee can have multiple benefit periods annually), a figure higher than the statutory minimum annual deductible for an HSA-qualified medical plan ($1,300 in 2017). In other words, if it were a commercial plan, Part A would be considered HSA-qualified coverage. And individuals covered by two or more medical plans are HSA-eligible as long as all plans are HSA-qualified.

This provision would have a positive impact on the federal budget. Today, individuals enrolled in employer-based HSA-qualified medical plans who enrolled in Part A disenrolled from the group plan if/when they realized that they weren’t HSA-eligible. If this provision becomes law, these individuals will remain enrolled on the group plan, which in many cases shifts responsibility for their claims from Medicare back to the group medical plan, thus saving Medicare money.

Allow employers to alter Health FSA plans mid-year to accommodate HSA eligibility. It’s not uncommon for employers to run their Health FSAs on the calendar year and renew their medical plans mid-year. This arrangement harms employees who want to enroll in an HSA-qualified medical plan and become HSA-eligible immediately. Their participation in the Health FSA makes them ineligible to open and contribute to an HSA during the Health FSA plan year (even if they exhaust their Health FSA election). Employers can’t make changes to their Health FSA program mid-year to accommodate just those employees who want to become HSA-eligible; any changes (like terminating the Health FSA altogether or limited eligible expenses) must apply to all participants.

The Hatch-Rubio-Paulsen bill allows employers to create a Limited-Purpose Health FSA (an HSA-compliant design that reimburses only dental and vision expenses) and move only those employees who want to become HSA-eligible into this more limited design. This provision gives employers a tool to deal with one of their knottiest problems transitioning employees into an HSA program.

Allow employees who receive basic care in an employer’s onsite clinic to remain HSA-eligible. Under current law, employees can receive care at a work-based clinic only if the care is minimal. This provision clarifies and expands that definition to include physicals and immunizations, over-the-counter drugs, treatment for work-related injuries, tests for infectious diseases, drug testing and monitoring of chronic conditions.

This provision makes onsite clinics more attractive. Imagine the benefits to an employer if it invests in a full-time clinic or part-time arrangement (a physician or  nurse practitioner once a week) who can administer routine physicals, monitor blood pressure and cholesterol in at-risk employees and test blood sugar and offer guidance to diabetics. Compliance. Convenience. Cost-effectiveness. This provision is a winner for employers and employees, at no cost to the federal treasury.

Extend bankruptcy protection to HSAs. HSAs don’t enjoy the same protection from creditors in bankruptcy proceedings as qualified retirement plans like IRAs. This provision would extend the qualified retirement plan protections to HSAs. It would have no budget impact.

Allow HSA owners to reimburse additional medical premiums tax-free from their HSAs. Under current law, the only non-Medicare premiums that can be reimbursed tax-free from an HSA are premiums for COBRA continuation or when the individual is receiving unemployment benefits. This provision would allow HSA owners to pay their group insurance premiums from an HSA (in cases in which the employer doesn’t provide for pre-tax premium contributions through a POP), pre-retirees to bridge the gap between group coverage (active or COBRA) to Medicare and the long-term unemployed to pay their premiums with pre-tax HSA distributions.

Members of the American Bankers Association HSA Council, on which I sit, oppose this provision. Their concerns:  First, this use of funds doesn’t promote consumerism. Second, this expansion of eligible premiums will exhaust HSA balances more quickly, leaving less for out-of-pocket expenses. Third, the necessary adjustment in contribution maximums to make this option feasible and still allow individuals to accumulate balances for out-of-pocket expenses would result in a large negative CBO score and give HSA critics ammunition to attack HSAs as simply instruments that allow the wealthy to avoid income taxes.

Expand the range of services eligible for tax-free distribution. The law proposes that the list of eligible expenses be expanded to include gym memberships, exercise equipment, health coaching and nutritional and dietary supplements. This provision is popular with those who wonder why the tax code rewards individuals for spending money to return their body to health but not to maintain general health.

The concern with this expansion of eligible expenses is that it increases the negative CBO score, creates additional gray areas in the law and invites confusion and abuse. Further, HSAs were designed to empower patients to make better decisions about treatment options. This provision is a concession to those who criticize the Internal Revenue Code for providing tax benefits for services related to illness but not maintaining general health. Their general argument – that the code discourages prevention relative to treatment – is legitimate, but turning that argument into law becomes problematic.

Will This Bill Become Law?

Ah, that’s the $64,000 question. Similar bills introduced by Sen. Hatch and Rep. Paulsen in the 1114th Congress weren’t enacted. The prospects in 2017 are much brighter due to Republican control of both chamber of Congress and the executive branch.

Here are four ways that this bill, or provisions within it, can become law:

Regular legislation. The bill as written likely would garner majority support in the House of Representatives, though CBO scoring might result in jettisoning some provisions that impact the federal budget in ways that members can’t manage with cuts to other programs or tax increases. The bill may require some adjustments to pass the Senate, where it needs 60 votes and Republicans control only 52 seats.

Many of the provisions enjoy broad support and could attract an additional eight Democrat votes – especially among some of the 10 Democrats up for re-election in states that President Trump won in the presidential election. Sens. Talent of Montana, Heitkamp of North Dakota, MCCaskill of Missouri, Donnelly of Indiana, Casey of Pennsylvania, Nelson of Florida and Manchin of West Virginia are potential supporters. The issue would be the price – what provisions are removed, what spending initiatives are added –that the bill’s proponents would have to pay to secure eight Democrat votes in the Senate.

Budget reconciliation on health care reform. This effort is on life-support, but not yet dead. Congress must pass a budget reconciliation bill by April 28 to extend federal spending authority. That bill, which requires only a majority vote in both chambers (not the 60-vote supermajority in the Senate), can include provisions that impact federal revenues, spending and debt. The House and Senate parliamentarians have final say on whether a provision impacts the budget. Republicans have included some of the Hatch-Rubio-Paulsen provisions into the AHCA, but many others aren’t directly related to the federal budget and thus can become law only through the standard legislative process.

Second budget reconciliation. Congress likely will consider a second budget reconciliation bill later in the summer thatfocuses on tax reform. Since HSAs are tied to federal tax law, many provisions of Hatch-Rubio-Paulsen could end up in that bill, which again requires only a majority vote in both chambers.

Administrative action. Other provisions in the bill may become law through administrative action by the Trump administration. For example, Section 213(d)  of the Internal Revenue Code (IRC), which allows a tax deduction for certain medical expenses, includes this rather vague language: “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. . .” There is no discrete list of eligible expenses contained within the Code. Instead, the IRS applies this broad definition to a variety of items and publishes Publication 502 annually. The IRS could incorporate some additional products and services into the list of HSA-eligible items without congressional approval.

A fifth avenue is a subset of regular legislation. Rep. Charles Boustany (R-LA) introduced a bill in the 114th Congress to allow HRAs to reimburse premiums for insurance purchased in the nongroup market. The bill passed the House in June 2016 but died in the Senate. During the lame-duck session of Congress following the 2016 election, the bill was incorporated into the 21st Century Cures Act that President Obama signed in December.

In a similar vein, if the Hatch-Rubio-Paulsen bill doesn’t become law in the whole, pieces that attract broad bipartisan support of it may be attached to other legislation during the 115th Congress through December 2018.

What we’re reading

What are the major trends in employee benefits in 2017? Here’s a sample, along with a link to listen to an hour-long podcast that provides additional detail.

How does the Affordable Care Act penalize young men and older women? John Graham provides the answer here.

Where does the public stand on the ACA? More divided than ever – with some very predictable patterns. See the latest survey here.


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