The AV Solution

“As a result of this law, no one with fully-insured HSA-qualified coverage in Maryland, (even women!) would be able to contribute to HSAs in 2018 because their plan covers vasectomy in full.”

William G. (Bill) Stuart

Director of Strategy and Compliance

March 29, 2018

A new idea floating in Washington DC could have a dramatic effect on the future of Health Savings Accounts.

Some members of the Trump administration and Congress are considering tying HSA eligibility to enrollment in a medical plan that falls below a certain actuarial value.

For those unfamiliar with the concept, actuarial value represents the percentage of total allowable charges that a medical plan with a particular benefit design pays for an average patient. In simple terms, a plan with a $1,000 deductible has a higher AV than a plan with a $5,000 deductible, since the first plan will pay 90% of the costs associated with a $10,000 medical bill while the second plan will pay only 50%.

In recent weeks, some Washington insiders have floated the idea of defining HSA-qualified medical coverage in terms of actuarial value rather than statutory minimum annual deductibles, statutory out-of-pocket maximums and a requirement that all services except select preventive care be subject to the deductible.

This proposal is intriguing. It offers the opportunity for millions more Americans to enjoy tax advantages by opening and contributing to HSAs. It also protects HSAs against potential state and federal benefit mandates that could disqualify medical coverage that otherwise meets the requirements of an HSA-qualified plan.

Millions of New HSA Qualifiers

Setting the threshold at an actuarial value of 70 would allow about 2 million individuals enrolled in ACA marketplace coverage and about 7 million on employer-sponsored plans to become HSA-eligible overnight. Suddenly, millions of individuals, particularly those who are covered on nongroup or small-group plans, would gain access to a tax-advantaged reimbursement account. They would, in effect, qualify for a discount card that would reduce their out-of-pocket expenses by anywhere from 20% to 35%, depending on their state of residence and income.

Think about that. The average Silver plan sold in ACA marketplaces has a deductible of $4,000 for self-only coverage and $8,300 for family coverage. Bronze plans (AV range of 58 to 62) have corresponding deductibles of $6,800 and $13,700. It’s difficult to imagine that these deductibles (assuming that Silver plan enrollees don’t have Cost-Sharing Reduction subsidies to offset some or much of their out-of-pocket costs) don’t pose formidable access to care for most enrollees, particularly when surveys show that nearly six in 10 Americans don’t have an extra $500 that they can access quickly in an emergency.

Opening and funding HSAs won’t eliminate this barrier for most individuals, but using an HSA to stretch their funds an additional 20% to 35% on every medical bill will make it easier for many to absorb these out-of-pocket costs.

More fundamentally, the concept will help protect and enhance HSAs.

Other Compliance Issues Solved

 HSA rules are written by the Internal Revenue Service (IRS), an agency that has jurisdiction in areas of tax law far beyond tax-advantaged medical accounts without the resources to produce guidance as fast as the law itself and technology change. As a result, the IRS hasn’t issued guidance on a number of issues that are important to insurers, employers, enrollees and HSA administrators. Among them:

Preventive prescription drugs: While many national and regional insurers have introduced preventive prescription drug riders, the IRS has provided almost no guidance on this topic. Statins and ACE inhibitors (see Q&A 27 in IRS Notice 2004-50) and insulin are specifically listed in IRS guidance as drugs that can be covered outside the deductible, but that’s the extent of the approved list.

Pharmacy benefits managers (PBMs) and insurers have created their own lists of  prescription drugs that they believe fall within the spirit of the vague notion of preventive prescriptions. Aetna first corresponded with the IRS a decade ago on this topic, and to date the IRS has issued no response to Aetna or additional guidance.

If the standard for HSA-qualified plans were based on AV, insurers and employers wouldn’t have to worry about an IRS list or potential compliance issues. As long as the plan falls below the target AV, the insurer’s or employer’s list doesn’t impact whether a particular plan is HSA-qualified.

Defining “preventive care” more broadly. A frequent criticism of all high-deductible plans is that the high up-front cost-sharing is a blunt instrument that creates a financial barrier to necessary care for individuals with chronic conditions. A growing number of insurers are studying (and some are launching) Value-Based Insurance Design (V-BID) plans that provide first-dollar coverage for services directly related to management of a chronic condition (think routine vision and podiatric exams for diabetics) while applying the deductible to other services (like day surgery, imaging and outpatient therapy for a knee injury or ruptured appendix).

Insurers moving in this direction have determined that investing in monitoring chronic conditions and identifying potential changes in conditions before they become acute (read: expensive to treat) makes economic sense to the insurers, as well as medical sense to the patient.

Under current law, insurers can’t offer V-BID HSA-qualified medical coverage. If the new standard for determining whether coverage was HSA-qualified were based on AV, insurers would be free to incorporate V-BID coverage into their HSA-qualified plans. This approach would help patients, who tend to shy away from HSA-qualified plans, often choosing coverage with lower-out-of-pocket financial responsibility but no tax-advantaged reimbursement account.

State mandate interference: The Maryland legislature passed a law in 2016 requiring gender equality in birth control. The law, which went into effect Jan. 1 of this year, required that male sterilization (vasectomy) be covered in full, just as female sterilization is covered, on all fully-insured coverage sold in Maryland. This law created an issue for HSA owners, as federal tax law doesn’t recognize vasectomies as a preventive benefit that can be covered below the deductible.

As a result of this law, no one with fully-insured HSA-qualified coverage in Maryland (even women!) would be able to contribute to HSAs in 2018 because their plan covers vasectomy in full. Fortunately, the IRS provided transitional relief, allowing legislators in Maryland (and four other states that had passed similar laws that flew below the radar) to carve out an exemption to the law for HSA-qualified plans if they choose to act before the end of next year.

Other state legislatures are considering other proposals to increase access to care on higher-deductible plans. An example is allowing a handful of diagnostic physician visits below the deductible. This approach may have merit from a medical standpoint, but absent congressional action, this benefit design would deny anyone covered on a fully-insured plan under that state’s jurisdiction the opportunity to open or contribute to an HSA.

If the federal government were to adopt a definition of an HSA-qualified plan tied to AV, these issues would vanish. State legislatures and regulators, insurers and employers would have the opportunity to design benefits and product that balance access, cost-sharing and premiums. The result would be a more robust market for HSA-qualified coverage options.

A second benefit to this approach is that it would relieve legislators and regulators (particularly insurance commissioners) from keeping up with rapid changes in the delivery of care or understanding federal tax law sufficiently to ensure that state initiatives don’t clash with federal requirements for HSA-qualified coverage.

Telemedicine: Virtual office visits have exploded in recent years, fueled by personal technology, a shortage of primary-care physicians, higher reimbursement levels for traditional office visits and the recognition that many conditions can be diagnosed and treated via algorithms in the hands of competent medical personnel.

The IRS, however, has issued no guidance on how telemedicine benefits impact HSA eligibility. We assume that individuals who want to open and contribute to an HSA can’t access telemedicine services for which they don’t pay the fair-market value for that service. In other words, these services can’t be covered in full or subject to a simple copay to encourage utilization.

If the definition of an HSA-qualified plan were tied to AV rather than regulations, insurers and employers would have more leeway in encouraging access without risking individuals’ HSA eligibility.

Onsite clinics: Larger employers provide onsite clinics to treat minor on-the-job injuries and short-duration illnesses without employees’ leaving the work site, as well as to give employees easy access to treatments such as chiropractic care and physical therapy, plus preventive care such as routine blood work, flu shots and mammograms (via contracts with mobile units). Under current law, employers must charge market rates for all services that don’t meet the narrow federal definition of “preventive.” Tying HSA qualification standards to AV would allow employers to provide financial incentives for employees to access this care without trying to determine what is “fair market value” for each diagnostic service or treatment.

Direct primary care: This movement has exploded during the last half decade, as a small but growing number of primary-care doctors leave the traditional reimbursement world and charge patients a flat monthly fee to cover all their services. Benefits include virtual visits (telephonic, Skype, e-mail, text) for convenience, home testing or monitoring of key treatment measures (blood INR, insulin, sleep, oxygen saturation) and in-depth conversations that identify patient preferences and lead to proactive strategies to build health rather than rushed visits to treat an existing illness. The IRS has issued no guidance on how direct primary care impacts HSA eligibility, though it has ruled that the monthly fee isn’t an HSA-qualified medical expense. Again, with an AV-defined standard for HSA-qualified plans, the need for guidance evaporates.

Stumbling Block: One Standard or Two?

Whether the HSA industry enthusiastically endorses this approach depends on the details. The key factor is whether the AV approach is in addition to  or in place of the current standards for an HSA-qualified plan.

If the AV approach is an alternative standard, it brings more flexibility but also more confusion to the market. The IRS will still have to issue guidance on many issues listed above for the plans following the traditional approach. Traditional HSA-qualified plans may become less attractive as the compliance risk increases absent IRS guidance. And the IRS may be tempted to issue even less guidance, reallocating resources away from HSA guidance because insurers and employers have an alternative means of creating compliant plans.

If the two-track system remains in place, a target AV of 70 (or so) would make sense as the line of demarcation between HSA-qualified and non-qualified plans.

If the AV approach replaces the current system, an AV of 70 would be problematic. In the ACA marketplace, the average deductible on Silver coverage (AV of 68 to 72) is more than $4,000 (more than $6,800 out-of-pocket) for self-only coverage and nearly $8,300 (approaching $14,000 out-of-pocket), according to Kaiser Family foundation. While employer-sponsored coverage offers lower financial responsibility, these numbers are still too high when $1,500/$3,000 and $2,000/$4,000 are the standard in group plans.

An AV of 70 might lower some enrollees’ premiums, but those individuals would be at risk of spending all their HSA contributions to reimburse immediate care, robbing them of the opportunity to build medical equity to reimburse future eligible expenses tax-free. Setting the AV ceiling at 70 would make those plans far less attractive to many current HSA-eligible individuals who would gladly pay their current higher premium in exchange for a lower ceiling on their potential out-of-pocket responsibility.

If AV were the sole standard for HSA eligibility, the AV would have to be set at a figure much higher than 70.

The advantage of this single-standard approach is that the IRS would be relieved of the burden of trying to play catch-up in writing guidance to adapt to new technology. Also, in the words of one IRS agent whose wisdom I absorb regularly at industry conferences, the IRS could stop playing “Whack-a-Mole” as it tries to stop those who creatively twist the lack of IRS guidance to justify their positions (such as “Telemedicine isn’t a benefit; it’s a program, and HSA eligibility is based on benefits rather than access to programs.” Wrong!).

With an AV standard alone, insurers and employers could become as creative as they wanted in balancing access and financial responsibility, as long as the plan stayed below the AV target.

We’re probably a long away from adopting this approach, not because it’s not a good idea, but rather because it’s likely that no medical coverage ideas are going to become law this year. There are simply too many competing political interests to unite the two major parties around meaningful long-term reform. At most (and even this appears to be a long shot), we’ll see movement on some fundamental Affordable Care Act (ACA) stabilization proposals like Cost-Sharing Reduction subsidy funding, grants for state invisible reinsurance pools and Section 1332 waivers.

In Washington, good ideas often end up in the last car of a train that doesn’t leave the station.

What We’re Reading

Paul Fronstin, a researcher who has been following HSAs since their inception at the Employee Benefit Research Institute, has figured out “How To Get People ‘Lined-Up Around The Corner’ For HSAs.” He’s almost certainly right because his most insightful observation mirrors what we’ve been saying for some time and repeat above.

Which health-related industry is held in lower public esteem than gun manufacturers? What percentage of Americans is ready to adopt a Medicare-for-All medical-coverage system? The Kaiser Family Foundation has the results of its latest public survey here.

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