The Moral Case for HSA Expansion

“Current law discriminates against working seniors who are enrolled in HSA-qualified plans based on their income and the size of their employers. This discrimination simply isn’t fair, especially when there is a fairly simple solution. As more Americans understand this issue, members of Congress will have an increasingly difficult time defending this ongoing discrimination.”

William G. (Bill) Stuart

Director of Strategy and Compliance

July 26, 2018

It’s tough to accuse Congress of doing nothing, as many critics do, based purely on legislative output. There’s a lot of action on Capitol Hill these days, even if these efforts don’t always result in bills that become law.

Earlier this month, the House Ways and Means Committee, the lower chamber’s most powerful committee, marked up and passed 11 separate bills that impact consumer-driven health. These 11 bills were then consolidated into two bills that, among other provisions:

  • Delay the Cadillac Tax for an additional two years.
  • Drop the requirement that HSA, Health FSA, and HRA participants secure a prescription to reimburse over-the-counter drugs and medicine without tax implications or penalties.
  • Increase HSA contribution limit to the statutory out-of-pocket maximum.
  • Eliminate the $500 ceiling on Health FSA carryovers.
  • Provide some flexibility to employers and employees when employees enrolled in a general Health FSA want to become HSA-eligible mid-year.
  • Allow patients to enroll in a direct primary care (DPC) program without disqualifying them from contributing to an HSA and designating DPC fees as qualified expenses (tax-free distributions) if they’re less than $150 per person or $300 per family monthly.
  • Define certain gym memberships, exercise equipment, and health instruction as a qualified expense subject to tax-free distribution from an HSA.

Unfortunately, the bills that the full House of Representatives is expected to consider this week don’t address, or don’t address adequately, three important HSA expansion measures that would provide those who most need the tax advantages associated with an HSA.

Every story has a villain that must be defeated or contained to prompt a just and proper outcome. Below we define each of these three issues.

Chronic Care

Villain: Current HSA rules don’t allow first-dollar coverage for any services except those deemed preventive care under federal law.

Impact: Employees with chronic conditions who enroll in HSA-qualified plans, particularly those whose employers offer only one plan, face substantial barriers to care if they want to manage their chronic conditions. For many, an HSA-qualified plan is a financial death sentence equal to the plan’s out-of-pocket maximum.

Solution: Change existing HSA rules to give insurers and employers the option to design plans that offer first-dollar coverage to high-value services that help manage chronic conditions.

The most recent figures (2012) from the federal Centers for Disease Control and Prevention indicate that about half of all adults have a chronic condition, and nearly one in four adults has two or more chronic conditions. While some of these conditions can be managed inexpensively, others require more expensive clinical and pharmaceutical management.

What are the top 10 chronic conditions in the US? In order of prevalence, they are: high blood pressure, high cholesterol, arthritis, coronary heart disease, diabetes, chronic kidney disease, heart failure, depression, Alzheimer’s disease and dementia, and chronic obstructive pulmonary disorder (COPD).

Anyone with one or more of these conditions who is enrolled in an HSA-qualified plan faces a financial barrier, deductible and often coinsurance, to receive care for any of these conditions. A growing number of plans offer a preventive pharmacy rider that covers prescriptions for some of these conditions (notably high blood pressure, high cholesterol, and diabetes) below the deductible, but they can’t cover physician visits, most tests, and non-pharmaceutical treatments below the deductible.

And since companies can’t adjust employer HSA contributions based on an employee’s (or her covered family members’) underlying medical conditions, these employees often face annual out-of-pocket expenses between $3,000 and $10,000. The median household income in the US in 2015 was $56,516. When this average family faces this level of out-of-pocket expense and another $4,800 to $12,000 in annual premium payroll deductions, the financial strain is obvious. Many families must choose between chronic disease management and other basic needs. Too often, the more urgent needs, like paying for housing and utility bills, and buying groceries, trump management of chronic conditions, which is important but not urgent.

Insurers know how to design these programs. It’s a concept called value-based insurance design (or VBID). Insurers study the treatment patterns of millions of patients with chronic conditions and have identified which services are high-value (the benefits in managing a chronic condition exceed the cost of the service).

Further, employers, particularly larger companies with access to claims trends within their employee population, know which conditions are drivers of their medical costs. This approach would allow them to open onsite clinics, or contract with convenient providers, to deliver value-based care at little or no cost. Opportunities might include mental health counseling, annual ophthalmic and podiatric physician visits for diabetics, and onsite mobile dialysis services.

If insurers and employers were given the option to design plans that allow for first-dollar coverage for certain chronic conditions, several positive things would happen.

First, employees would be able to better balance their finances and manage their conditions. They wouldn’t face a constant financial trade-off between urgent basic living expenses and important chronic care.

Second, employees would have the opportunity to accumulate tax-free savings to pay for other services. They’d still face a deductible when they receive care for strep throat, a ruptured appendix, a knee replacement, and chronic back pain. They would have the same opportunity as healthier HSA-eligible individuals to make tax-free contributions to an HSA to cover current or future qualified expenses with tax-free distributions.

It’s time to recognize that individuals with a chronic condition deserve the same opportunity to manage their health and pay for their qualified expenses through a tax-advantaged account as do healthier Americans.

The current bill allows insurers to cover up to $250 ($500 for a family contract) of high-value services like chronic care and telemedicine under the deductible. This dollar value is entirely too low to be meaningful.

Working Seniors HSAs

Villain: Current HSA rules don’t allow working seniors who are otherwise HSA-eligible but enrolled in any Part of Medicare to remain HSA-eligible.

Impact: Current law discriminates against working seniors who are enrolled in HSA-qualified plans based on their income and the size of their employers. This discrimination simply isn’t fair, especially when there is a fairly simple solution. As more Americans understand this issue,members of Congress will have an increasingly difficult time defending this ongoing discrimination.

Solution: Allow working seniors who are enrolled in Medicare Part A, Part B, or both to remain HSA-eligible.

I’ve spent a lot of time this spring in Washington and on the phone with White House officials and congressional leaders’ and committee staff members explaining this situation and outlining legislative solutions. And Congress has listened to an extent. The Ways and Means legislation includes a provision that allows individuals to enroll in Part A without losing their eligibility. This approach removes one level of discrimination (against lower-income working seniors), but not another (against working seniors at small companies).

A growing number of Americans are working past age 65. Some enjoy their work while many others simply don’t have adequate resources to finance their retirement, particularly those hit hard by the recession a decade ago. And half of all Americans begin collecting Social Security benefits before they turn age 65. When they do, they’re automatically enrolled in Medicare Part A. They can’t disenroll from Part A unless they disenroll from Social Security (and repay all benefits received to date).

This situation impacts lower-paid employees disproportionately, since they’re far more likely to start collecting Social Security benefits before their full retirement age (their 66th birthday for today’s retirees) than are their higher-paid counterparts who delay enrollment to increase their future monthly Social Security benefit.

And the impact is two-fold. Not only can they no longer make personal HSA contributions to reduce their taxable income, but they can’t receive an employer contribution either. So, while their 63-year-old co-worker receives a $1,500 employer contribution to help offset a $3,000 deductible, these working seniors are subject to the same $3,000 deductible without an employer contribution or any pre-tax payroll deductions from their income. It’s a double whammy.

The Ways and Means legislation allows working seniors to enroll in Part A and remain eligible. This solves the problem for all workers age 65 or older who are collecting Social Security benefits, are otherwise HSA-eligible, and work for companies with 20 or more employees. They can receive an employer contribution and set up personal pre-tax payroll deductions as well.

The proposed solution doesn’t help many employees at companies with fewer than 20 employees. In many cases, their employer’s insurer requires that they enroll in both Part A and Part B once they turn age 65 and are first eligible to enroll in Medicare. When working seniors in small companies are enrolled in both their employer’s plan and Medicare, Medicare is the primary coverage. All claims go to Medicare first, and only the portion of the claim that Medicare doesn’t pay is submitted to the employer’s insurer. In many cases, commercial insurers maintain their secondary position by requiring employees to enroll in Part A and Part B.

Thus, the proposed legislation doesn’t help many working seniors at small companies. They can’t receive an employer contribution or make personal pre-tax contributions. Unless the proposed legislation is revised to include Part B, the law will continue to discriminate against working seniors at small companies.

Actuarial Value

Villain: Current rules defining the requirements of an HSA-qualified plan are rigid, don’t take into consideration technology and market changes of the last 15 years, and exclude millions of Americans struggling to manage high out-of-pocket costs.

Impact: Each year, more and more Americans face out-of-pocket expenses far in excess of the minimums for HSA-qualified plans without access to the tax advantages that an HSA offers.

Solution: Create a second approach to creating an HSA-qualified plan based not on prescriptive benefit designs but rather on the portion of claims for which the average covered individual is responsible.

The intent of the original legislation is clear: Consumers must have “skin in the game” and a real incentive to become better consumers before they can open and contribute to an HSA. And at the time of the original legislation, a deductible of $1,000 ($2,000 for family coverage) was indeed, as defined by the legislation, a “high-deductible health plan.”

Times have changed. The average deductible in the small-group market today is around $2,000/$4,000, figures higher than the inflation-adjusted HSA-qualified plan minimum deductibles of $1,350/$2,700 in 2018 and 2019. The average Silver plan in ACA marketplaces has a deductible in excess of $4,000/$8,200. And these figures don’t include coinsurance after the deductible, a level of cost-sharing rarely imposed before 2003 but now common in nearly all ACA marketplace and small-group plans and increasingly common in large-group plans as well.

The rigid prescriptive approach of the 2003 HSA enabling legislation creates two fundamental problems.

First, millions of Americans have high out-of-pocket costs, as high if not higher than those facing HSA-qualified individuals, without the opportunity to contribute to an HSA to reimburse those expenses with pre-tax dollars. Though they have HSA-level cost-sharing, some component of their benefit design, perhaps high-value telemedicine services are covered in full or high-value generic prescription drugs are covered subject to a $5 or $10 copay, disqualifies the plan.

Second, the current rules don’t allow insurers and employers to offer high-value care with lower cost-sharing to drive more effective care. Insurers and employers can’t use copays or full coverage as financial incentives to deliver more effective and cost-efficient care at lower total cost.

The simple solution is to allow a second approach to designing HSA-qualified plans based on actuarial value. The standard would match the original law’s intent: to provide a financial opportunity for individuals willing to take more responsibility for their medical spending. It would be based on the actuarial value (AV) of the plan, which is simply a measure of what percentage of claims the plan pays on average. A plan with an AV of 70 (an ACA marketplace Silver plan) pays, on average, 70% of the total medical costs that a patient incurs; the patient pays the remaining 30%. If the plan has a $3,000 deductible and the patient incurs $2,000 of expenses, the plan pays 0%. If the patient incurs $100,000 of expenses, the plan pays 97%. On average, though, a plan with an AV of 70 pays 70% of all claims.

As a bonus, the AV approach would eliminate the needs for clarification on many new issues on which the HSA and insurance industries have been asking the IRS for clarification for years. Can telemedicine be offered below the deductible (for example, subject to a $10 copay)? How does direct primary care, which offers the promise of more low-cost intervention and more active price-shopping for specialty care, fit into an HSA-qualified plan? What is the definition of a preventive prescription that can be offered under the deductible? Can certain high-value services to manage chronic conditions be covered under the deductible? How do state mandates that conflict with current rules impact HSA eligibility?

An AV approach would open the HSA opportunity for millions more Americans. How many? Those who’ve studied the issue believe that setting the AV at 70% (a Silver plan on the ACA marketplaces) would allow an additional 10 million Americans to open HSA, while an AV at 80% (a Gold plan) would open the doors to 40 million Americans.

Remember, these people are facing out-of-pocket costs higher, typically much higher, than the minimum levels for an HSA-qualified plan. They’re barred from opening, contributing to, or receiving an employer contribution to their HSA because one more of their non-preventive benefits are covered under the deductible at a richer benefit level (typically a copay rather than subject to the deductible).

The Ways and Means package includes a provision that would define catastrophic plans and Bronze plans (AV of 60%) as HSA-qualified. It’s unclear whether this provision is limited to plans purchased in the nongroup market or includes employer-sponsored coverage with an AV of 60% or less.


It’s important to note that these proposals, and others that increase access to and the value of an HSA, are not the answer to the high costs that plague our medical-delivery system. HSAs are not the answer to the hardships that employers and employees face in the medical-finance system.

Rather, HSAs are a tool to help employees manage their out-of-pocket expenses. And HSA-qualified plans give patients an incentive to be more prudent consumers, since they pocket the initial savings that they generate when they make decisions around whether and where to access initial and ongoing care. This is precisely the type of behavior that Congress should be encouraging.

No, HSAs aren’t the answer, but they are an important ingredient in any recipe to reducing the growth of medical expenditures and helping patients manage those costs. And Congress should take prudent steps to encourage HSA expansion.


One thought on “The Moral Case for HSA Expansion”

  1. Rolsndo says:

    Bravo Bill
    Thank you for your updates and clarity of thought
    Always enjoy your comments

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