How to Kill the HSA Opportunity on Federal Exchanges in Three Steps
William G. (Bill) Stuart
Combining gamification and education to optimize employee benefits performance.
Health Savings Accounts are the only tax-advantaged accounts available to nongroup buyers of medical coverage. But the federal government is enacting policies that will limit or eliminate HSA-qualified plans in federal-facilitated marketplaces.
Consider the tax deduction for a home mortgage. Taxpayers who pay 30% of their income in federal and state income taxes and itemize their deductions pay 30% less than those who don't itemize. For many families on the cusp of home ownership, the tax deduction reduces their net cost enough that they can afford to obtain a mortgage to buy a home.
The same concept applies to reimbursement of medical expenses. Tax-advantaged accounts - Health FSAs and Health Savings Accounts - allow individuals with low, medium, and high out-of-pocket expenses alike to save 30% (in our example - it may be more or less, depending on your tax situation) on every medical claim, dental procedure, pair of glasses, and over-the-counter medication that they purchase. These savings add up over time and help patients who otherwise might stretch out a prescription (think of a diabetic injecting half the recommended dose of insulin to save money) or foregoing ongoing care for a chronic condition (stopping mental-health visits altogether). [Note: As a bonus, these tax benefits are available even to taxpayers who don't itemize their deduction, as most taxpayers no longer do.]
Nobody (presumably) wants patients who need treatment to consume less-than-appropriate levels of high-value care because of their out-of-pocket financial responsibility. Yet the Biden Administration has made some decisions that will reduce the number of Americans who buy medical coverage in the nongroup market from taking advantage of a potential tax deduction for their care. Note that these laws are being written by the executive branch, not the people's elected representatives in Congress.
Let's look at the administration's recent policies and their effect on nongroup purchasers.
The Role of HSA-qualified plans in the Nongroup Market
Why are HSA-qualified plans important in the nongroup market? Most people who purchase nongroup coverage don't have access to a traditional employer-sponsored plan. In other words, they are sole proprietors, own businesses whose financial activity flows through their personal tax return (members of a Limited Liability Company, partners in a partnership, and 2%-or-greater owners of a Subchapter S corporation), are contract ("Form 1099") employees, or work part-time and don't qualify for their company's benefits. These individuals don't have access to the other common reimbursement accounts - Health FSAs and Health Reimbursement Arrangements - that employers can sponsor for their employees ("W-2" workers).
Thus, Health Savings Accounts are the only opportunity that these individuals have to reduce their taxable incomes and pay their qualified expenses with tax-advantaged dollars. This concept is particularly important in the nongroup market, where deductibles for the most popular (Silver) plans average more than $4,750 for self-only coverage (and average more than $7,050 for Bronze self-only coverage).
A tax-advantaged account can take the sting out of that potential out-of-pocket financial responsibility. A nongroup purchaser in the 24% federal tax bracket living in a state with a flat 6% income tax would save $1,155 if she contributed the maximum $3,850 in 2023. In other words, depending on how you look at the situation a Health Savings Account would give her either
Yet the Biden Administration is continuing to enact regulations that restrict this opportunity, thereby increasing the burden of out-of-pocket medical responsibility and, in many cases, increasing medical debt. The result? Less appropriate high-value care, more personal bankruptcies, more premature withdrawals from tax-deferred retirement accounts (included in taxable income and generally assesses an additional 10% tax as a penalty), and additional emotional despair.
That's hardly a political position to advance. Yet it's precisely the effect that these regulations have on hard-working Americans with out-of-pocket health-related expenses.
Actuarial-Value Ranges
Metallic tiers are a key feature of the federal-facilitated marketplaces operated in 38 of the 50 states. These exchanges label four distinct ranges of actuarial values. In simple terms, actuarial value, or AV, refers to the percentage of total claims paid by the insurer (the balance is the patient's responsibility).
For example, consider a plan whose enrollees incur $100 million of claims during a year. Patients pay $20 million in the form of deductibles, coinsurance, and copays. The insurer pays the remaining $80 million. The AV of this plan is 80%.
The federal metallic-tier standard is as follows:
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The purpose of metallic tiers is to sort plans into tight ranges to help buyers compare plans. Within the silver tier, for example, deductibles and coinsurance may vary, but on average patients will pay the same amount out-of-pocket for these plans. This knowledge allows a buyer to determine a comfortable level of personal financial responsibility and then choose a plan from within that metallic tier based on premium, network, and other factors.
These tight ranges affect HSA-qualified plans because they don't have as much flexibility in plan design as other coverage. For example, if a non-HSA-qualified Silver plan's AV falls to 66%, it can reduce the copay for an office visit or eliminate cost-sharing for certain prescriptions to boost the AV to 68%. Similarly, if the AV falls to 64%, the insurer might raise copays or increase the deductible or out-of-pocket maximum to drop the AV to 62% and reclassify the plan as Bronze.
HSA-qualified plans' cost-sharing can be manipulated as well. But all services except select preventive care must be applied to the deductible. Thus, altering copays isn't an option (at least until the deductible has been satisfied, when copays can be applied to services). And although HSA-qualified plans can adjust deductibles and the out-of-pocket maximum, the ceilings on these plans ($15,000 out-of-pocket maximum for a family contract in 2023) are far lower than for all other plans ($18,200 in 2023).
Thus, it becomes increasingly difficult for HSA-qualified plans to remain within the specified ranges. If they can't fit within those bands, these plans can't be sold on any federal-facilitated exchanges.
Standardized Plans
The Biden Administration is further narrowing the range of products that can be sold. It now requires certain standard plans within each metallic tier. In other words, actuarial value is no longer sufficient to place available plans into cost-sharing categories. Now, plans must have identical cost-sharing (e.g., the same deductibles, coinsurance, and out-of-pocket maximum, and the same financial treatment for services post-deductible).
The problem? No HSA-qualified plans are included in the standard menu. This means that even in the Bronze tier, where patients are responsible for roughly 40% of the cost of covered services, individuals and families won't be covered by a plan that allows them to open and fund a health Savings Account. That's bad news ($1,155 of bad news in our example above) for families struggling to pay their medical bills and maintaining their family income as a family member is injured or ill and other family members try to offer physical and emotional support.
The regulations do allow insurers to allow a limited number of non-standard plans - at least for 2023. But these plans are labeled non-standard and are placed below the standard plans on each metallic tier. Thus, the rules don't prohibit HSA-qualified plans, though they don't receive the seal of approval (standard) that the administration offers to plans that cannot be paired with a reimbursement account that reduces patients' net out-of-pocket expenses.
Expect the Biden Administration to issue new rules in early 2023 for the 2024 open-enrollment period that further restrict - and perhaps eliminate - non-standard plans altogether.
Political Motives
It's dangerous to try to speculate on the political motives of policymakers who pass laws or issue regulations. Clearly Biden Administration officials want to reduce confusion by adopting the same approach that the National Council of Insurance Legislators (NCOIL) created for Medicare supplement plans. NCOIL devised a menu of standardized plan designs (identical coverage for services within each category) so that consumers in 47 states (exceptions: Massachusetts, Minnesota, and Wisconsin) can eliminate plan design and the often-confusing cost-sharing features from consideration and allowing them to focus on other factors (like brand recognition and customer service). And requiring standard plans with the standard label certainly both simplifies the selection process for consumers and gives certain plans an official seal of endorsement.
On the other hand, the standard designs reflect the views of regulators, not buyers. Henry Ford simplified consumer choice in car colors in the 1920s by making the Model T in black only. Competing car companies offered more color options and attracted consumers who were willing to veer from the market standard (set by a seller facing competition, not a government monopoly) to purchase a product that more closely met their needs. Buyers of nongroup coverage are seeing their product options limited not by a single insurer hoping that standardization reduces costs or simplifies the buying process, but by unelected officials whose decisions are law and from which no buyer or seller can deviate.
The Bottom Line
Keep an eye on the Biden Administration's future efforts in this area. We're likely to see further restrictions (such as outlawing non-standard plans) rather than more opportunities for buyers to choose a plan that meets their needs. And the most noticeable casualty will be HSA-qualified plans and the opportunity for buyers to reduce the net cost of their medical care.
Thanks for reminding us all to keep our eye on the bigger picture!