How Does Health Care Reform Impact HDHPs and HSAs?

Will HSA qualified health insurance plans and Health Savings Accounts (HSA) still exist after the majority of the remaining PPACA changes are implemented in 2014?  That’s a question that we often hear from Colorado health insurance clients who are concerned about their existing HSA qualified high deductible health plan (HDHP)/HSA, as well as people who are considering an HDHP but uncertain about the future of that type of health insurance.

In terms of direct impact, the PPACA changes very little about HDHPs and HSAs.  There are only two specific changes, and both have already been in effect for almost two years (since January 2011):  OTC meds can no longer be purchased with HSA funds, and the penalty for withdrawing money from an HSA for non-medical expenses – prior to age 65 or the account-holder becoming disabled – increased from 10% to 20% (income tax is also collected – and always has been – if the money is withdrawn from the HSA for non-medical expenses, regardless of the age of the account-holder).

That’s it as far as direct changes to HDHPs/HSAs from the PPACA.  And we know that nothing in the healthcare reform law will impact existing HSA balances or use.  If you have an HSA that you’ve been funding, you’ll still have it after the PPACA is fully implemented.  Even if you no longer have an HDHP (either because you opt for something else or because your health insurance carrier stops offering the HDHP option), your balance with your HSA administrator will still be available for you to use to pay future qualified medical expenses.  So for Colorado health insurance clients looking for a tax-advantaged way to set aside money to cover future medical bills, an HDHP paired with an HSA is still a very good choice.  At some point in the future, if the HDHP is no longer available, you would not be able to contribute additional funds to the HSA.  But money you had already set aside in the HSA would still be available for medical expenses, or as an additional retirement account.

There are several aspects of the PPACA that could possibly impact HDHPs/HSAs.  This article is a year old, but it’s still a good resource with a lot of information.  One of the potential problems for HDHPs is the Actuarial Value (AV) requirements in the healthcare reform law.  In order to be sold in the health benefits exchanges, health insurance policies will have to have an AV of at least 60%.  That means that the minimum plan would have to pay at least 60% of the average expected medical costs of its policyholders.  This is harder for high deductible plans simply because those plans are designed to have the patient pay a larger portion of the bills than traditional, lower-deductible health plans.  The trade-off is that the insured pays a lower premium, and the increasing popularity of the HDHP/HSA over the last several years indicates that there is a significant portion of the population that is happy to take on additional risk in trade for lower health insurance premiums.  In order to have AVs that are high enough for the plans to be sold in the health insurance exchanges, the HDHPs might be forced to have lower deductibles.  That would lead to increased premiums, which might reduce the attractiveness of HDHPs.  CMS has suggested that a portion of employer contributions to employees’ HSAs should be counted in the numerator of the AV calculation (which would increase the AV of the policy – see page 9 of the CMS report).  However, employee contributions would not count, and nothing contributed to an HSA by a policy-holder in the individual market would count.  In the small group market, the PPACA will cap deductibles at $2000 per person and $4000 per family.  Currently, Colorado HSA-qualified health insurance plans can have maximum out-of-pocket expenses of up to $6050 for an individual and $12,100 for a family.  So some of the higher out-of-pocket HSA-qualified options that are currently being offered by small employers will likely have to lower their deductibles – which will mean higher premiums.

Another potential problem arises with compliance with the medical loss ratio (MLR) rules that have been in effect now for almost two years.  Most – but not all – health insurance carriers were already meeting the MLR guidelines before they were implemented.  The ones that are still not meeting the requirements (at least 80% of premium dollars have to be spent on medical expenses, and 85% for large groups) have to refund the difference to their policyholders.  Colorado health insurance broker Jim Sudgen explains how HDHPs have a harder time than traditional health insurance policies when it comes to hitting the MLR targets.  But it appears that HDHPs will get at least a partial break with regards to the MLR, thanks to a “credibility adjustment” for higher deductible health plans.  The issue of MLRs and HDHPs is addressed on pages 19/20 of this Congressional Research Service report, and the credibility adjustment is offered as a possible remedy for the problem.  The authors of the report seem to think that in the long run, HDHPs will be able to meet the MLR requirements and that the concerns about HDHP viability are overblown.

Our own family had an HDHP/HSA combination for several years.  We loved the simplicity of the plan – it had a high deductible and then 100% coverage with no separate deductibles for things like prescriptions.  We also liked the price, as our HSA qualified plan was less expensive than most of the other comparable-quality individual health insurance policies available in Colorado at the time.  But over the last few years, we saw the price on our HSA-qualified health insurance plan rising faster than similar plans that were not HSA-qualified.  One possible reason is the family deductible on HSA-qualified plans.  We have a family of four, and although our deductible was relatively high (it ranged from $3000 to $7000 over the years we had the plan), it was a combined deductible for all of us.  High deductible plans that are not HSA-qualified can have individual deductibles, which increases the out-of-pocket exposure on the policy and thus leads to lower premiums.  We eventually switched to Anthem Blue Cross Blue Shield’s Core Share policy, which has individual deductibles instead of a family deductible.  (Don’t read too much into what we have because we got that plan when it was priced really low. There are a lot of great health insurance policies in Colorado.) We can no longer put money into our HSA (although we can still pull money out of the HSA if we incur medical costs), but our premiums are about $150/month lower than they would be with the HSA-qualified health insurance plan.  So although the HDHP/HSA combo still offers great tax advantages, it’s reasonable to assume that other families are having similar experiences and choosing to switch to plans that are not HSA-qualified.  It remains to be seen how the AV “metal” designations (bronze, silver, gold, platinum) will impact the individual health insurance market, and specifically the HDHP market.

Taking all of this into consideration, I would say that a lot remains to be seen as far as HSAs and the healthcare reform law.  If you’re considering a Colorado HSA-qualified health insurance plan, now is a great time to get one in place and contribute as much as you can to the HSA.  Any money that remains in the HSA rolls over from one year to the next and would be available to pay medical expenses as time goes on, regardless of the future of HDHPs.

About Louise Norris

Louise Norris has been writing about health insurance and healthcare reform since 2006. In addition to the Colorado Health Insurance Insider, she also writes for healthinsurance.org, medicareresources.org, Verywell, Spark by ADP, and Boost by ADP, and Gusto. Follow on twitter and facebook.

Comments

  1. Louise:
    I am curious about your opinion (and others as well) on offering a traditional plan having first dollar coverage, unlimited preventive and lifetime benefits, etc. In other words, ACA compliant.
    Does the ACA say anything about a person having additional coverage? For example, a plan which would be primary, first-dollar coverage, with limited paid-up benefits increasing monthly.
    These paid-up benefits would also be first dollar coverage.
    However, if the insured voluntarily elects not to make claims, when, indeed, he did have the opportunity, he chooses to increase his deductible (for purposes of premiums only but in reality he still has first dollar coverage), in order to save on premiums.
    The coverage is still first dollar coverage. The insured is voluntarily choosing not to make claims. How might this affect the AV of the plan? Would it be determined on one’s opportunity to submit claims on merely on the claims actually submitted?
    Don Levit

    • Don, as always, you make good points and bring up good questions. I don’t know all of the answers, and from the reading I did on this subject while I was writing the post, I’m not even sure that the people creating the laws and writing the reports have answers for those questions. The link that I included above to “credibility adjustment” has an interesting sentence regarding deductibles. If you scroll almost all the way to the bottom, in the footnotes section, number 8 says that the methodology is “based on the assumption that few insurers would have had plans with deductibles greater than $2,500…” So I think that the idea of catastrophic plans isn’t really even in the picture as far as the ACA is concerned. The possibilities of dual coverage, or of an insured choosing not to make claims in order to lower his premiums, haven’t come up in anything that I’ve read so far regarding the ACA. Everything seems to be geared more towards the comprehensive, low deductible end of the spectrum. The $2000 cap on deductibles for small businesses is a good example. I think it’s unfortunate, as high deductible plans can be a great fit for some people (although they only work well if the insured is well-informed as to the nature of the policy and capable of covering the out-of-pocket costs should the need arise).

  2. I have personally been using a HDHP and a HSA plan for a few years now, and every year I am worried they are going to make changes that continue to degrade the setup. My plan originally was the cashflow health costs as much as possible while maxing out my HSA, hoping to use it years down the road when I needed it most. Tax deduction and tax free growth / distribution. Hard to beat that.

    They already nerfed it when they changed the early withdrawal penalty from 10%-20%, and what is to say that within the next 20 years they don’t absolutely knee cap it?

    My question is, how confident can someone be at putting thousands of dollars into an HSA over years when they can just change the plan? It would be like saving in a ROTH IRA for 30 years and then the govt deciding that now they are going to go ahead and tax withdrawals.

    • Good questions Eric, and I would say that nobody can really say for sure what things will look like in 30 years. However, unlike a Roth, you still have to pay income tax on the money in an HSA if you pull it out during retirement for non-medical purposes (ie, if you’re treating it like a retirement plan, it’s more like a traditional IRA than a Roth). It’s true that they increased the early withdrawal penalty for people who take money out prior to retirement age for non-medical purposes. But that doesn’t impact the ability of an HSA to be a good additional source of income in retirement, since the penalty wouldn’t apply then. And the money can always be pulled out tax-free if it’s being used for qualified medical expenses. I suppose it’s possible that years down the road they could change things regarding HSAs, but the money is still yours, and having a backup supply of money to cover medical expenses (even if it were only allowed for that purpose) seems like a worthy goal.

  3. Kevin Higgins says

    Louise – you indicated that in the small group market in CO that deductibles will be capped at $2000 for an individual. Is it your understanding that this cap applies both in and outside of the exchange?

    I keep getting conflicting answers on that.

    • Kevin – yes, my understanding is that the $2000 deductible cap for an individual ($4000 for a family) in the small group market applies both in and out of the exchange.

    • Just to clarify – the cap on deductibles in the small group market is nationwide, not just in Colorado. I write from a Colorado perspective (and we’ve had lots of healthcare reform here at a state level over the last few years), but changes stemming from the ACA apply in all states.

Speak Your Mind

*