Higher Out-of-Pocket Costs on HSA-qualified Plan? Check Your Facts!

Though burdened with the negative label High-Deductible Health Plans, HSA-qualified coverage has statutory caps on out-of-pocket costs that are far lower than traditional plans'.

Part of the problem rests with its name. In the 2003 legislation that created Health Savings Accounts, HSA-qualified plans were labeled high deductible plans. Today, it seems laughable to refer to a plan with a $1,000 self-only and $2,000 family deductible as high deductible. The Kaiser Family Foundation reports that, in 2019, the average deductible for employees covered by a plan with a general deductible was $1,655. And 45% of all workers are covered by plans with deductibles of more than $2,000. (See the discussion preceding Figure F for more information.)

The back-end of patient financial responsibility, the out-of-pocket maximum, receives far less attention. Yet HSA-qualified coverage provides far more protection to patients with high claims costs than does the Affordable Care Act, legislation passed nearly seven years later that its supporters touted as an effort to help patients manage costs.

Defining Terms

People outside the insurance industry often struggle with terms thrown at them during open enrollment: Copay. Coinsurance. Deductible. Out-of-pocket maximum. So lets take a minute to define them.

Copay: Patients pay a fixed amount each time they receive a service. The insurer pays the balance of the bill, regardless of the amount. For example, you and I both have $250 high-tech imaging copays on the first day of our plan year. You go to an independent, free-standing imaging center for a $600 MRI and I choose an academic medical center that offers the same service fro $3,000. You and I each pay $250 and our insurer covers the remaining $350 of your bill and $2,750 of mine.

Coinsurance: Patients and insurers split the cost of each service. For example, you and I have 20% coinsurance, rather than a copay, on high-tech imaging. In the example above, you pay $120 (20% of $600) and I pay $600 (20% of $3,000) for our respective MRIs.

Deductible: Patients are responsible for the first portion of covered services before the insurer begins to pay. For example, you and I both have a $1,500 deductible, then 20% coinsurance after that amount. Your insurer applies $600 toward your $1,500 deductible, leaving you with another $900 to satisfy before you reach your deductible. My insurer applies the first $1,500 of my MRI toward the deductible, then requires me to pay an additional $300 (20% of the remaining $1,500), a total of $1,800.

Out-of-pocket maximum: This figure represents the most that patients pay for covered services with contracted providers during the plan year. It's the sum of all copays, coinsurance, and deductibles. It doesn't include services that aren't covered by insurance (for example, hearing aids and foot orthotics usually aren't covered), benefits in excess of plan limits (for example, 10 physical therapy visits beyond the plan's limit of 30), services from doctors outside the plan's network, or penalties assessed to patients for failure to follow plan rules.

Statutory Out-of-Pocket Maximum

One of the selling points of the Affordable Care Act was the imposition of a federal limit on patients' out-of-pocket costs. Prior to the law, the federal government didn't set any limits (except on H SA-qualified coverage), although many states did. The federal limit is adjusted annually and currently stands at $8,150 per person and $16,300 per family. In other words, if a patient incurred $1.2 million of covered expenses during the year, she would pay no more than $8,150 of that amount. Her insurer would be responsible for paying the remainder.

The Health Savings Account legislation also set a limit on patients' financial responsibility for the cost of their covered care. That figure, adjusted annually, is $6,900 for self-only contracts and $13,800 for family contracts this year. Note that these limits apply to contracts, not people. In other words, whereas a patient was capped at $6,900 if she were covered on a self-only contract, she might be responsible for up to $13,800 if she were enrolled in family coverage.

Effective in 2016, the Affordable Care Act out-of-pocket ceiling was applied to HSA-qualified plans. A family plan can have an out-of-pocket maximum as high as $13,800 this year, but the ACA's $8,150 ceiling per patient limits any one family member's total financial responsibility.

The Further Effect of the ACA

Prior to passage of the Affordable Care Act (whose 10th birthday will be celebrated next week), out-of-pocket maximums meant little in nongroup or employer-sponsored coverage. Nearly all plans capped patient financial responsibility at levels far below the ceilings set by the federal tax code for HSA-qualified plans or state law.

But the ACA changed all that by requiring insurers to accept all applicants, regardless of risk, in the nongroup market and not to consider their risk (medical history and current conditions) when setting their premiums. And since insurers had to offer the same plans in the nongroup market as they did in the small-group market (companies with 50 or fewer employees), these rules changed the nature of employer-sponsored coverage as well.

Without the ability to charge a premium based on risk (as insurers offering all other forms of coverage can), medical insurers were left with three levers to manage costs: out-of-pocket costs, network, and prescription-drug formulary.

The result? Markets that had offered plans with low deductibles, no coinsurance, and low out-of-pocket maximums were turned upside down. Today, many plans in the nongroup/small-group market have deductibles of $2,000 or more for individuals, along with in-network coinsurance up to the out-of-pocket limits imposed by Health Savings Account legislation or the ACA.

Imagine a family in the nongroup market with a $3,000 deductible and no coinsurance in 2010. Today, the family would expect to pay about $3,600 if the figure rose with general inflation or more likely $4,500 if it increased with medical inflation. Instead, the family's deductible is probably higher than $4,500, and their coverage most likely includes coinsurance up to a maximum of $8,150 per member and either $16,300 (non-HSA-qualified plan) or $13,800 (HSA-qualified coverage).

Those figures would be difficult for any family to absorb, particularly if the medical condition is ongoing.

The Bright Side

But note that the family covered by the HSA-qualified plan pays $2,500 less than the family whose out-of-pocket maximum is governed by the Affordable Care Act. Furthermore, that family can divert $7,100 from taxable income into a Health Savings Account, thus saving about 30% (more than $2,000) in taxes. Combine the $2,500 less in out-of-pocket responsibility with the $2,000 in tax savings and the family covered by an HSA-qualified plan pays more than $4,500 less in medical costs in a bad claims year.

Their financial responsibility is high, but a lot lower than it would be without the protection of Health Savings Account rules.

I'm director of strategy and compliance at Benefit Strategies, LLC, a provider of Health Savings Accounts and other tax-advantaged benefits. You can read my biweekly Health Savings Account GPS blog and subscribe by clicking here and my weekly HSA Wednesday Wisdom and occasional Healthcare Update column published on LinkedIn. I've also created your Health Savings Academy, an educational resource for financial and benefits professionals, as well as employers and account owners.My book, HSAs: The Tax-Perfect Retirement Account, is the definitive guide to navigating the intersection of Health Savings Accounts, Medicare, and retirement planning. It's available in book and e-book forms from Amazon.

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