If HSAs: Are They a Good Fit for You? made you wonder whether or not opening a health savings account might be a good strategy for funding qualified medical expenses before and after retirement, read the following first.
HSAs are Popular
Many believe that containing health spending requires engaging consumers in their healthcare expenditures. A high-deductible health plan and a health savings account do that and are gaining in popularity. AHIP’s 2011 Census Report shows that the number of HSAs has grown every year since the inception of HSAs in 2003. As of January 2011, per the AHIP, 11.4 million Americans had a plan pairing an HSA with an HDHP, double the number since January 2008 and a 14% increase over the prior year. More than 10% of all newly purchased health plans are HDHP/HSA.
HSA advocates believe that the growing interest in HSAs is due to the growing number of consumers who want more control over their healthcare dollars. HSAs are a market-based solution. When consumers are directly tied to costs, they make more cost-effective choices.
Not So Fast
In a December 7, 2011 story, Investor’s Business Daily reports:
A new Obama administration rule could drive out of the market the low-cost, high deductible plans that are supposed to be available under ObamaCare. That would likely mean a sharp jump in taxpayer subsidies.
People with high-deductible and HSA plans could lose their coverage.
This rule requires that in 2012 small group or individual insurers must spend at least 80% — the medical loss ratio (MLR) — of insurance premiums collected on medical costs. Large groups must spend more, 85%, based on the premise that many administrative costs are fixed. The remaining percentage is allocated to all administrative overhead.
ObamaCare requires health plans to cover “essential benefits’” – a comprehensive list of preventative services — with no cost sharing. Currently, HSAs allow, but do not require, HSA/HDHPs to cover certain preventative services. Requiring HSA/HDHP plans to cover all preventative services on a first-dollar basis will increase the cost of HSA/HDHP plans and make them less attractive, forcing premium payers to send more money to the insurance company and leaving less money for their HSA.
Medical Loss Ratio vs. Actuarial Value
In order to understand the ramifications for HSAs due to this recent ruling from the Department of Health and Human Services, one needs to understand two concepts.
According to www.healthcare.gov, a federal government website managed by the U.S. Department of Health & Human Services, important definitions are as follows:
Medical Loss Ratio (MLR)
A basic financial measurement used in the Affordable Care Act to encourage health plans to provide value to enrollees. If an insurer uses 80 cents out of every premium dollar to pay its customers’ medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%. A medical loss ratio of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions. The Affordable Care Act sets minimum medical loss ratios for different markets, as do some state laws.
MLR is the proportion of an insurer’s income from premiums paid in that it uses to pay out medical claims.
The percentage of total average costs for covered benefits that a plan will cover. For example, if a plan has an actuarial value of 70%, on average, you would be responsible for 30% of the costs of all covered benefits. However, you could be responsible for a higher or lower percentage of the total costs of covered services for the year, depending on your actual health care needs and the terms of your insurance policy.
Actuarial value is the proportion of the total cost of covered benefits that are paid by the insurance company.
HDHP/HSA and the Medical Loss Ratio and Actuarial Value
Insurance carriers are classified by actuarial value. Actuarial value takes into account the benefit package: deductibles, copayments, and coinsurance differences for each plan. Higher deductible plans have lower actuarial values because they are not designed to pay for routine expenses, only catastrophic medical expenses, although many are combined with a health savings account which is intended to pay for routine care.
A plan with an actuarial value of 60% (a bronze plan) means the insurance carrier pays 60% of healthcare costs and the policyholder pays 40%. A silver plan can have a 70% value. Under the new HHS rule, bronze and silver plans must now meet the 80% medical loss ratio. However, the MLR calculation only includes payments made by insurers in the medical expenses total, not any medical expenses paid by individuals before they reach their deductible. Historically, only 5% of HSA policies even have claims above the policy’s high-deductible amount. This HHS rule makes it almost mathematically impossible for many HDHP/HSAs to meet the 80% medical loss ratio.
Self-insured or ERISA plans are exempt from the MLR regulation, so large employers whose employees have an HSA can keep them; that is: unless large employers stop providing health insurance coverage – since the relatively small penalty for not providing health insurance is less expensive per employee than purchasing health insurance.
Large insurers will be able to offset MLR credits from high MLR plans against high-deductible health plans that inherently have lower MLRs.
It will be difficult for many HDHP/HSA plans to meet the 80% MLR. If it’s too difficult, insurance companies may not offer them. That would mean that the most affordable policies would no longer be available.
Of great concern is that without a low cost option, more individuals will choose to go without healthcare insurance, and thus, the average cost of a health plan in the ObamaCare exchanges will grow. And, when fewer people can afford to buy healthcare, government healthcare subsidies will have to increase.
ObamaCare and Healthcare Exchanges
ObamaCare requires that starting in 2014 states must set up health insurance exchanges, marketplaces where consumers and small businesses can shop for government-approved healthcare coverage. This quasi-governmental entity will be a clearinghouse for purchasing health insurance in each state.
Exchanges could effectively put health insurance — and the delivery of care — under the control of the federal government. HHS would dictate what these healthcare policies look like and how doctors would treat patients with exchange-provided coverage.
As of December 2011 only thirteen states have passed exchange legislation since health reform became law. Because the legislation is still being debated legally, many states are reluctant to spend money on a program that may be revamped or eliminated. Other states are taking no implementation steps until the Supreme Court considers the constitutionality of the law, probably in June 2012. If a state refuses to set up its own exchange, ObamaCare allows the federal government to come into the state and set one up.
Exchanges must be available in January 2014, however they must be HHS certified by January 1, 2013. And, the last opportunity for a state to receive federal assistance to build an exchange is June 30, 2012.
The PPACA (Patient Protection and Affordable Health Care Act) legislation further stipulates that people can only access billions of dollars in tax credits and subsidies earmarked for the purchase of policies by shopping in the state-run marketplaces. However, the text of the law stipulates that only state-based exchanges — not federally run ones — may distribute credits and subsidies. What happens with credits and subsidies if the federal government sets up a state exchange is not clear.
Another concern is that without the option of a low-cost healthcare solution in the exchange (bronze plans and HSAs) the healthy will either go without insurance (at least until they become sick since the law prohibits discrimination based on pre-existing conditions) or find insurance coverage outside of the exchange. Ultimately this could mean that only the less healthy will be participating in the exchange. Costs would go up and subsidies would have to grow to help finance the increased cost.
A high-deductible health plan combined with a health savings account may make sense for your healthcare needs and personal financial situation. If so, it is important to be aware of the uncertainty surrounding the future of HSAs, dependent on the pending legal battles over the Patient Protection and Affordable Care Act.