The Prescription-Drug Benefit That Can Disqualify You Instantly

Politicians want to help you manage the cost of your prescription drugs. But one provision may cause more financial harm than benefit for most Health Savings Account owners.

When we discuss potential situations that would disqualify someone from opening and funding a Health Savings Account, we focus on benefits and coverage. The rules are straight-forward around the basic design of the underling medical plan and the services (nearly all) that must be applied to the deductible before the plan begins to reimburse claims.

In recent years, though, another threat to eligibility has emerged: the application of coupons for prescription drugs. The way that coupons are applied to the deductible isn't spelled out in the Schedule of Benefits or other plan documents. But some state legislatures (and perhaps soon Congress) have passed or are debating bills that would instantly disqualify all HSA-qualified plans governed by that state's law. The result would be that no one enrolled on those plans could open and contribute to a Health Savings Account.

What Is a Drug Coupon?

Some pharmaceutical manufacturers issue coupons to reduce the net price that patients pay for their drug. These coupons reduce the patient's financial responsibility at the point of purchase.

Example: Your doctor prescribes Drug X, which has a negotiated price of $500 monthly through your insurer. You're covered on an HSA-qualified plan, so you pay the full $500. The manufacturer offers you a $400 coupon, which works like other retail coupons, reducing your out-of-pocket cost to only $100 per month.

Why do drug companies offer these coupons? The answer may depend on your point of view.

One answer is that they're concerned that patients won't receive the benefit that the drug delivers if they forego a prescription or reduce their doses to save money. The coupon increases patient compliance and thus outcomes by reducing the patient's net price.

Another answer is that the drug has a generic (or less expensive brand) competitor. The drug company wants patients to choose its version of the drug rather than a competitor's. The coupon is a targeted way of reducing the patient's net price so that the manufacturer retains its sales volume.

Example: A $2,000 brand-name drug competes with a $500 generic drug. The manufacturer issues patients a $1,500 coupon to reduce its net price to the generic equivalent. As a result, the brand-name manufacturer retains its volume, although with lower revenue. When the patient reaches her deductible and the insurer begins to reimburse 50% or more of the negotiated price, the manufacturer realizes additional revenue.

What's the Problem with Coupons?

The coupons themselves don't create an eligibility issue. But now a growing number of state legislators and regulators and even some members of Congress want to force insurers to apply the patient's gross financial responsibility, not the net responsibility after applying the coupon, to the deductible and out-of-pocket maximum.

Example: Same situation as the first example. But the amount applied to the deductible isn't the $100 that the patient paid out-of-pocket, but rather the $500 negotiated price that includes the $400 coupon.

In this scenario, the patient receives credit for $400 that she never paid. Thus, if she had a $2,000 self-only deductible and purchased only this drug, she could satisfy her deductible with four purchases of this prescription ($500 monthly for four months = $2,000) while actually paying only $400 out-of-pocket.

The IRS has weighed in on this design in a letter responding to correspondence from the State of Illinois. The agency's view is that (in this example) the patient has satisfied only $400 of a deductible and now is receiving benefits at the post-deductible level of cost-sharing. Since $400 is well below the statutory minimum annual deductible of $1,500 (2023 figure - the 2024 amount rises to $1,600), this plan is not an HSA-qualified plan, no matter the published deductible.

Further, the IRS noted that the plan is disqualified because of this requirement that the price prior to the coupon be applied to the deductible. This new treatment of the coupon disqualifies everyone enrolled on an insured HSA-qualified plan that falls under this mandate, not just patients who benefit from drug coupons.

In effect, no plan regulated by that state (all insured plans) is HSA-qualified. Because state mandates don't apply to self-insured coverage, those plans could remain HSA-qualified by not applying the mandate. And residents of a state covered by a plan governed by another state's laws (for example, an Illinois resident covered by a plan governed by her company's home state of Utah) wouldn't be affected by her home state's mandate.

What's Motivating Politicians?

Why are politicians implementing this approach to coupons? They want to help patients with chronic conditions managed by expensive drugs to reap the benefit that these coupon programs offer. If only the patient's net price is applied to the deductible, some patients may receive little benefit from the coupon.

Example: Your HSA-qualified plan has a $3,000 deductible and reimburses all covered services in full after you satisfy the deductible. You have a chronic condition that you manage with a drug whose negotiated price is $500 monthly. In addition, despite your actively managing the condition, you end up in the emergency department about twice annually at a cost of $1,500 per trip.

If you're credited the full $500 toward your deductible each month for your drug, you meet your deductible in six months with no other expenses. Total cash out-of-pocket: $600 for your share of six months of the prescription, and you've satisfied the deductible. Your subsequent $1,500 ED visit is covered at the post-deductible level, perhaps at 20% coinsurance ($300 total). Total cash out-of-pocket after seven months: $3,300, with all remaining services covered at the post-deductible level of benefits.

If your deductible is credited with only your $100 out-of-pocket cost, you're credited with $600 and then are responsible for the full $1,500 ED visit. Total cash out-of-pocket after seven months: $2,100, with $900 more of deductible to satisfy before reaching the post-deductible benefit level.

The intent is noble. And for most patients, crediting the value of the coupon to the deductible reduces their total cash out-of-pocket. The problem is that the arrangement disqualifies everyone covered on the plan from funding a Health Savings Account. A patient undergoing spinal-fusion surgery, a cancer patient, an urban child with asthma, or a victim of a hit-and-run can't run expenses through a Health Savings Account to reduce the net cash that they pay for their care.

So why do state legislators and regulators proceed? They don't understand how Health Savings Account eligibility is affected by their proposed mandates. They don't understand how the federal tax code interacts with a medical plan over which they have a level of statutory or regulatory authority. They don't realize that when they open a window to the benefit of some patients, they slam shut a door for many others.

What about Other Ways to Pay for Prescription Drugs?

What's frustrating about the IRS's interpretation is that other patient subsidies aren't disqualifying:

• If a foundation gave you a $400 stipend monthly based on financial need to pay for your $500 prescription, the full $500 would be credited to the deductible and you'd remain HSA-eligible.
• If you received a $400 check monthly from the drug manufacturer's patient-assistance program and applied that money toward your $500 out-of-pocket price, you'd remain HSA-eligible.
• If a parent or friend have you $400 cash monthly to help you purchase your drug (the person could even stand beside you at the pharmacy and hand the cash to the pharmacy tech), you'd get credit for $500 of deductible satisfied and would remain HSA-eligible.

Addressing the Issue

How can this situation be addressed? Here are several proposals that are being actively worked by industry groups:

• Educate state legislators and regulators, individually and through their professional associations, about Health Savings Accounts and the effect of state mandates that require coverage of certain services below the deductible or credit deductibles for amounts that the patient doesn't pay.
• Advocate for state-by-state legislation that would exempt HSA-qualified plans from any state mandate if the application of that mandate would disqualify enrollees from opening and funding a Health Savings Account.
• Advocate for federal legislation that would ensure that statutes and regulations passed by states that would otherwise disqualify an HSA-qualified plan won't disqualify enrollees from opening and funding a Health Savings Account.

It's a tedious process. And prescription-drug coupons are the tip of the iceberg. Many states are proposing mandating full coverage for abortion services following last year's Supreme Court Dobbs decision. State lawmakers are proposing full coverage for services that they deem preventive, though the service doesn't fall under the federal definition of preventive care.

In each case, the presence of the benefit disqualifies everyone enrolled - not just those who access the benefit - from opening and funding a Health Savings Account. A classic example occurred several years ago when the State of Maryland disqualified everyone enrolled on an insured HSA-qualified plan - including women (irony to follow) - from opening and funding an account because the state mandated full coverage for male sterilization (e.g., a vasectomy). The state recognized the problem, appealed to the IRS, received a denial, and changed the law.

The Bottom Line

A trained eye can look at a Schedule of Benefits and pinpoint a benefit that disqualified the plan from meeting the requirements of an HSA-qualified plan. But when the disqualifying factor relates to the processing of coupons rather than the benefits themselves, confusion ensues. These coupon requirements disqualify everyone enrolled in an HSA-qualified plan from opening and funding a Health Savings Account, even though only a handful of patients reap the financial benefits of the mandate. That hardly seems like an appropriate trade-off.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.