Identifying the Best Approach to Cover Chronic Care with HSAs

The prescriptive approach to HSA-qualified plan designs leaves little room for value-added coverage for chronic conditions below the deductible. What's the best approach?

The Employee Benefit Research Institute (EBRI) has built a reputation for thorough analysis of many benefits-related issues, including Health Savings Accounts. EBRI recently released a comprehensive study of the effect of a 2019 executive order that expanded the range of prescription drugs, tests, and services that can be covered below the deductible (lower or no cost-sharing) when prescribed for certain chronic conditions without affecting a covered person's eligibility to fund a Health Savings Account.

We'll focus on the results of that research next week, including how the new standard has affected utilization of these services, cost-sharing designs, and the effect on premium.

This week, we set the stage by weighing the different options to expanding the range of services for chronic conditions that can be covered with lower patient cost-sharing below the deductible.

Regulatory Expansion of Services Covered below the Deductible

HSA-qualified plans must apply all but select preventive services to a deductible of at least $1,500 (self-only plan) or $3,000 (family coverage) in 2023. Guidance from the Internal Revenue Service since Health Savings Accounts launched in 2004 has defined what's considered select preventive care. This guidance may include fewer items and services than you, your doctor, or your medical plan might add to the list.

IRS Notice 2019-45, issued by the Trump Administration, listed 14 specific services that can be covered below the deductible on an HSA-qualified plan for a patient with a specific diagnosis. (Note: The term covered below the deductible means that the plan can reimburse a portion of or all the negotiated price for this service before the patient satisfies her deductible.)

The list links each prescription drug, test, or treatment to a specific diagnosis. For example, selective serotonin reuptake inhibitors (SSRIs) can be covered below the deductible with a diagnosis of depression. But SSRIs can't be covered below the deductible when prescribed for other conditions, and other drugs used to treat depression (including drugs prescribed when the patient doesn't respond to SSRIs) don't fall under this guidance as preventive care.

The reaction to this guidance in 2019 was mixed. It added some clarity where none existed before. Absent guidance, many insurers had developed policies, ranging from conservative (a narrow definition of services that could be classified as preventive and thus covered below the deductible) to broad. When the IRS published the notice, it wasn't clear whether the services identified represented a non-exclusive list (examples of what could be considered preventive) or exclusive (no other services fell within the definition of preventive). Within a month of the release, I spoke to a White House official who said it was non-exclusive and that more examples would be forthcoming soon and an IRS agent who stated that the list was exclusive. (Note: Neither person represented his employer, but rather offered an opinion based on his knowledge of the law.)

The issue with a list like this, whether it stems from legislation (passed by Congress) or regulation (issued by the executive branch), is that government doesn't move fast enough to adjust to changes in medical technology, treatment patterns, and documented evidence. As new medical treatments emerge, as old diagnostic tests prove less accurate, and as new drug discoveries are made, insurers and employers can't cover these new services below the deductible until federal tax law changes. And those changes aren't a high priority for Congress or the IRS.

So, what other approach may meet patients' needs for more favorable coverage of emerging diagnostic tests and treatment while remaining HSA-eligible?

Expand the Prescriptive Plan Design

Sen. Tom Carper (D-DE) and Sen. John Thune (R-SD) introduced the Chronic Disease Management Act in 2021 and again in 2023. A companion bill was introduced in the House in 2021. This proposed legislation permits certain services for the treatment of chronic conditions to be considered preventive care and thus covered below the deductible. To qualify, a service must:

• be low-cost,
• have medical evidence supporting high-cost efficiency of preventing the disease from progressing or creating another condition, AND
• be supported by strong clinical evidence of its efficacy.

This approach allows for future flexibility. But the terms used are rather vague, which undoubtedly will give insurers and employers pause to cover services below the deductible absent guidance from the IRS. Such guidance generally evolves slowly and, like legislation, can't keep up in a timely manner with medical advances. It's a step in the right direction, but the pace can be presumed to be slow.

Define HSA-qualified Plans by Actuarial Value

This approach builds on the methodology that the federal government implemented to measure the relative value of medical plans offered in the taxpayer-subsidized nongroup market. The term actuarial value refers to the percentage of aggregate claims that the insurer pays.

Example: A plan generates $100 million in claims. Patients are responsible for paying $30 million through plan cost-sharing (deductibles, coinsurance, and copays). The insurer pays the remaining 70% of claims. The actuarial value is 70 (representing the percentage of claims that the insurer pays).

The advantage of this approach is that it allows flexibility as medical technology and treatments advance. Insurers and employers have wide latitude in determining which services they want to prioritize by reducing patients' out-of-pocket costs - not just preventive care, but other services to diagnose or treat conditions that patients often don't receive due to out-of-pocket cost. The plan must increase cost-sharing elsewhere to keep the actuarial value below the threshold set for an HSA-qualified plan.

Example: An insurer or employer wants to provide first-dollar coverage for all services related to diabetes and heart disease. This design would tend to raise the actuarial value, since the insurer now pays for services for which patients were responsible before they satisfied their deductible. The insurer must adjust other variables - increasing the deductible or coinsurance, for example - to ensure that it doesn't pay more in aggregate claims than the ceiling for an HSA-qualified plan.

This approach retains the link that ties eligibility to open and fund a Health Savings Account to enrollment in an underlying medical plan with a certain level of patient cost-sharing. It opens the Health Savings Account opportunity to millions of Americans who are now covered by plans with high deductibles - often exceeding deductibles for HSA-qualified plans - that don't meet the definition of HSA-qualified because of a design feature (such as full coverage after a copay for diagnostic office visits, mental-health counseling sessions, or prescription drugs).

Actuarial value is a concept with a decade-long history in the nongroup market. Because the employer-sponsored market is different, the formula needs to be adapted. But this work isn't overwhelming.

Decouple

The broadest approach to addressing access to chronic care is to decouple Health Savings Accounts from the underlying medical plan. In other words, rather than limit the opportunity to open and fund an account to people who are covered by an HSA-qualified plan (and meet other eligibility requirements), decoupling would allow anyone with coverage that meets the requirements of the Affordable Care Act to become HSA-eligible. This approach would allow insurers and employers to design plans that encourage high-value care without closing the door to enrollees who want to fund a Health Savings Account.

In this scenario, anyone enrolled in an ACA-compliant employer-sponsored or nongroup plan, Medicare, or Medicaid to open and fund a Health Savings Account. It would allow tens of millions of Americans to enjoy tax savings on current and future reimbursements for qualified medical, dental, vision, and other health-related services.

The concerns with this approach are two-fold. First, from a fiscal perspective, expanding eligibility to nearly double the current market would increase the program's tax expenditure. The phrase tax expenditure refers to the amount of tax revenue that the federal government would lose if more Americans were able to access this tax break. Under current congressional rules (which appear to be applied selectively), any new spending must be offset by spending reductions or tax increases elsewhere so that the net effect on the federal budget is zero.

Second, from a policy perspective, without a tie between the underlying medical coverage and the tax benefit, Health Savings Accounts may become just another tax break that Congress targets when it seeks additional tax revenue to fund a new program or expansion of an existing effort. We've seen recent examples of this approach in the benefits world (tax-free reimbursements from a health account for over-the-counter drug and medicine required a prescription between 2012 and 2020) and more generally (capping the tax deduction for state and local taxes at $10,000 since 2017).

This approach would allow all Americans with ACA-qualified coverage to open and fund a Health Savings Account to reduce their net cost of care. Sponsors of a bill could argue that the loss of revenue to the federal government represents a dollar-for-dollar retention of earned income by patients. And the program would benefit disproportionately individuals and families with high expenses due to chronic conditions or acute episodes of care. It's difficult to argue against allowing a family with a child with cystic fibrosis or a family member battling cancer to retain more of their earned income to pay their out-of-pocket expenses.

The Bottom Line

Adding flexibility to the design of HSA-qualified coverage should be a top priority of members of Congress. Both major parties appear to understand the effect of rising premiums and out-of-pocket costs of patients who vote. Expanding Health Savings Accounts would allow more Americans to retain more of their earned income to pay for medical care.

#HSAWednesdayWisdom #HSAMondayMythbuster #HSA #HealthSavingsAccount #TaxPerfect Coming soon: #ICHRAinsights

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.

https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_587_pdc-27july23.pdf?sfvrsn=cdc3392f_4

https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_587_pdc-27july23.pdf?sfvrsn=cdc3392f_4