Are HSAs a Good Deal for Patients with Chronic Medical Conditions?

One of the frequent criticisms of Health Savings Account programs is that they're not appropriate for people with chronic conditions. Is that charge accurate?

It's unfortunate that the federal tax code refers to HSA-qualified coverage as a high deductible health plan. What an instant turn-off - and a very poor grade for that thumb-nail description in a college marketing class! Without any mention of the corresponding benefit (guaranteed lower premiums in exchange for the possibility of paying more of your claims), too many people shut down and check any box but high deductible health plan when they purchase medical coverage through their employer or in the nongroup market.

That's unfortunate, because the plan with the higher deductible and lower premium may be a better option financially, even for someone with a chronic condition who requires regular medical care and prescription drugs to manage that illness. Let's look at the financial implication of two different self-only plan designs on a patient with a chronic condition.

Two Approaches to Coverage

Plan 1: A $1,000 self-only deductible, with $35 and $50 copays for office visits, plus copays or coinsurance for prescription drugs. After the deductible, copays for emergency visits, day surgery, and inpatient care, up to an out-of-pocket maximum of $4,000.

Plan 2: A $3,000 self-only deductible for all non-preventive services, then 20% coinsurance to a $5,000 out-of-pocket maximum.

Which plan is better? The average employee - that is, a typical worker who spends 18 minutes during open enrollment making 17 benefits decisions, according to one recent survey - would more than likely choose Plan 1. After all, it has a lower deductible. And office visits are covered after a copay, so there's an element of cost certainty.

That's especially true of an employee who has - or covers a family member who has - a chronic medical condition that requires frequent physician care, occasional hospitalization, and expensive prescription drugs.

But Plan 1 may not be the best choice. In fact, an employee could cost herself thousands of dollars by choosing Plan 1 after only a cursory reading of the two plan designs.

The Three Variables That Matter Most

Employees focus too much on the deductible alone, particularly if one plan is defined as a High-Deductible Health Plan. The deductible is important, but it's one of a trio of important variables.

Price of coverage. The price of coverage, aka the premium, is important. A plan that begins to pay claims sooner, as Plan 1 does, typically carries a higher premium. For example, let's say the employer prices Plan 1 at a $250 semi-monthly payroll deduction and Plan 2 at $190. That's a difference of $60 per bimonthly pay period, or $1,440 annually.

In other words, an employee focused solely on deductible may not realize that it costs $1,440 to buy down the deductible by $2,000. That may be a prudent choice for someone who incurs high claims to manage a chronic condition. But it's a starting point - not the finale - of proper analysis. Sadly, most employees stop there.

Price of care. Let's imagine that in a typical year, the patient has 12 PCP and eight specialist visits, fill prescriptions that cost $250 monthly (the insurer applies 50% coinsurance), and is admitted to the hospital once annually. Let's add up those costs under Plan 1:

• 12 PCP visits @ $35 each equal $420. Eight specialist visits @ $50 each total $400. Total: $820 in physician visits.
• $250 per month ($3,000 annually) prescription drugs at 50% coinsurance total $1,500.
• One inpatient visit after the deductible is assessed a $750 copay.

Total out-of-pocket cost: $820 physician visits plus $1,500 prescription drugs plus $1,000 deductible plus $750 inpatient copay equals $4,070. The out-of-pocket maximum is $4,000, so this patient pays $4,000 out-of-pocket.

These same services are applied to the deductible on Plan 2. A patient's financial responsibility is capped at $5,000, or $1,000 more than under Plan 1.

Net out-of-pocket costs. Out-of-pocket responsibility is one factor. How you pay for it is another. Plan 2 is an HSA-qualified plan, and the company deposits $1,000 into the Health Savings Account of each employee eligible to open and fund an account.

To balance the scenario, let's assume that the enrollee in Plan 1 participates in a Health FSA, which she funds at the maximum of $2,850 to help pay her $4,000 of out-of-pocket expenses. She must pay the balance ($1,150) with after-tax funds since her employer - like nearly all - doesn't contribute to her Health FSA.

The employee enrolled in Plan 2 can fund her Health Savings Account up to $2,650 (the $3,650 statutory maximum in 2022 less the $1,000 employer contribution).

Note: There are other variables that may be important to buyers, like the plan type (HMO, PPO, POS Plan), provider network, and other factors. We hold those constant between each options in this example for simplicity.

Putting It All Together

Let's look at the total cost of each plan.

Plan 1

$6,000 premium

$4,000 out-of-pocket expenses

$10,000 total ($8,850 pre-tax dollars and $1,150 after-tax dollars)

Plan 2

$4,560 premium

$5,000 out-of-pocket

($1,000) employer contribution to her Health Savings Account

$8,560 total ($7,210 pre-tax dollars, a $1,000 tax-free gift, and $1,350 after-tax dollars)

Now which plan looks better for a person with a chronic condition?

Note: This is but one example - an accurate one, but merely one example. All plans are different. We can't design a rule of thumb to reduce a buyer's effort - sorry! Buyers must do the math (or use a calculator provided by the insurer) to do the math. . . Also, our exercise is with a patient with a chronic condition who incurs high claims annually. When a person or family is healthy and claims are more random, the modeling becomes more difficult because we must assume years with claims far below the out-of-pocket limit and occasional random years at the ceiling of financial responsibility.

An Asterisk for the Nongroup Market

This analysis considers employer-sponsored care only. In the nongroup market, the differences between the two plans are often more stark:

• Employers don't subsidize premiums in the nongroup market (though roughly five-in-six nongroup buyers are eligible for taxpayer-funded premium subsidies). Absent subsidies, the total premiums differences between the two plans are much greater than the subsidized figures in our example above.
• Many nongroup plans have out-of-pocket maximums at the ceiling allowed by federal tax law. That's $7,050 for HSA-qualified plans and $8,700 - a meaningful advantage for HSA-qualified plans for high utiliziers.
• Health FSAs are available through employers only. A buyer in the nongroup market who doesn't choose an HSA-qualified plan has no access to a tax-advantaged reimbursement account to leverage tax savings to reduce the net cost of care.

The Bottom Line

Benefits decisions have financial implications. The decision not to enroll in some coverage (say, accident or long-term disability) to save a few dollars may be prescient (you don't suffer a loss that the plan would cover), mildly negative (you missed out on a $300 payment for an emergency-room visit and x-ray of a broken arm), or catastrophic (you go without income for three months following an accident because you didn't have disability coverage).

When you do choose to enroll and you face a choice of coverage, it's important to understand how each plan works and to calculate the best case, likely case, and worst case utilization scenarios. Most employees don't budget the time to run the numbers. But as you've seen in the example above, an extra hour of study may yield savings of $1,000 or more.

Few employees make $1,000 per hour in their regular jobs. When they can pocket $500 or $1,000or more for a consulting job with a client who presumably is pleasant and eager to accept their advice (themselves!), doesn't it make sense?

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