This "Helpful" Mandate Could Create Financial Hardship

Drug-copay accumulator programs help some patients manage the cost of care. At the expense of everyone else.

You've read the headlines and tuned into the news stories: Some prescription drugs are expensive. Very expensive. And plan designs that shift that cost to patients are making these costs transparent. In response, legislators at the federal and state level are contemplating - and some have enacted - laws that require insurers to apply the full negotiated price of a prescription to the deductible and out-of-pocket maximum even when a patient presents a coupon that reduces her net price.

These programs, called drug-copay accumulator programs, have a disastrous effect on insured medical plan enrollees' eligibility to open and fund a Health Savings Account, whether or not they purchase any prescriptions with coupons. Let's dive into this issue.

How Drug-Copay Accumulator Programs Work

Prescription-drug manufacturers sometimes offer coupons to patients to help them cover the high price of a brand-name prescription drug.

Example: Juan's brand-name drug costs $350 per month through his insurance. Another drug manufacturer recently introduced a generic version that would cost him $50 per month. His manufacturer offers a $300 coupon to bring the brand-name price to parity with the generic equivalent. Juan continues to purchase the brand-name version.

The drug manufacturer's motive in offering the coupon may be altruistic (it's concerned that patients won't be able to afford the prescribed dose) or competitive (it must reduce the patient's net price to keep the patient from seeking a less expensive alternative treatment). Regardless of motive, the patient pays less out-of-pocket for the drug.

So far, so good. No compliance problem. But a few states have passed - and many others are considering - laws mandating that the full negotiated price of the drug be applied to the deductible on insured plans regulated by the state.

Example: In Juan's case above, although he pays only $50 out-of-pocket after a $300 coupon, the full $350 negotiated price of his drug is applied to his deductible.

This policy is problematic because an insurer may begin to cover medical services and prescription-drugs before a patient satisfies the statutory minimum annual deductible for an HSA-qualified plan.

Example: After six months, Juan has paid $300 out-of-pocket ($50 net price monthly), but $2,100 has been applied to his self-only plan's $2,000 deductible. He then undergoes a $1,200 MRI, which is covered at 80% by his medical plan. His insurer pays 80% of the price of the MRI, even though Juan to that point has paid only $300 out-of-pocket toward his $2,000 deductible. Without a drug-copay accumulator mandate, Juan would be responsible for all $1,200, rather than only $240 (his 20% of $1,200) of the bill.

The Internal Revenue Service has stated that this arrangement is out of compliance with federal Health Savings Account rules. Because the plan begins to pay claims before the patient has assumed financial responsibility for at least $1,600 (self-only coverage) or $3,200 (family plan) of medical and prescription expenses (2024 inflation-adjusted figures), the medical coverage isn't HSA-qualified.

Because all insured medical plans must comply with state mandates, no one covered by an insured plan that's otherwise HSA-qualified can open and fund a Health Savings Account. The mandate doesn't affect everyone living in the state. About half of all employees' plans are self-insured and, under federal labor law, aren't affected by state mandates. Also, some state residents may be covered by insured HSA-qualified plans that are written in the company's home state, which doesn't have a drug-copay accumulator mandate. Conversely, some residents of those states without the mandate may be disqualified because they're covered by a company plan governed by a state with a mandate.

Note that the drug-copay accumulator compliance issue applies only to HSA-qualified coverage. These plans are required by federal tax law to impose a minimum deductible that patients must satisfy before the plan can begin to reimburse eligible claims. Non-HSA-qualified plans aren't similarly regulated by federal law. The mandate helps patients who face high prescription drug prices without affecting any other enrollees.

The Compliance Problem

Copay-accumulator programs can be a godsend for patients who rely on expensive prescriptions to manage chronic conditions. As more medical coverage moves from the traditional copay model to covering high-cost drugs subject to the deductible or high coinsurance, patients' out-of-pocket costs spike. This price increase may force patients to stop filling their prescriptions or rationing their supplies (for example, stretching a one month's supply to cover two months by using the drug every other day or taking half the prescribed dose daily). This approach doesn't deliver good results to patients - or the drug manufacturer.

Enter the drug-copay accumulator program. It credits patients' deductibles with the full negotiated price of the drug, as illustrated in the example above, even though the patients' net price is far lower. Thus, the plan may begin to reimburse claims before the patient has paid at least the statutory minimum annual deductible in actual out-of-pocket expenses.

This mandate helps patients who fill prescriptions for expensive prescription drugs whose manufacturers offer these coupons and whose plans are required to apply the full negotiated price to the deductible. They're no longer eligible to fund a Health Savings Account, but in many cases their savings more than compensate for this lost opportunity.

But the damage doesn't end there. The compliance issue doesn't affect only these patients. Everyone covered by these plans is disqualified, including patients who are healthy and those who incur high out-of-pocket expenses due to an acute medical event or a chronic condition.

Example: Amanda and Basi are both covered by a plan with a $6,000 deductible, then full coverage. Amanda pays $200 per month for a $1,000 drug. She satisfies her deductible after six months, having paid only $1,200 of her money toward her deductible. Basi falls off her bicycle and undergoes surgery to stabilize a broken collarbone. She pays $6,000 toward her deductible.

Thus, the loss of Health Savings Account eligibility affects Basi, who can't save $2,000 in taxes by running her $6,000 of deductible expenses through a Health Savings Account, much more than it does Amanda, who would generate about $400 in tax savings without the drug-copay accumulator mandate but would pay $4,800 more in out-of-pocket expenses.

Potential Solutions

There is no easy solution to this issue - or other situations in which state mandates violate federal requirements of HSA-qualified plan design. Here are some options:

Pass federal legislation stating that any mandates imposed by states that would disqualify covered individuals from funding a Health Savings Account won't be considered disqualifying. This approach would solve the problem, but it might open states to mischief that would undermine the lower premiums that HSA-qualified plans generally offer. For example, a state might mandate full coverage for all mental-health services, maternity care and delivery, or certain cancer treatments, or some politically divisive services like termination of pregnancy and gender-reassignment surgery.

Pass blanket state legislation stating that any mandate that is disqualifying to Health Savings Accounts won't apply to HSA-qualified plans. This approach would automatically protect eligibility for all enrollees, regardless of future state mandates. But it's often difficult to draw state lawmakers' attention exclusively to one topic, Health Savings Accounts, particularly when these plans are governed by federal tax law.

Educate state legislators and regulators and fight states legislation bill-by-bill to ensure that each bill that would otherwise be disqualifying has language exempting the mandate from HSA-qualified plans. This is a tedious process often compared to playing the children's game Whack a Mole. It requires monitoring thousands of bills introduced in legislatures in more than 50 jurisdictions.

The Bottom Line

Drug-copay accumulator laws are one of the more recent examples of states' passing laws that conflict with federal tax law's definition of an HSA-qualified plan. The Internal Revenue Service thus far has not relaxed federal tax law (although it has, in some cases, given states time to change their laws so that a conflicting mandate doesn't apply to an HSA-qualified plan) to allow enrollees in these plans to remain eligible to fund a Health Savings Account. Given higher out-of-pocket financial responsibility and political pressure, state lawmakers can be expected to continue to mandate coverage that conflicts with Health Savings Account requirements. This activity poses ongoing threats that pose an under-the-radar threat to an important consumer tool to manage the cost of medical care.

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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.

Drug copay accumulator programs: A many-sided argument (mercer.com)