Do State Mandates Disqualify HSA-qualified Medical Plans?

States have primary responsibility for regulating medical coverage. Their decisions can disqualify enrollees on plans governed by the state from opening and funding a Health Savings Account.

As medical care becomes more expensive and more patients are enrolled in coverage with high out-of-pocket costs, state lawmakers and regulators are increasingly receptive to requiring insurers to cover more benefits, often with little or no patient cost-sharing. These laws may reduce some patients' financial responsibility, but they may simultaneously make it more difficult for other patients to afford the medical care that they need.

What Is a Mandate?

A mandate, as its name implies, is a required benefit that all insurance plans governed by a government must incorporate. Prior to 1996, the federal government left this area of regulation almost exclusively to the states. Since then, and particularly since passage of the Affordable Care Act in 2010, Congress and regulatory agencies have become more active in imposing mandated benefits. At the same time, state lawmakers and regulators have accelerated their efforts. Today, there are more than 2,000 mandates among the 50 states.

Medical plans are either insured or self-insured.

Insured. A company or individual pays a fixed monthly premium and offloads all claims risk to the insurer. If claims are less than total costs (of reimbursing providers and providing administrative services like customer service, claims processing, and network management), the insurer retains the difference. If claims exceed costs, the insurer absorbs the loss. All nongroup and most plans offered by small companies are insured.

Self-insured. The sponsoring company is responsible for claims risk. The insurer, who may be a traditional carrier (like UnitedHealthcare or Kaiser) or a third-party administrator, develops working rates that it collects monthly, plus an administrative fee. The employer wins when claims are below the working rate and must pay more when claims exceed that threshold. Companies usually purchase stop-loss insurance, which places a ceiling on their claims responsibility for each member and for the group as a whole, from a large general insurer to protect itself against catastrophic loss. (Self-insured policies aren't available in the nongroup market. Not purchasing coverage and assuming liability for all your claims constitutes the nongroup form of self-insurance.)

This funding distinction is important to understanding mandates. Federal mandates (like minimum maternity stays and parity between mental health and other services) apply to all plans, regardless of funding arrangement. On the other hand, state mandates apply only to insured plans. Self-insured plans have what's called an ERISA exemption, which places them beyond the reach of state regulators.

You can't tell by looking at your plan whether it's insured or self-insured. This information is important. Not only does the funding arrangement affect your benefits, but your rights to appeal plan decisions (like a denied authorization for a service) vary depending on whether your plan is regulated by the state in which the policy is issued).

About half the 170 or so million Americans enrolled on employer-sponsored plans are covered by self-insured arrangements. These plans allow employers to provide standard benefits (rather than complying with the mandates of each state in which it has a facility or employees live) and tailor their benefits more narrowly. They can also leverage their employees' and their covered dependents' good health (lower claims) to pay less for coverage. But they face some upside risk before their stop-loss coverage reimburses high claims expenses.

Three Types of State Mandates

State lawmakers and regulators are acutely sensitive to requests by constituents, professional organizations (like providers of certain medical services, such as acupuncturists), and patient advocacy groups. Mandates usually spring from organized efforts by these parties to influence decision-makers to add specific services to the list of state mandated benefits.

For decades, states have mandated that certain benefits be covered on a medical plan. Typical examples include broad services not traditionally covered by insurance (like chiropractic care and acupuncture), coverage for certain conditions (like autism, developmental delays, and the inability to digest high-protein foods), and select services (like circumcisions and removal of port-wine stains and varicose veins).

More recently, states have expanded their reach by mandating that certain services already covered now be covered in full. For example, to create "reproductive equity," some states mandated that circumcisions, like voluntary termination of pregnancy, be covered with no patient out-of-pocket financial responsibility. Others require that all treatments for certain high-profile diseases, like breast cancer, be covered without patient cost-sharing.

An emerging third type of mandate requires insurers to count certain dollar amounts toward the deductible that weren't previously credited.

Example: Some prescription-drug manufacturers offer coupons to patients to reduce their net price of a brand-name drug. A drug maker may offer a $300 coupon on a $350 drug to reduce the patient's net price to $50 so that the company can compete on price with generic equivalents. An insurer would normally apply $50 (the amount that the patient pas out-of-pocket) to the deductible. With this mandate, the insurer must apply all $350 to the patient's deductible.

Non-Disqualifying Mandates

Mandates that expand coverage but don't dictate patient cost-sharing don't disqualify a medical plan. These mandates by definition increase premiums (if they were cost-effective, insurers would already have incorporated these benefits into the plan design) and overall medical spending (by reducing patients' financial barriers to care). They don't, however, interfere with Health Savings Account rules that require HSA-qualified plans to cover all services except select preventive care to a minimum deductible ($1,600 for self-only and $3,200 for family coverage in 2024). Thus, the inclusion of a mandate to cover up to 12 acupuncture visits isn't disqualifying if the financial responsibility for those services is applied to the deductible.

Disqualifying Mandates

During the past five or so years, a growing number of proposed (and, in some cases, passed) state mandates have been disqualifying as proposed. These mandates were drafted to require insurers to provide full coverage for services that fall outside the federal definition of select preventive care (the only services that can be reimbursed by the insurer before a patient meets the plan deductible).

Federal law regulates the design of HSA-qualified plans and defines which services can be covered in full. Any services that fall outside those parameters must be covered subject to the deductible. State lawmakers or regulators may define a mandated service as preventive, but it's the federal, not an individual state's, definition, that prevails.

Example: A state mandates that insurers cover in full three behavioral visits per patient annually. The rationale is that prompt intervention in the case of behavioral issues can identify potential threats to the patient and the broader community, thus "preventing" more serious consequences of untreated conditions. Because federal law doesn't define this approach - however beneficial it may be - as preventive, this mandate would be disqualifying.

In these cases, many state decisionmakers stick to their definition of preventive for political reasons, rather than bow to politicians and regulators at a higher level of government.

Weighing the Benefits and Costs

It's important to understand that mandates don't increase the number of medical services available to patients. Rather, they shift the financial responsibility for these services.

For example, patients who want to receive acupuncture care can do so, regardless of their medical coverage, if they can find a provider. An acupuncture mandate simply forces insurers to include this service among covered benefits, thereby shifting financial responsibility (if the patient has satisfied the deductible) from the patient to the insurer. And if the patient works for a company that meets the state definition of a large employer (at least 50 employees under federal law, though states can set a higher threshold), the cost of claims reimbursed by the insurer is passed along, in whole or in part, back to the company and its enrolled workers in the form of higher future premiums.

Let's look at another example: full coverage for all treatment related to breast cancer. This mandate can save a patient with an ACA-compliant medical plan up to $9,450 in 2024 (the federal out-of-pocket maximum, less any deductible, coinsurance, or copays incurred on other diagnoses and treatments) for covered services. For a patient undergoing this treatment, not paying up to $9,450 is a financial blessing. That's a substantial benefit to those patients.

On the other hand, this mandate would disqualify everyone covered on a plan governed by the state from funding a Health Savings Account. Think about it. A patient undergoing treatment for ovarian cancer, leukemia, or a brain tumor could pay up to $9,450 out-of-pocket for covered treatments. And those patients wouldn't be able to fund a Health Savings Account to pay their deductibles, copays, and coinsurance with pre-tax dollars, perhaps reducing their net out-of-pocket responsibility from $9,450 to $6,500.

The effect isn't felt by just other cancer patients. Also affected are families dealing with a diagnosis of asthma, congestive heart failure, sickle-cell anemia, or diabetes. And patients who undergo surgery to repair ruptured discs, replace joints, and reset broken bones. And families dealing with a member's behavioral-health or substance-abuse issues that threaten the patient's health and the family's (and perhaps the broader community's) safety and tranquility. They too can't fund a Health Savings Account to reduce their net cost of care.

The Solutions

Most state lawmakers, and many regulators, don't understand the nuances of the federal tax code or how Health Savings Accounts work (if they even know what a Health Savings Account is or can distinguish it from a Health FSA). It's not their business. They impose these disqualifying mandates not because they want to shut a door to tax advantages on some constituents, but rather because they don't understand the broader implications of their decisions.

There are several approaches to solving the problem.

The gold-standard approach is to pass a law in each state stating that any mandated benefit that would disqualify a plan established under Section 223 of the federal tax code (the section governing HSA-qualified plans) doesn't apply to that plan to the extent that it would be disqualifying.

Translation: A mandate requiring full coverage for breast-cancer treatment either (1) would not apply to an HSA-qualified plan at all or (2) would apply the full-coverage provision only after the patient reached the statutory minimum deductible for her contrast type (in other words, in 2024, the mandate would shift financial responsibility from her to her insurer once she and her family reached $3,200 of deductible expenses).

This approach is ideal because it doesn't require current or future policy makers to understand the federal tax code.

A second approach is legislation that allows the insurance commissioner to adjust any laws to ensure that they don't conflict with Section 223. Some states empower their insurance regulators with this authority, whereas others don't.

A third approach is for industry groups to hire analysts and attorneys to track every healthcare bill introduced in the legislature of every state and possession and identify any potentially disqualifying provisions, then coordinate an effort to educate policy makers and ask them to amend the bill.

What's happening today? The American Bankers Association HSA Council, the only organization dedicated exclusively to Health Savings Accounts, is investing in educating state legislators and regulators, through their professional associations, about the effects of state mandates on Health Savings Account eligibility. The Council is working with a handful of early-adopter states to implement the gold-standard approach so that all future mandates don't apply to HSA-qualified plans if they would disqualify enrollees. And it has assembled a team that tracks all bills, identifies problems, and works with in-state resources to advocate for changes to remove the disqualifying provisions. This is a tedious exercise that, with luck, becomes less onerous over time with the council's educational efforts and advocacy of the gold-standard legislation.

The Bottom Line

Mandates are always a response to an organized group's concentrated efforts or a lift caused by political winds. They are popular because, like most government initiatives, the benefits are targeted (to specific patients and providers) and the price of the policy is absorbed by the masses. Patients are relieved of thousands of dollars of out-of-pocket spending, and the mandate adds only pennies or dimes to each insured person's monthly premiums. But pennies and dimes add up. And when those coins aren't tax-advantaged, former and prospective Health Savings Account owners become the financial victims of the new mandate.

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HSA Monday Mythbuster is published fortnightly, alternating with HSA Question of the Week on Mondays. 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. HSA Monday Mythbuster is published every other Monday, alternating with HSA Question of the Week.

 Many states are becoming more aggressive in proposing benefit mandates to cover more medical treatments and alter who pays for these services. Do these mandates pose a financial threat to Health Savings Account owners? Read on . . .

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