Reworking HSA rules

Last December, I argued that deductibles are the preferred means of cost sharing for a given actuarial value if we are seeking to minimize the total amount spent by a chronically ill individual:

Deductible plans favor the sickest people as the low utilizers pay for almost all of their care via deductible cash. That means the proportion of the pool’s individual responsibility amount is borne by healthy people.

Co-pay only plans favor people who use highly concentrated cost services. A co-pay does not differentiate between a specialist visit with a contract expense of $200 and a specialist visit with a contract expense of $600. It is the same fee. So people who use very costly services but only rarely are best off. People who use a lot of fairly low costs services on a regular basis pay more proportionally.

Co-insurance only plans favor low cost utilizers. They are not paying full price via their deductible, and unlike co-pays, the individual cost per unit matters.

There are a pair of points about cost sharing on the Exchange that need to be tweaked.

First Louise Norris notes that the maximum cost sharing amount allowed on Exchange has increased over the allowable cost share amount for the HSA tax benefit:

In 2014, the out-of-pocket maximums for individual health plans under the ACA were the same as the limits on HDHPs: $6,350 for individuals and $12,700 for families.

But in 2015, the ACA began to allow maximum out-of-pocket limits even higher than those allowed for HSA-qualified plans. Under ACA guidelines, the maximum out-of-pocket for all plans in 2015 was $6,600 for an individual and $13,200 for a family. But HSA guidelines limited the maximum out-of-pocket on HSA-qualified plans in 2015 to $6,450 for individuals and $12,900 for families.

The gap increased in 2016. The maximum out-of-pocket for all plans under the ACA is $6,850 for an individual, and $13,700 for a family. But for HSA-qualified plans, the maximum out-of-pocket in 2016 is $6,550 for an individual, and $13,100 for a family.

And for 2017, the gap will widen even more. The maximum out-of-pocket limit on all plans will be $7,150 for individuals and $14,300 for families. But for HSA-qualified plans, the out-of-pocket limits will remain unchanged from 2016, at $6,550 for individuals, and $13,100 for families.

This means people who are buying Bronze plans probably can not benefit from the tax benefit of the HSA so their effective costs are higher than people who can afford to buy Silver or Gold HSA compliant plans if they both use significant services over the course of the plan year. The policy tweak would be to have Congress mandate that the HSA deductible limit be synchronized with the QHP out of pocket maximum limit.

The other issue that needs to be addressed with HSA’s and HDHP is that these plans key on deductibles. As I have shown before, there are lots of ways to get the same actuarial value with several different types of cost sharing:

Creating a deductible only plan was fairly simple. The insurance would pay nothing out until the person spends $3,725 on cost-sharing eligible services.

The co-insurance routine was a bit harder to build. There are a wide ranges of co-insurance rates that could be chosen. For simplicity sake’s I chose a $0 deductible and a 40% co-insurance rate to start with. That failed. I could not design a Silver plan using only co-insurance at 40% before I hit the maximum out of pocket constraint of $6,850.

A 50% co-insurance rate creates a 72% Silver plan while a co-insurance rate of 53% creates a 70% Silver plan. The out of pocket maximum for these plans are $6,850.

Those three benefit design choices all produce plans that have roughly the same actuarial value. However the deductible only plan design is HSA/HDHP eligible. The other two plan designs are not HSA eligible.

That is stupid.

That is fixable.

The fix is to tie HSA/HDHP tax benefits to the plan’s actuarial value independent of the cost sharing arrangements that produced the calculated actuarial value. The entire goal of the HDHP movement was to lower the actuarial value of coverage so that people could have more “skin in the game”. The tax benefit of an HSA would act as a bit of a cushion to the increased individual level risk. However as plan designs have gotten a bit crazier and esoteric, the HDHP goal of lower actuarial values is being achieved but the tax benefits are idiosyncratically applied.