A Regulatory Gap: The flawed definition of the HDHP

One key decision when selecting a health insurance plan is whether to couple it with a Health Savings Account (HSA). In today’s market, health insurance plans are passing on a larger share of costs to consumers (more high deductible health plans available for purchase). HSAs were created in 2003 so individuals covered by these high deductible plans could receive tax-preferred treatment of money saved for medical expenses. HSA enrollments have grown 15% per year since 2011, and in 2014, 17.4 million Americans had enrolled in HSAs. This represents 6.2% of the total insured population of 280 million people.

Money put into an HSA can only be used for eligible medical expenses, and because of this, that money is not taxed. As of 2015-2016, individuals can contribute up to $3,350/year, tax-free to a HSA. HSAs represent an intelligent investment option, particularly for people who know they’ll have large medical expenses in a given year, i.e. have a chronic illness or plan to become pregnant. But, HSAs aren't only a vehicle for reducing taxes in a given year -- money invested in a HSA can grow over time as a secondary retirement benefit. Accumulated HSA balances can be spent on care as you age, such as premium payments on certain Medicare supplemental plans once you're over 65.

Qualifying for an HSA - The Flawed Definition of the HDHP

There is a big caveat to enrolling in an HSA – the health care plan a consumer chooses has to qualify as a High Deductible Health Plan (HDHP). For 2015, a plan qualifies as a HDHP if the individual deductible is more than $1,300 and the individual out-of-pocket maximum (OOP max) is less than $6,450.

We discovered an important problem in the HDHP definition and its application to HSAs. The Affordable Care Act allows for plans with OOP maxes of up to $6,600. With incredibly high deductibles and OOP maxes, these plans – the plans which offer the least coverage – do not qualify as HDHPs! Because their OOP maxes are too high, their holders cannot contribute tax-free money to an HSA.

To demonstrate this point, we looked at plan data from the 24 states we currently offer coverage in. The chart below plots OOP maxes against deductibles – the colored points represent a plan’s metal tier, while the dotted lines represent the threshold values in the definition of a HDHP.

The plans in the upper right quadrant (red) are the HSA-excluded plans: their OOP maxes are too high to meet the HDHP definition. The plans in the lower right quadrant (green) are the ones defined as "High Deductible Health Plans.” Note: this quadrant includes many silver and even gold plans, generally better and more expensive than bronze plans. Many of these silver and gold plans qualify for HSAs, whereas many bronze and catastrophic plans don't.

A Regulatory Gap

Most of the HSA-excluded plans are bronze and catastrophic. Generally, people short on cash or young-and-invincibles buy these plans – people who want to be covered in case of a disaster, but can’t afford (or don’t need) better care. Since the HSA’s core purpose is to alleviate costs for people who can only afford the highest deductible plans, excluding the worst plans from utilizing a HSA is extremely counterproductive.

What should be done? The current HDHP definition creates a regulatory gap that must be closed. In analyzing the plan purchasing behavior of Americans, we found that this seemingly accidental gap in qualifying plans may be leaving up to 26% of Americans without an HSA – most likely the Americans that could benefit from one the most. We must change the definition of a HDHP to give HSA access to those who it was designed for and those who need it – specifically, we must include all plans up to the maximum allowable OOP amount in the HDHP definition. To eliminate this regulatory gap in 2016, plans with OOP maxes up to $6,850 should be defined as HDHPs. We're calling on coordination between the IRS and HHS to align guidance on HDHPs as they finalize their 2016 qualifications.