Embedded or Aggregate? How Do These Concepts Relate to HSA Plans?

Do you know the difference between an embedded and aggregate deductible or out-of-pocket maximum? If you're covered on a family contract, you should. And your employer or insurer must.

They're terms that only insurance people use. The words aggregate and embedded are used in other contexts ("aggregate - or total - economic output was up 3% last quarter" and "the news network embedded reporters with fighting units during the war"). But usually the reader doesn't face financial consequences for not understanding what the terms mean.

Not so for aggregate and embedded deductibles and out-of-pocket maximums. In the context of medical insurance, not understand the difference between these two terms and how a medical plan is constructed can result in a four-figure misunderstanding.

Let's dissect the terms and implications on patient out-of-pocket financial responsibility.

Aggregate Deductible

Plans with an aggregate deductible feature a single bucket against which all covered family members' deductible expenses are applied. Typical aggregate deductible amounts range from $3,000 (the new statutory minimum for 2023) and $6,000 for employer-sponsored coverage. Plans offered in the nongroup market may have family deductibles that are much higher.

Example 1: Gar Farkel covers her family on an HSA-qualified plan with a $5,000 aggregate deductible. Gar is hospitalized early in the 2023 plan year and incurs $34,000 of covered expenses. The first $5,000 are applied to the family deductible, at which point the family satisfies that deductible and all subsequent services are covered in full.

The advantage of an aggregate deductible is simplicity - every claim is applied to a single deductible. But a family with one high claimant may end up paying much more out-of-pocket than with an embedded deductible.

Embedded Deductible

A plan with an embedded deductible includes a family deductible bucket and a separate bucket for each family member. Each claim is applied to the family member's and the family's bucket. When a family member satisfies her deductible, she begins to receive services that are reimbursed via the post-deductible financial arrangement.

Example 2: Simon Farkel's employer offers a plan with a $5,000 family deductible and a $2,500 deductible for each family member. Simon undergoes arthroscopic day surgery early in the 2023 plan year and incurs $4,200 of covered expenses. The first $2,500 are applied to both the family deductible and her personal deductible. At that point, she has satisfied her deductible, and the remainder of her $1,700 of covered expenses for that service and any other care that she receives for the rest of the plan year is covered at the post-deductible level (20% coinsurance up to $7,500 out-of-pocket in her case). The remaining family members must incur an additional $2,500 in covered expenses applied to the deductible before the family has satisfied its deductible and subsequent covered services are covered in full.

The embedded deductible has more moving parts (each claim is applied to two separate deductibles - individual and family - but may result in lower out-of-pocket costs when one member of the family incurs most of the claims.

Special Rule for HSA-qualified Plans

If an HSA-qualified plan has an embedded deductible, that deductible can't be less than the statutory minimum annual deductible on a family contract ($1,400 in 2022, rising to $1,500 in 2023).

Example 3: Fritz Farkel's plan has a self-only deductible of $2,000 and a family deductible of $4,000. The insurer wants to offer an embedded deductible of $2,000 to align with the deductible for self-only coverage for ease of understanding. But the embedded individual deductible on the HSA-qualified plan can't be less than $2,800 in 2022 ($3,000 in 2023). That's confusing and difficult to abbreviate. Instead of $2,000/$4,000, the shorthand has to be something like $2,000/$2,800/$4,000 in 2022, or perhaps $2,000/($2,800)/$4,000. It just doesn't roll off the tongue.

Out-of-Pocket Maximum

Out-of-pocket maximums - the most a patient or family must pay before the insurer reimburses all additional covered expenses in full - are required in all plans. They can be either aggregate or embedded. But irrespective of design, federal law imposes a maximum per-person (embedded) out-of-pocket maximum of $8,700 in 2022 and $9,100 in 2023.

Example 4: Ingomar Farkel's family plan has a $12,000 aggregate out-of-pocket maximum. During the 2023 plan year, Jack incurs $74,000 of covered expenses to treat his cancer. The most that he pays out-of-pocket is $9,100 before the plan pays the balance of his claims. The rest of his family must satisfy the remaining $2,900 (for a total of $12,000) before the plan pays all family members' covered expenses in full.

Which Design Is Better?

If a family has only one member who incurs high claims, the embedded design is better. As we saw in the example above, Gar Farkel ($5,000 family deductible) incurred financial responsibility of $5,000 for her claims. Simon Farkel ($5,000 family deductible with a $2,500 embedded deductible) paid only $2,500 against her deductible.

Because the insurer may begin to cover expenses sooner with an embedded deductible, the plan typically carries a higher premium than a plan with an aggregate deductible. In many cases, that premium difference is less than 1%, which seems like a small price to pay to help employees manage their out-of-pocket financial responsibility for covered care.

If two or more family members incur high expenses, the design doesn't matter.

Example 5: Jack Farkel and his wife Jill are covered on a plan with a $5,000 family deductible and a $2,500 embedded deductible. Jack, who suffers from diabetes, incurs $7,150 of expenses during the year, of which $2,500 are applied to his embedded deductible. Jill, who has multiple sclerosis, receives care totaling $9,300, of which $2,500 is applied to her embedded deductible. The two of them pay $5,000 in deductible expenses - the same amount that they would pay if their plan had a $5,000 aggregate deductible.

Example 6: Sparkle Farkel and her family are enrolled on the same plan as Jack. Sparkle incurs $4,725 of claims, of which $2,500 are applied to her deductible. The other three family members incur deductible expenses of $1,200, $800, and $500. At that point, the family satisfies the family deductible ($2,500 + $1,200 + $800 + $500 = $5,000), even though only Sparkle reaches her embedded deductible.

A plan with an embedded deductible never results in higher out-of-pocket costs than a plan with an aggregated deductible when the two family deductibles are identical. Sometimes the plans result in the same out-of-pocket responsibility (multiple family members incur high claims) and sometimes the embedded deductible saves money (one family member incurs most of the claims).

Which Design Is Better?

This section is a review of what we've already noted. The embedded plan never results in higher deductible responsibility when the family deductibles are the same. It protects families in which one family member incurs all or most of the claims. But this benefit - having the insurer begin to pay claims earlier as one family member meets her deductible - comes at a cost. That cost is a higher premium for that coverage.

Know Your Plan

Early in the evolution of HSA-qualified plans, a woman called me out of the blue. My company didn't sell her coverage, but someone told her that I could answer her question. She purchased a $5,000/$10,000 plan in the nongroup market and was shocked when the first $10,000 of her husband's cancer treatment was their financial responsibility. She assumed that "$5,000/$10,000" meant that the deductible was $5,000 per family member and $10,000 per family.

She was wrong. Her insurer didn't deceive her. The medical-insurance industry uses shorthand like "$5,000/$10,000" to describe the out-of-pocket responsibility. The problem is that this shorthand can mean one of two things:

• $5,000 for self-only coverage and $10,000 for family coverage.
• $5,000 for self-only coverage. For family coverage, $10,000 per family with an embedded deductible of $5,000 per family member.

You can see that there's a big ($5,000) difference between those two deductible structures. In one, one family member can incur up to $5,000 in deductible expenses. In the other, he can satisfy the full $10,000 family deductible by himself.

This woman learned the hard way. And she bought that plan before the passage of the Affordable Care Act in 2010. That legislation barred insurers from turning away applicants in the nongroup market based on their claims experience or health status. Unable to price their products to reflect risk - as, for example, vehicle, life, and homeowner's insurers can - medical insurers attempt to manage their risk by increasing out-of-pocket costs, narrowing networks, and limiting benefits. Thus, plans with aggregate $10,000 family deductibles are more common than they were prior to passage of the ACA.

The Bottom Line

Be sure you understand exactly how your plans deductible and out-of-pocket maximum work. Otherwise, you could be in for a rude awakening when a family member incurs very high claims. It might have taken the woman in the section above 10 minutes to confirm her plan design with the insurer's member services department if she'd known to ask the question. She would have saved $5,000 in out-of-pocket expenses (less the higher premium if she'd chosen another plan with an embedded deductible).

Now you know the question to ask.

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