You Have a Chronic Condition. Is an HSA-qualified Plan the Best Coverage?

Chronic conditions change the financial calculus when determining the right coverage. But even a plan with a broader and higher deductible may be the better option.

At first glance, HSA-qualified plans appear to be the worst possible form of coverage for someone with a chronic condition that requires regular and expensive treatment. After all, under federal tax law, these plans must apply all diagnostic services and treatments to the plan's deductible.

Some efforts have been made to make HSA-qualified plans more accommodating to patients with chronic conditions. Sens. John Thune (R-SD) and Thomas Carper (D-DE) have introduced legislation to provide insurers and employers with the flexibility to cover a range of services for chronic conditions below the deductible. More recently, nascent efforts to "decouple" (allow everyone not just those enrolled in an HSA-qualified plan, to open and fund a Health Savings Account) or create HSA-qualified plans based on actuarial value (the percentage of total claims paid by the insurer - versus the patient). And the Trump administration released guidance in 2019 listing 14 services or classes of prescription drugs that could be defined as preventive so that they could be covered below the deductible.

But these efforts either haven't been enacted into law (the legislative proposals) or target a narrow segment of the population with a chronic condition (the regulatory guidance). The fact remains that most care for chronic conditions must be applied to the deductible. This requirement alters the financial calculation for these patients. Whereas most families incur random years of high medical expenses (a birth or musculoskeletal injuries and rehabilitation, for example), those with chronic conditions that require regular, intensive treatment incur high financial responsibility year after year.

So, HSA-qualified plans are never the right choice for patients with chronic conditions, right? Well, not so fast. That may be true when patients have a choice. But it's worth digging a little deeper, as an HSA-qualified plan and the associated Health Savings Account may be more advantageous financially.

Network

The roster of participating hospitals, doctors, and other medical professionals is the wild card in choosing a medical plan. When employers offer a choice of two plans, including HSA-qualified coverage, the HSA-qualified plan is often a PPO and the other option an HMO. The networks may be very different, so be sure to check the network status not only of your current providers, but the facilities that you might need to visit to treat your condition if it deteriorates. You want to be sure a regional teaching hospital or perhaps a nationally renowned hospital for your condition (like Cleveland Clinic for cardiovascular disease) is in-network.

Also, a PPO provides a level of coverage outside the network that an HMO doesn't. The out-of-network benefit may include a higher deductible, higher coinsurance, and a higher out-of-pocket maximum as a means of keeping you within the network, where your insurer has negotiated prices. But when your life hangs in the balance (or even if you believe that it does), you may want the option to access the best care regardless of network status or financial arrangement.

Out-of-Pocket Maximum

Today, most Americans outside of government workers and union members (and some within these segments) have coverage with a deductible of at least $1,400 for self-only and $2,800 for family coverage (the 2022 statutory minimum annual deductible for an HSA-qualified plan). But many of these plans aren't HSA-qualified because of a design feature, such as copays for diagnostic visits, behavioral-health sessions, of Tier 1 prescriptions.

Many plans apply coinsurance (the insurer and patient share a percentage of each dollar of allowable charges) to services after the deductible. The percentages vary, with no consistent differences between HSA-qualified and non-HSA-qualified plans.

The out-of-pocket maximum rules are different. Under federal law, a non-HSA-qualified plan's out-of-pocket maximum can't exceed $8,700 for self-only and $17,400 for family coverage. Most employer-sponsored plans don't have ceilings that high, but it's not uncommon for coverage sold in federal- and state-facilitated public marketplaces ("exchanges") to reach this level.

In contrast, the maximum for an HSA-qualified plan is $7,050 for self-only and $14,100 for family coverage (with a ceiling of $8,700 for any one family member). That's $1,650 (self-only) and $3,300 (family) less than the maximum allowed other plans. If you have a chronic condition that requires frequent and expensive medical intervention, that difference can be meaningful. Depending on your project (and, in the end, actual) expenses, you may be better off enrolling in the HSA-qualified plan - even with its broader and perhaps higher deductible - if it caps total out-of-pocket spending.

Prescription-Drug Coverage

This is a special category of expenses. A growing number of medical plans - particularly self-insured coverage cobbled together by an administrator that chooses "best-in-class" medical, behavioral-health, and prescription-drug benefits - apply prescriptions to a separate deductible and out-of-pocket maximum. This design can add thousands of dollars to your out-of-pocket costs on a non-HSA-qualified plan (though total spending for covered medical services and prescriptions can't exceed the $8,700/$17,400 ceiling noted above).

In contrast, HSA-qualified plans generally - but not always, so check your plan carefully - fold prescription drugs into the medical benefit under a single deductible and out-of-pocket maximum. Again, the HSA-qualified plan may offer lower out-of-pocket financial responsibility, even though non-preventive prescriptions are applied to the deductible rather than subject to copays or coinsurance.

Reimbursement

Enrollees in a non-HSA-qualified plan can participate in a Health FSA if their employer offers one. This plan allows them to divert up to $2,850 (or less, at the employer's discretion) of their income on a pre-tax basis into a reimbursement account to pay their medical, dental, and vision bills. If both spouses have access to a Health FSA, each can make an election to pay each other's expenses. An unmarried patient with a $5,000 of out-of-pocket expenses can pay $2,850 of that bill with pre-tax dollars (saving $855 at a 30% marginal tax rate) and the other $2,150 with after-tax funds. Total spent after tax savings: $4,145.

In contrast, the same patient with the same expenses can deposit $3,650 pre-tax into a Health Savings Account (thus saving $1,095 in taxes) and pay the balance ($1,350) with after-tax funds. Total spending after tax savings: $3,905.

The Health Savings Account owner pays $240 less. That's not a huge difference. But Health Savings Account owners can accumulate balances when they're healthy and spend those funds later in life. Thus, this patient could pay the entire $5,000 bill with Health Savings Account balances and save $1,500 in taxes. That would make the difference between the two plans $645.

Still not convinced? If both patients are married, the Health Savings Account owner can save up to $7,300 in his account, generating tax savings of $2,190 and leaving her with a balance $2,300 for future qualified expenses.

In contrast, the Health FSA owner faces the same limit if his spouse doesn't have access to a Health FSA at work. If she does, they may be able to elect up to $5,700 and save up to $1,710 in taxes. that's still less than the Health Savings Account owner - and Health FSA funds can't be carried well into the future.

The Bottom Line

Like many things in life, the answer isn't always obvious. Never evaluate your options for medical coverage on one dimension alone - whether you're healthy or not. You must understand the medical coverage and financial arrangements that each plan delivers. And you must project your likely utilization and your financial responsibility for that care. Patients with chronic conditions that require regular, expensive care don't have to project. But they still must understand the coverage and financial arrangements under each coverage option to determine which is more beneficial to them. The HSA-qualified plan may - or may not - trump other options in the end.

#HSAWednesdayWisdom #HSAMondayMythbuster #HSA #HealthSavingsAccount #Taxperfect #yourHSAcademy #yourHealthSavingsAcademy