The Obama Administration vs. Consumer Directed Health
Many folks have been asking me questions regarding the impact that the Obama administration's new Medical Loss Ratio rule released last week will have on Health Savings Accounts and High Deductible Health Plans.
For the non-wonks reading this, the MLR issue hinges on the requirement within Obamacare that forces insurers to spend no more than 20% of each insurance premium on non-health care costs in the small group and individual market, and 15% in the large-employer market. Shorthand: it’s basically a hard cap for insurers’ profits, which is odd, not just because such a thing is fundamentally un-American, but because insurers are not very profitable to begin with—averaging about 4 percent in profit.
One of the key questions in advance of the administration’s rule was whether HHS would allow for Consumer Directed Health Plans—essentially a phrase that describes high deductible health plans + HSAs—to even exist within the government managed marketplace of the exchanges. This combo package has been steadily increasing in popularity, surpassing 10 million people last year despite being gutted in some respects by other rules within Obamacare (mostly limitations on what you can use HSA funds to purchase which made them a lot less attractive to families with young kids).
A new Obama administration rule could drive out of the market the low-cost, high deductible plans that are supposed to be available under ObamaCare. That would likely mean a sharp jump in taxpayer subsidies.
The problem stems in large part from contradictions in the hastily written health care overhaul.
Starting in 2012, ObamaCare requires insurers in the individual or small group (small business) market to spend at least 80% of premiums on medical costs, leaving 20% for salaries, advertising, fraud prevention, profit, etc. For large groups, this medical loss ratio (MLR) must be 85%. But another section of the law establishes the actuarial value of plans that can be sold on exchanges, which will cater to individuals and small groups. A bronze plan is allowed to have an actuarial value of 60%, meaning the insurer pays 60% of health care costs and the policyholder 40%. A silver plan can have a 70% value. Lower-actuarial plans tend to have lower MLR requirements.
Insurers offering bronze and silver plans must meet the 80% MLR under the final rule issued by the Department of Health and Human Services this week.
For those confused on what this means for the marketplace, Dan Perrin of the HSA Coalition has an answer, and it’s not good:
For example, the health savings account qualified health plan, and other health plans with healthy deductibles, cannot meet the MLR limits set by the rule. Not because HSA qualified plans are inherently incapable of meeting the MLR limits, but because the rules of how MLR is computed discriminates against HSAs and other health plans with higher deductibles. How does the MLR rule discriminate against bronze plans and HSAs? Here’s how: any payment for a health care service below the deductible by an individual or family does not count in the weird and bizarre world of the government bureaucrats MLR. Payments for health care services by insurers do count, but not payments by individuals.
To repeat, just so everyone is clear: If an insurer pays for a health care service for their insured, the MLR rule counts that in their MLR rule. But if an individual pays for a health care service to meet their deductible, the MLR rule does not count that expenditure.
Only five percent of those with an HSA qualified health plan in a year have any claims paid by their insurance. Therefore, it is a mathematical impossibility for HSAs to meet the MLR limits when the new HHS rule allows only five percent of HSA payments for health care services to count towards their MLR limit.
HSAs were essentially the only thing conservatives got out of the passage of Medicare Part D, and their ability to survive continued nibbling from the feds in the past three years is a testament to their popularity. But this may be too much of a hit for them to survive now. As Transom subscriber and health policy guru Greg Scandlen passes along this illustration of how it works:
- I buy an insurance policy with no deductible that costs $5,000.
- I have $4,000 in medical expenses.
- That is 80% of my premium, so the health plans is in compliance.
Flip side with an HSA/HDHP plan:
- If I buy a policy with $1,000 deductible for $4,000 in premium,
- And still have $4,000 in medical expenses.
- I pay the first $1,000 directly to meet my deductible.
- The health plan pays the remaining $3,000
- That is only 75% of my $4,000 premium, so the plan is not in compliance.
The left continues to argue that one of the reasons Obamacare is unpopular (roughly 34% support in the most recent poll) is that all its wonderful benefits haven’t kicked in yet; I continue to argue the reverse is true. Once the rules start to really impact the marketplace, where you arbitrarily take popular plans away from people who were promised they could keep them, I expect this law to become even less popular.