Discrimination Against Consumer-Directed Healthcare

Health Savings Accounts are the fastest growing product in the health insurance marketplace. Currently, about 25 million families are managing some of their own healthcare dollars as a result. Virtually every serious study has found that these plans lower costs without jeopardizing the quality of care people receive. In fact, most employers have decided that giving financial incentives to employees is the most reliable way to rein in spending.

Given that one of the main goals of health reform was to lower the rate of growth of healthcare spending, it would be truly ironic if the new law makes the most reliable way of achieving the goal unavailable to millions of people. But it appears that is about to happen.

Here’s the reason. HSA plans achieve their lower premiums by having patients take more control over healthcare dollars. People pay less to the third-party payer because they agree to take responsibility for more of the expenses. Yet under the new rules for the medical loss ratio (MLR), the out-of-pocket spending from an HSA is not counted in the MLR calculation—at least for individually owned insurance.[1] Specifically, if an insurer pays for a healthcare service for their insured, that counts as a medical expense in calculating the medical loss ratio. But if an individual pays for a healthcare service to meet her deductible, that expense does not count as a medical expense for purposes of MLR calculation.

Health policy analyst and insurance veteran Greg Scandlen gives this illustration:

Suppose I buy an insurance policy with no deductible that costs $5,000. I have $4,000 in medical expenses. That is 80 percent of my premium, so the health plan is in compliance with the new MLR rule.

However, 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 percent of my $4,000 premium, so the plan is not in compliance.

Both cases have the exact same total cost of coverage. They have the exact same medical expense. But one design complies and the other does not.[2]

Repeal of the new MLR regulations would go a long way toward ensuring that HSA plans remain in the market and continue to thrive. However, more should be done. There is enormous potential to use Health Savings Accounts to meet the needs of the chronically ill. To realize that potential, we need not only to repeal self-defeating regulations produced under ACA, we also need to liberalize the restrictions in the pre-Obama tax code that keep these accounts from reaching their potential.

For more, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.


1. “Actuarial Value and Cost-Sharing Reductions Bulletin,” US Department of Health and Human Services, February 24, 2012. http://www.ncpa.org/pdfs/HHS-EHB-Actuarial-Equivalence-Bulletin-022412.pdf. Also see Mark E. Litow et al., “Impact of Medical Loss Ratio Requirements Under PPACA on High Deductible Plans / HSAs in Individual and Small Group Markets,” Milliman Inc., January 6, 2012.

2. Greg Scandlen, “New Regulation Threatens Agents, HSA Plans,” ­John ­Goodman’s­ Health ­Policy ­Blog, December 12, 2011, http://healthblog.ncpa.org/new-regulation-threatens-agents-hsa-plans/.

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books, Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America.
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