By Jim Prince, J.D. McAfee & Taft

Most health insurance policies require persons covered by them to share in the costs. This strategy, often referred to as cost-sharing, serves two purposes. First, it provides participants an incentive to make sure that the services they receive are necessary and cost-effective. Second, it reduces the amount that plans pay out and, at least theoretically, lowers the premiums participants pay for coverage.

Cost-sharing strategies

A typical plan will have several cost-sharing strategies, including:

• Copayments, which require a participant or beneficiary to pay a fixed amount for certain services for the plan to pay the rest;
• A deductible, which is the sum the participant must pay before the plan will pay for any services; and
• Coinsurance, which indicates the plan will pay only a percentage of expenses after the deductible has been met (for example, 90% of the costs of a service after the deductible has been met).

Historically, many plans have also provided that after a participant pays a specific amount of expenses in the aggregate, often referred to as the out-of-pocket maximum, the plans will pay 100% of the costs of covered services.

ACA provision caps out-of-pocket maximums

Among many other things, the Affordable Care Act (ACA) imposes limitations on cost-sharing provisions and out-of-pocket maximums. Specifically, the Act requires all nongrandfathered plans to limit the out-of-pocket amounts that participants must pay to $6,600 for individuals and $13,200 for coverage options other than individual coverage, such as family coverage. In 2016, the out-of-pocket maximums will increase to $6,850 and $13,700, respectively. Note that those limits do not apply to grandfathered plans.

Individual maximums for 2016 regardless of coverage level

Recently, the federal government announced that group health plans will be required to implement individual out-of-pocket maximums for all tiers of coverage in 2016. The government refers to this practice as “embedding” individual out-of-pocket maximums in each level of coverage. The new rule, which the government considers a “clarification,” takes effect January 1, 2016.

The rule means that if one member of a family incurs covered medical costs that exceed the individual out-of-pocket limit, group plans will have to pay 100% of that person’s expenses, even if family coverage was selected and the out-of-pocket maximum for family coverage has not been reached.

Coverage example

Let’s look at an example of how the new out-of-pocket maximums will work in 2016. One of your employees, Robert, enrolls in your group health plan and selects coverage for himself and his spouse. His plan has a $500 individual deductible and pays 80% of expenses in excess of the deductible. Robert undergoes a medical procedure and incurs $50,000 in covered expenses. He pays his $500 deductible, and the plan pays 80% of $49,500 (the costs in excess of the deductible). Thus, if there were no out-of-pocket maximum, Robert would have to pay $9,900 (20% of $49,500).

Prior to the new rule, the plan could require Robert to pay the entire $9,900 because he chose family coverage and the family out-of-pocket maximum of $13,700 was not met. Thus, the total amount he would pay for the procedure would be $10,400 ($500 deductible plus $9,900 in coinsurance). The plan would have to pay $39,600.

Under the new rule, the plan would have to use the individual out-of-pocket maximum for all persons regardless of the level of coverage they choose. In Robert’s case, that means he would have to pay only $6,850, the individual out-of-pocket maximum for 2016. The plan would have to pay $43,150.

Next steps for employers

Employers that sponsor nongrandfathered, self-funded health plans should (1) evaluate their plans’ design to determine how to implement the new rule, (2) amend plan documents to expressly include the new requirement, (3) amend summary plan descriptions to ensure they are consistent with the new rule, and (4) determine the rule’s impact on plan costs and premiums. Employers with fully insured plans must confirm with their third-party administrators that their providers are complying with the new requirement.

The author may be reached at jim.prince@mcafeetaft.com.