Cost-sharing (out-of-pocket maximum) federal rule explained

Immediately after Memorial Day, three federal agencies released a guidance document that explains health plan cost-sharing limits (e.g., out-of-pocket maximums on deductibles, copayments and coinsurance) for in-network essential health benefits.

On May 26, 2015, the Departments of Health and Human Services (HHS), Labor (DOL) and Treasury (IRS), released a set of frequently asked questions (FAQs) to explain limitations on cost-sharing that were addressed two months earlier in a formal rulemaking.

Background

To promote affordable health insurance, the ACA prohibited 2015 group health plans (non-grandfathered) from exceeding an annual cost-sharing maximum of $6,600 for self-only coverage and $13,200 for family coverage. In 2016, those limits increase to $6,850 and $13,700, respectively.

On February 27, 2015, HHS issued its 2016 Notice of Benefit and Payment Parameters (“NBPP”), a rulemaking that primarily applied to individual and small group market plans offered through an Exchange, but also included rules of more general applicability to insured plans.

In a significant change in policy, HHS stated in the Notice Preamble that annual maximum cost-sharing limits apply to each individual, whether enrolled in self-only coverage or family coverage.

Why did three federal agencies issue FAQs on this rule?

The FAQs were issued because there was confusion about the application of the cost-sharing limits to self-funded and large group health plans, as well as high deductible health plans.

Because the original Notice was issued only by HHS, and because the cost-sharing language was in the preamble rather than the body of the rule, many stakeholders questioned whether the cost-sharing limits would apply to plans under the jurisdiction of the DOL and the IRS. The FAQs were issued jointly by all three agencies so it was clear that the cost-sharing rule applied to all non-grandfathered group health plans subject to the ACA.

What do the FAQs say?

The FAQs make clear that cost-sharing limits for single coverage also apply to individuals covered in a family policy in all non-grandfathered plans. In other words, there is an “embedded” individual cost-sharing maximum even within a family plan, so that an individual’s cost sharing for the essential health benefits may never exceed the self-only annual limitation on cost sharing.

What is an embedded cost-sharing limit?

Having a separate individual cost-sharing limit for each family member in addition to an overall family cost-sharing limit is referred to as having an “embedded” cost-sharing limit. In contrast, if a plan had a non-embedded cost-sharing limit, the amount of cost-sharing expenses that any one family member incurred would not matter. The cost-sharing limit would not be met until the total of all family members’ cost-sharing expenses reached the family cost-sharing limit.

How does the rule work?

Here’s how the embedded family MOOP works in 2016, according to the federal example. Let’s say a family of four is enrolled in family coverage under a group health plan with an aggregate annual limit of $13,000 on cost-sharing for all four people.

• Person No. 1 incurs $10,000 in claims. Persons 2, 3 and 4, incur $1,000 each in claims. Total claims equal $13,000.

• Person No. 1 pays $6,850 out of pocket, the maximum amount of cost-sharing per individual.

• The plan must pay the difference between the $10,000 in expenses incurred by Person No. 1 and the $6,850 cap (i.e., $3,150) – even though the family has not exceeded its cost-sharing limit for all four people.

Without “embedded” cost-sharing limits, the plan would not have incurred any expense in this example. NOTE: Where the example mentions “the plan,” this means the employer for self-funded groups.

Does this impact high-deductible health plans?

Yes, the FAQs confirm that these cost-sharing rules also apply to high deductible health plans (HDHPs) with Health Savings Accounts (HSAs). Such plans that are effective on or after January 1, 2016 must continue to have a “collective” family deductible, to which all covered family members’ qualified expenses apply, as well as the “non-collective” individual maximum annual cost-sharing limit of $6,850. The cost-sharing limits for HDHPs with HSAs are different than those that apply to other types of plans and are $6,550 for self-only coverage and $13,100 for family coverage for 2016. As such, out-of-pocket (OOP) maximum for single plan HDHP coverage of $6,550 satisfies the 2016 single plan cost-sharing limitation of $6,850.  For a family HDHP, no one family member can incur more than $6,850 per individual while the family aggregate cannot exceed the maximum HDHP of $13,100.

When is the rule enforceable?

The new cost-sharing rule will be enforced for plan years beginning in 2016. Note that under the ACA, the "plan year" may not be the same thing as the "policy year," the "renewal year," or the "deductible year."

Learn more about the cost-sharing rule by visiting the United States Department of Labor’s FAQs page.

Note: The "How does the rule work" section of this post has been revised since the original publication for clarity and accuracy.