CEOs and CFOs across the country have been challenged with the need to offer a competitive employee-benefits plan that both meets requirements established under the Affordable Care Act (ACA) and remains affordable to the organization. With several of ACA’s mandates requiring employers to offer an increased number of covered benefits, many of which are at no member cost share, such as routine and preventive services, employers have been searching for solutions to offset the cost impact of such requirements.
One solution for employers that are not confined by the terms of established collectively bargained agreements is to increase members’ first-dollar coverage in the form of higher plan deductibles and out-of-pocket limits. The benefit of this strategy is twofold. One, it shifts some dollars back to plan members. Second, studies show that increasing the amount that a member must pay out-of-pocket for non-routine services results in members becoming more conscientious about avoiding unnecessary services and out-of-network providers.
Limiting unnecessary or repetitive services and increasing utilization of in-network providers are proven factors that help to mitigate overall plan costs. Employers have been adopting high-deductible health plans and increasing PPO plan deductibles in order to implement this cost-mitigating strategy. However, new ACA regulations, set to go into effect for plan years beginning on or after Jan. 1, 2015, will require employers to make even more strategic decisions regarding their cost-sharing strategy relative to out-of-pocket limits on medical and prescription-drug benefits.
The U.S. Centers for Medicare and Medicaid Services (CMS) defines out-of-pocket limits as the most that an individual would pay during a policy period before his or her health plan starts to pay 100 percent for covered essential health benefits. Federal mandates require that the limits for all health-benefit plans include deductibles, coinsurance, and co-payments. Federal mandates do not require the inclusion of premiums, balance billing amounts for out-of-network providers, spending for non-essential health benefits, or items not covered by the plan, though under a self-funded health-plan model, an employer may choose to include such costs at its discretion, depending on its preferred member cost-share philosophy.
In 2014, the maximum out-of-pocket cost limit that an employer or insurance carrier can require is $6,350 for an individual plan and $12,700 for a family plan. Health plans that are still grandfathered, meaning that they were in existence on March 23, 2010, and have not been changed in ways that substantially cut benefits or increased costs for consumers, are exempt from this requirement. Out-of-pocket limits for non-grandfathered plans are set to increase for plan years in effect on or after Jan.1, 2015, to $6,600 for an individual plan and $13,200 for a family plan. These total dollar amounts are not the only aspect of the out-of-pocket limit requirements that will be changing in 2015, however.
Starting in 2015, ACA will allow health plans to set separate out-of-pocket limits on medical, versus prescription-drug costs, as long as the combined amount of all such limits does not exceed the total allowed amount. For example, a health plan could limit an individual plan member’s prescription-drug spending at $5,000, and her medical expenses at $1,600 — since combined, the two limits do not exceed the overarching limit of $6,600 for an individual.
It is also important to note, that the out-of-pocket limit applies to in-network expenses only, as plans are not required to limit members’ out-of-pocket spending. This new regulation means that organizations offering non-grandfathered plans are faced with yet another strategic plan-design decision with potentially significant plan-cost repercussions: Should its health plan(s) combine its medical and prescription drug out-of-pocket limits, or set separate requirements?
To determine which strategy is most cost-efficient for your organization, begin your analysis by considering all non-premium, cost-sharing requirements for all offered medical and prescription drug-plan designs including deductibles, copays, and coinsurance.
- Does your plan include deductible and/or out-of-pocket limit requirements for either your health or prescription-drug plan today? If so, are they combined, or are the requirements separate for the two plans?
- How do your out-of-pocket limits compare to ACA’s 2015 limits? What would be the cost-saving implications of increasing your limits to meet ACA’s limit maximums? Would increasing your limits to meet ACA’s maximums mean a too significant cost-shift for your members in one year?
- Would a strategy of increasing your plan’s limits over five years be a more realistic transition?
- What percentage of your plan’s overall cost share is the responsibility of your members? If your plan places very little out-of-pocket cost-share requirements on its members, consider what impact, if any, adding a large dollar out-of-pocket limit will have on your plan.
Once you determine the cost-share strategy that will best meet the needs of your employees while remaining affordable for your organization, your next consideration should be whether to allow 2015 medical and prescription-drug costs to accumulate toward one out-of-pocket maximum, or whether your plan will set separate out-of-pocket limits that combined, meet ACA limit requirements. To determine the best strategy for your organization, work with your carrier or administrator, or consultant or broker, to analyze your current plan experience.
According to the Society for Human Resource Management (or SHRM), the majority of U.S. employers are spending 16 percent or more of their total health-care budget on pharmacy benefits. Analyze the needs of your plan members, and then consider setting a separate limit for prescription-drug spending. Once a member reaches the prescription drug out-of-pocket maximum, though your plan will still be required to pay future prescription-drug costs in full, the member will still need to reach a separate medical out-of-pocket spend limit before medical costs are paid-in-full by your plan as well. Separating the medical and prescription-drug limits will mitigate overall plan costs associated with members who are higher utilizers of one type of benefit.
A final consideration for all organizations should be communications to plan members regarding any plan changes that will affect them in 2015. Individuals who understand their benefits and the potential for incurring out-of-pocket expenses are typically more conscientious regarding their benefit utilization. When informed plan members choose to make more conservative decisions regarding their health-plan utilization, your organization will stand to benefit financially without the need to compromise its plan design.
Vanessa Flynn is vice president, client services for the POMCO Group.