HSA-eligible health plans can provide more preventive services, with IRS's blessing

The IRS recently issued guidance expanding the definition of "preventive care" that may be covered—possibly free of charge—by a high-deductible health plan (HDHP) that's paired with a health savings account (HSA). While the changes made by the guidance are relatively simple, they have the potential to make HSAs substantially more attractive, particularly to employees who have a chronic condition that is controlled by medication or therapy. Before diving too far into the details, however, it's important to have a solid understanding of HSAs and how they work.

Some background

HSAs are a type of tax-favored account employees put money into on a tax-free basis and later use to pay their medical expenses. For an individual to contribute to an HSA, he must be covered by an HDHP that covers only "preventive care" until after the deductible is met.

In other words, other than the types of preventive services all health plans are required to cover at no cost to employees (such as immunizations and mammograms), employees who are covered by an HSA-eligible HDHP have been required to pay 100 percent of their health expenses up to the amount of the (very high) deductible. While that can be off-putting to many, some of the tradeoffs include substantial tax benefits, lower premiums, a low out-of-pocket max (often the same as the deductible), and, for some, sizeable employer contributions to their HSAs.

The rationale behind the HSA/HDHP approach is that when employees are required to pay their own health expenses up front, they will be more motivated to shop around for cost-effective care and/or avoid unnecessary treatments. One of the biggest objections to HSAs, however, has been that they can discourage participants from getting the care they need and cause worsening health conditions in the long run. The new IRS guidance is intended to reduce that concern to some extent.

What has changed?

In short, the new guidance allows HSA-eligible HDHPs to cover more preventive drugs and therapies at no cost to employees (or possibly with some form of coinsurance or copay) by expanding the definition of "preventive care" the plan can cover before the deductible is met. Previously, the definition of preventive care was narrowly restricted to things like immunizations, annual exams, and standard screenings such as colonoscopies or mammograms.

The types of preventive care that now may be covered by an HSA-eligible HDHP include a number of medications, tests, therapies, and devices that can help employees manage or minimize such conditions as:

  • Diabetes;
  • High blood pressure;
  • Various heart conditions;
  • Osteoporosis and osteopenia;
  • Asthma;
  • Liver disease and bleeding disorders; and
  • Depression.

Some specific examples of items that can be covered as preventive medicine include blood pressure monitors for hypertension, a glucometer and A1C testing for diabetes, and SSRIs, which are a category of anti-depressants. The complete list can be found in the guidance at https://www.irs.gov/pub/irs-drop/n-19-45.pdf.

Some final thoughts

When it comes to HSAs, it's important to distinguish among:

  1. The types of preventive care that are required to be covered by a group health plan at no cost to employees;
  2. The types of preventive care an HDHP can cover before an employee has met his deductible; and
  3. The types of medical expenses an employee can use an HSA to pay for.

The only effect of the guidance is that it expands the definition of preventive care with regard to #2. It doesn't require plans to cover those services for free (but we would expect many HDHPs to be designed that way). Nor does it have anything to do with the types of medical expenses that can be reimbursed out of an employee's HSA.

While the effective date of the notice was July 17, 2019, employers that offer a fully insured health plan likely will have to wait until their next renewal (or possibly even longer) while their insurance carrier works through implementing the changes and getting them approved by the necessary state departments of insurance. If you're self-insured, you should be able to take advantage of the new rules sooner than that, either by modifying an existing HDHP or offering one for the first time.

Finally, HSAs are very popular among Republicans and many Democrats, and how many things can you say that about? As their popularity has increased, there have been increasing calls from legislators and healthcare/insurance professionals to make them more "user-friendly," so to speak. The IRS guidance may be the first of many attempts to do just that, so keep an eye out for future developments.