Welcome back to the deep dive. If you've ever
had to, you know, enroll in a benefits plan You
know that health care finance seems to operate
under this deliberate fog of confusing terminology.
It really does. We are talking about the maze
of deductibles, copayments, coinsurance, and
that bewildering alphabet soup of tax accounts,
HSA, FSA, HRA. Right. It feels less like an organized
system and more like a high -stakes scavenger
hunt for your own money. It absolutely feels
that way. But the reality is that these specific
terms, while people often use them interchangeably,
in just casual conversation. Each one dictates
a really unique mechanism for how and when and
where money leaves your pocket for health services.
OK, so our mission today is to cut through that.
Exactly. Our mission today is a targeted deep
dive into the detailed financial sources you
shared, cutting through the confusion to provide
a, well, a definitive. clear map of these systems.
And the goal. We want you to walk away understanding
not just what these things are, but, you know,
how they're intended to operate and why they
were designed that way in the first place. OK,
let's unpack this by establishing the fundamental
concept first. We often hear the word coinsurance
used broadly in finance. Before we narrow it
down to the health care context, what is the
foundation? of coinsurance. So at its foundation,
coinsurance or coinsurance is simply the general
concept of splitting or spreading financial risk
among multiple parties, just spreading it out.
It's a mechanism of risk distribution in the
specific context of the U .S. insurance market.
It means the joint assumption of risk and liability
between the insurer and the insured party. It's
the idea that neither party carries the entire
financial burden alone. That makes sense. It's
fundamentally. shared risk. But when we look
at an actual benefit statement, we see three
distinct terms that are constantly mixed up and
whose sequence really defines our out -of -pocket
costs. When we drill down into U .S. health insurance,
what are the three core cost -sharing mechanisms
we need to clearly define? The three terms that
are essential for the listener to keep separate
are the deductible, the copayment, and then coinsurance
itself, used in a very specific, narrow sense.
Let's get those definitions locked in right now.
When we talk about the deductible, What is its
primary function? When does it kick in? The deductible
is the gatekeeper. It is the fixed dollar amount
you, the insured, pay out of pocket first. So
nothing happens until that's paid. Exactly. It's
a mandatory threshold that must be completely
satisfied before the insurance provider pays
any significant covered expenses beyond, you
know, usually basic preventative care. Fixed
amount first. Okay. How about the copayment?
A copayment or a copay is the fixed dollar amount
paid for a specific service each time you access
it. Every single time. Every time. Think of it
as a flat fee transaction cost, whether it's
$20 for a routine doctor's visit or, say, $75
for an emergency room visit. And finally, that
specific health insurance term. Coinsurance.
How does it fit into the payment timeline relative
to the other two? So coinsurance is the percentage
split. It is triggered only after you have satisfied
your initial deductible. After the gatekeepers.
Right. You pay this percentage of the remaining
allowed medical costs. And this sharing continues
until you hit your policy's stop loss limit,
which is your out -of -pocket maximum. And once
you hit that stop loss? The insurer then assumes
100 % of all additional covered medical costs
for that plan year. That sequence deductible
first, coinsurance percentage second, and then
co -pays existing throughout as these fixed transaction
fees. That is the absolute foundation for navigating
this entire system. It is. Now, let's dive into
the mechanics of the deductible because that
is the mechanism that determines the true front
end cost of an insurance plan. The deductible
carries significant weight because it is the
primary threshold that separates, you know, everyday
spending from catastrophic coverage. Insurers
rely on this mechanism heavily and it serves
three primary strategic purposes for them beyond
just the simple mathematical reduction in their
payout. OK, so what are those strategic drivers
that make the deductible so important to the
insurer's model? The first is just direct liability
reduction. By forcing the insured to bear that
initial cost, which in modern plans can be thousands
or even tens of thousands of dollars, the plan
reduces its overall financial liability directly.
Simple enough. What's the second? The second
strategic driver, and this is especially critical
in high deductible health plans or HDHPs, is
behavioral. Deductibles are fundamentally intended
to disincentivize unnecessary or frivolous claims.
Ah, that concept of moral hazard. The idea that
people overuse a service when they don't bear
the full cost. Precisely. If you are enrolled
in a plan where you know you have to clear a
$6 ,000 hurdle out of pocket, you are far less
likely to seek minor unnecessary care. because
you are effectively paying the full negotiated
rate for those initial services. So the hope
is that you become a more responsible, cost -conscious
consumer. That's the expectation, yes. And the
third driver focuses on the scope of the insurer's
focus. It's about restricting the insurer's liability
to only significant, potentially catastrophic
events. By shifting the financial burden of small,
routine claims, the minor illnesses, the routine
tests away from the plan, the insurer dramatically
reduces its administrative load. And that lets
them concentrate their resources. Exactly. They
can concentrate their massive resources purely
on handling and mitigating the largest claims
where the insured is truly exposed to financial
ruin. This strategic removal of small claims
allows the insurer to achieve higher overall
savings and price the policy more competitively.
This strategic choice leads directly to the classic
insurance tradeoff. Premiums versus deductibles.
Right. Our source material gives us some excellent
real -world numbers illustrating that necessary
inverse relationship. It's the core equation
of insurance design. You have to choose where
you want the cost burden to fall. You can opt
for a high monthly premium for the comfort of
a low deductible or a low monthly premium but
accept a high deductible. So what were the numbers
in that comparison? We saw a stark comparison
in the material. One plan had a relatively high
monthly premium of $1 ,087. This plan offered
a $6 ,000 deductible. Which means your ongoing
monthly drain is high, but your catastrophic
ceiling is relatively contained. Exactly. Now
compare that with a competitive plan that offered
a significantly lower premium, $877 a month.
The annual savings are substantial, but that
plan came with a massive required deductible
of $12 ,700. Wow. The tradeoff is clear. You
save $2 ,100 annually on premiums, but you are
personally liable for more than twice the upfront
costs before the insurance really kicks in. So
that lower premium is your financial wager that
you will not require major care. That's a perfect
way to put it. You're betting on your health.
That puts the choice into sharp relief for the
listener. Now, we touched on how deductibles
are applied, and it changes depending on the
type of insurance, which is an important clarification
point. It does. In health and travel insurance,
deductibles are typically term -based, meaning
they reset annually. Every year, back to zero.
Right. And this structure is necessary because
medical treatment for a single diagnosis often
spans multiple visits, months, or even years.
So applying it per visit would render the coverage,
well, useless. It's an annual reset regardless
of how many covered events occur. But that structure
changes entirely in property and automobile insurance.
Here, the deductible is often applied per covered
incident. If you total your car today, you pay
the deductible. If you have another covered separate
accident six months from now, you pay the deductible
again. OK, that makes sense. And what's more,
in property insurance, a single policy might
delineate completely separate deductible amounts
based on the cause of the claim. You might have
a lower fixed dollar deductible for theft, but
a substantially higher percent. Managed deductible
specifically reserved for catastrophic events
like a windstorm or an earthquake. So the deductible
acts as a risk modifier tailored to the specific
high exposure risk involved. That's exactly right.
Let's clarify some insurance jargon now that
sounds like a deductible but functions profoundly
differently. We need to define the difference
between a deductible and something called a franchise.
Yes. This is a subtle yet profound difference
in WISC dynamics that listeners must understand.
A deductible means the policyholder always pays
a fixed amount and the insurer pays the rest.
It is a shared liability. Okay. A franchise,
however, is a pure threshold. If a claim falls
short of that franchise threshold, the policyholder
is financially liable for the entire amount.
The whole thing. Can you give us an example using
specific numbers? Certainly. If you have a franchise
set at $20 ,000 and your claim for loss comes
in at $19 ,900, the policyholder pays the entire
$19 ,900, the insurer pays zero. Wow. But if
that claim is $20 ,100, the full liability for
that $20 ,100 is transferred to the insurer.
The whole amount, not just the amount over the
threshold. The entire thing. The franchise is
a line in the sand. The insurer is saying we
only engage if the loss is catastrophic. It shifts
the risk burden completely between the two parties
based on where the claim falls. That makes the
choice between those two systems extremely high
stakes for the policyholder. We also need to
dedicate some time to the major administrative
complexity that arises with third -party deductibles
found in liability coverages like auto liability
or workers' compensation. These are known as
third -party deductibles, and they are notoriously
complex because the money flows are, well, convoluted.
The insured is paying a portion of the claimant's
loss. Of someone else's loss. Yes. When a covered
liability event occurs, the insurer has a legal
and contractual obligation to immediately pay
the claimant the full covered amount to settle
the loss quickly. So the insurer covers the third
party loss right away, including the portion
that is technically owed by their own customer.
Correct. But by doing so, that payment automatically
creates a receivable and amount owed back from
the insured to the insurer equal to the deductible
amount stipulated in the policy. And the sources
note that this process is such an administrative
nightmare that millions of dollars frequently
go uncollected by insurers. It's a huge problem.
Why does this massive internal administrative
leak happen? It stems from a combination of systemic
issues and poor coordination. First, the event
triggering the receivable is usually a massive
stressful incident, a serious accident, a lawsuit,
meaning the insured is distracted, dealing with
the human and legal fallout. And the second reason.
The insurer's internal systems are designed to
prioritize complex claims adjudication over collecting
small receivables from their own clients. The
claims departments and the billing or accounts
receivable departments are often completely siloed,
leading to a breakdown in billing communication.
And the timing is bad. too, I'd imagine. The
timing is very difficult. The insurer pays the
claim immediately, but the policyholder may not
be billed until months later after the crisis
has passed, making the collection effort feel
punitive and much harder to enforce legally.
So the system prioritizes the rapid closure of
the third -party claim, but in doing so creates
a massive internal chasing problem. The insurer
has to chase their own customer to collect the
money they already paid out on their behalf.
That's a perfect summary of the problem. Okay,
let's move on to coinsurance. in the health context.
Let's reestablish its position in the cost -sharing
timeline. It starts only after the deductible,
the gatekeeper, is met. This is the period of
percentage -based joint liability. And this percentage
split continues until the insured hits the maximum
safety net, the stop -loss. Correct. We see common
insurer -insured percentages like 70 -30, 80
-20, or 90 -10. The first number is always the
insurer's share. Once you reach the stop loss,
which typically ranges from about $1 ,000 to
$3 ,000 in additional costs beyond the deductible,
the insurer then assumes 100 % of any additional
covered medical costs for that plan year. So
the stop loss is the contractual firewall against
financial ruin from a catastrophic medical event.
It is. It's the ultimate protection. That distinction.
The stop -loss limit is the safety net that is
specific to health. But as we discussed earlier,
the word coinsurance is also used in completely
different contexts, like property and title insurance,
where it actually functions as a punitive tool
rather than a safety net. It's an amazing functional
transformation. In property insurance, coinsurance
operates as a penalty for underinsuring the value
of your tangible property. A penalty. Yes. The
insurer includes a coinsurance clause, often
requiring the property to be insured for at least
80 or 90 percent of its replacement value to
prevent policyholders from saving money on premiums
by reporting an artificially low asset value.
And if they fail that test, if they underinsure?
If the policyholder files a claim for a loss.
and the insurer determines the property was significantly
underinsured according to the clause, the insurer
imposes a penalty. The payout is reduced, and
the policyholder has to share the loss based
on the percentage they should have insured versus
the amount they actually did insure. So it forces
policyholders into compliance regarding accurate
asset valuation. Exactly. That shifts the risk
dynamic completely from splitting a cost you
didn't foresee to... penalizing you for an intentional
decision to underinsure. And title insurance
takes this complexity to an other level entirely.
It really does. Title insurance, particularly
using the Older American Land Title Association,
ALTA, forms from 1987 to late 2006, outlines
two very specific scenarios where the insured
retains a percentage of the risk for partial
losses. And the first one is similar to property
insurance. The first, again, is if the insured
failed to insure their title for at least 80
percent of its market value when the policy was
issued, the insurer only pays 80 percent of any
partial loss. OK, that makes sense. But the second
scenario. involves property improvements, and
the formula required to calculate the retained
risk is notoriously complex. It is arguably one
of the most complex formula in insurance law,
and it is specifically designed to prevent the
policyholder from receiving an undue windfall
following significant uninsured property improvements.
So if you build a huge addition on your house
but don't update your title insurance. Precisely.
If post -policy improvements increase the property
value by 20 % or more above the original policy
amount, this coinsurance formula kicks in. Let's
attempt to articulate that ratio because it highlights
the level of legal nuance. Okay, so... The insurer
pays a percentage of the claim equal to 120 %
of the amount of insurance purchased, divided
by the sum of the original amount of insurance
and the cost of the new improvements. I see why
they call it complex. In short, it artificially
deflates the effective coverage percentage to
reflect the fact that the massive spike in property
value was never underwritten or charged a premium
for by the title company. It's a mechanism to
manage unexpected surges in insurable value after
the policy is written. The variation in the definition
of coinsurance is truly staggering. From a healthcare
safety net, to a property penalty, to a complex
legal ratio governing title changes. It's all
about context. Before we move on, how does this
percentage apply to business interruption coverage?
In business income interruption insurance, which
is a form of time element coverage, the coinsurance
percentage actually indicates the duration of
coverage the business is eligible for. It relates
to the estimated time needed to resume normal
operations. So a higher percentage means more
time? Exactly. For example, a 50 % coinsurance
might allow for six months of coverage, whereas
a much higher 125 % coinsurance allows for 15
months of coverage. It functions as a durational
metric, letting the business select its required
recovery timeline. Let's move to the most frequent
cost -sharing payment the consumer makes, the
copay. This is the fixed dollar amount paid directly
to the provider. That direct payment to the provider
is the norm, but we must note the specific administrative
exception for Medicare Part D patients enrolled
in the Medicare Prescriptions Payment Plan. What's
changing for them? Well, starting January 1st,
2025, they will see their copayments handled
indirectly through their insurance company rather
than paying the pharmacy directly. Now, let's
go back to the distinction that trips up so many
people trying to hit their out -of -pocket maximums.
Why is it so crucial to remember that copayments
are typically treated differently than deductible
and coinsurance payments? Because copayments
generally do not contribute toward that policy's
out -of -pocket maximum or stop loss. At all.
Generally not. You could spend hundreds or thousands
of dollars in copayments for routine visits and
prescriptions, and you may find that none of
that money helps you reach the ceiling where
the insurer takes over 100 % of costs. But deductible
and coinsurance payments do. They do. Deductible
payments and coinsurance payments do count. Copays
often do not. That makes calculating your annual
liability extremely difficult for the average
consumer. What is the intent behind the insurer
using co -pays if they don't count toward the
limit? The intent is twofold, and it's rooted
in utilization management. Insurers use co -payments
to share costs, but primarily to prevent that
moral hazard we keep returning to. By placing
a small fixed financial barrier, say $20, they
aim to deter people from seeking non -essential
medical care. reducing over -utilization and
the administrative processing of small claims.
And in some non -U .S. systems, they can also
serve to regulate access. Exactly. In systems
that rely on waiting lists for non -emergency
care, copayments can serve as a regulator to
reduce the welfare cost associated with those
long waiting periods. By tempering demand, they
theoretically allow the system to respond more
quickly to high -priority cases. That is the
theory. But let's examine the serious unintended
consequences, the dark side of cost sharing that
researchers have consistently documented. The
observation is stark. Higher copayments are strongly
associated with reduced use of necessary medical
care. Research has shown that these high financial
barriers lead to lower rates of drug treatment
adherence, worse adherence among existing users,
and more frequent discontinuation of therapy.
And this is particularly problematic for chronic
conditions. The sources specifically mention
chronic heart failure, breast cancer, chronic
obstructive pulmonary disease and asthma. For
these conditions, avoiding a low cost copay for
a daily drug can quickly spiral into a high cost
emergency event. It creates a perverse and expensive
public health incentive. You save the small copay
on the preventive measure, but you incur massive
costs for the subsequent emergency room visit
or hospitalization that was entirely avoidable.
So this mechanism undermines long term health
goals for short term utilization control. That's
the core conflict. This issue is often magnified
in the context of prescription. drugs, where
the cost differential between generic and brand
name drugs is managed via the copay structure.
Right. Insurers deliberately set the copay for
non -generic or brand name drugs higher than
for generics to incentivize the use of cheaper,
effective alternatives. However, pharmaceutical
companies actively try to disrupt this steering
mechanism. How do they do that? By offering drug
coupons or temporary subsidized copayment reduction
programs, which typically last anywhere from
two to 12 months. And those temporary subsidies
are designed to achieve patient lock in to the
high cost brand. Yes. The patient uses the drug
coupon, pays the minimal copay, and gets accustomed
to the brand name medication. Once that temporary
subsidy expires, the patient is suddenly faced
with the full high copay. And if they have a
serious chronic condition and no similar effective
generic is available. They're locked into paying
the high cost or suffering the consequences of
non -adherence. It's a calculated marketing strategy
used to maintain high patient loyalty and revenue.
To wrap up our discussion on copayments, let's
look one last time at the German national experiment
from the late 1990s, where they used copayments
to curb utilization on a systemic level. Germany
introduced comprehensive copayment rules specifically
to control costs and utilization in their statutory
health insurance. They did implement protections
for the vulnerable, you know, chronically ill
members, had an annual gross income limit of
1 % for copayments, including dependents. But
what was the result? Well, despite these efforts
and other administrative changes that reduced
average hospital stays, research studies ultimately
show that the copayment system was simply ineffective
in reducing doctor visits and overall utilization.
A major expensive experiment that failed its
core behavioral purpose. Yes, the system was
found to be administratively complex and failed
to meaningfully change behavior without damaging
access to care. So in the end, the Bundestag
voted the copayment system out entirely in 2012.
Which provides strong... International evidence
against relying on minor fixed financial barriers
for broad utilization control. Very strong evidence.
They've broken down the three core mechanisms
used to share costs. Now we shift gears to the
instruments designed to help the consumer pay
those costs using pre -tax dollars. This is where
the alphabet soup gets serious. We are starting
with the most celebrated and complex, the health
savings account, or HSA. The HSA is unique because
it masterfully combines health spending with
aggressive investment and retirement planning.
But we must reiterate the foundational role.
The big one. HSAs are available only to taxpayers
enrolled in a high -deductible health plan, HDHP.
That pairing is a strict requirement. And the
primary reason for their popularity, often driving
high -income consumers toward HDHPs, is the legendary
triple tax advantage. Let's detail each of those
three layers. Okay, layer one, tax -free contributions.
Contributions made by the employee via payroll
deduction are pre -tax, and contributions made
directly by the individual are tax -deductible,
shielding that income from federal taxes at the
time of deposit. Layer two. tax -free growth.
The funds roll over and accumulate year to year,
entirely sheltered from taxation. Unlike almost
any other tax -advantaged account, the investment
earnings, so interest, dividends, capital gains,
are not subject to current taxation. This makes
long -term compounding exceptionally powerful.
And layer three, tax -free withdrawal. Any withdrawals
made for qualified medical expenses at any point
in the participant's life are entirely tax free.
Tax free in, tax free growth, tax free out, provided
the funds are used for health expenses. That
level of sheltering is just unmatched. The ownership
structure is also key, differentiating it from
an employer -controlled account like an HRA.
Right. HSAs are owned by the individual. They
are completely portable. Even if the policyholder
loses their job, changes careers, or switches
to a non -HDHP plan, the money already deposited
remains theirs, always available for tax -free
withdrawals for qualified expenses. But they
can't add more money. They simply lose the ability
to make further deposits without active HDHP
enrollment. This portability and tax -sheltered
growth allow the HSA to transition into a powerful
investment vehicle, often dubbed the ultimate
retirement account. Because the funds are protected
from taxation, they can be actively invested
similarly to an IRA in stocks, bonds, mutual
funds, and other growth assets. And the key strategy
this enables is self -reimbursement, which is
where the long -term tax benefit is truly maximized.
Explain the self -reimbursement strategy because
it requires massive discipline, but maximizes
the tax benefit decades later. Okay, so the strategy
dictates that the participant... pays their current
medical costs, co -pays, deductibles, glasses,
etc., out of their own pocket rather than using
the HSA. Not using the HSA money at all for current
expenses. Right. They must meticulously retain
every single receipt from that point onward.
They allow the money in their HSA to grow completely
untouched for years or even decades, maximizing
the power of tax -free compounding returns. So
the HSA balance swells over time. When do they
finally withdraw the money? Later in life. when
they need a large untaxed lump sum of cash, perhaps
for something non -medical, they can withdraw
funds out of the HSA up to the value of those
decades -old retained receipts, entirely tax
-free. And there's no time limit. The IRS places
no deadline on when you must reimburse yourself
for expenses incurred after the HSA was established.
That is essentially converting initial pre -tax
income into tax -free retirement income decades
later, provided you had the liquidity and discipline
to pay for current health costs out of pocket
initially. It's a crucial tool for financial
strategists. Let's cover the contribution and
withdrawal rules. The contribution limits are
indexed annually by the IRS. For 2025, the limits
are $4 ,300 for a single person and $8 ,550 for
families. And for participants aged 55 or over,
there is an additional $1 ,000 catch -up contribution
available. It's important to remember that all
funds contributed, whether by the employer or
the employee, count toward that single annual
maximum. Now, if a participant withdraws the
money for a non -medical expense before reaching
age 65, what penalties do they incur? That withdrawal
is subjected to two significant financial hits.
It is immediately taxed as ordinary income, plus
a steeped 20 % penalty. This penalty is the IRS's
method of ensuring the account maintains its
health -focused purpose. But that 20 % penalty
disappears once the person reaches 65 or becomes
disabled. Correct. At that point, non -medical
withdrawals are only subject to income tax. This
allows the HSA to fully transition into functioning
like a traditional tax -deferred IRA, but with
the added benefit of maintaining its triple tax
-free status for any future qualified medical
expenses. We should also clarify the rules around
using HSA funds for insurance premiums, which
are generally not eligible. Right. Insurance
premiums are generally not HSA eligible, with
specific exceptions designed for vulnerable populations.
COBRA continuation premiums, premiums paid while
receiving unemployment compensation, certain
Medicare expenses, or age -based limits on long
-term care premiums are permissible. Otherwise,
the HSA cannot be used to pay your monthly insurance
bill. To put the growth of this system into context,
the HSA model replaced the older medical savings
accounts in 2003. The market today is colossal.
The adoption has been exponential, driven by
the shift toward HDHPs. As of the 2025 data point
cited in the sources, there is an estimated $159
billion being held across 40 million health savings
accounts. That's incredible. It has matured from
a niche concept to a dominant influential component
of the financial services and health sectors.
Let's switch gears to the FSA, the flexible spending
account. These accounts are generally simpler.
offered even with traditional health plans, and
are commonly used to cover the deductibles, copayments,
and coinsurance payments we detailed earlier.
But the biggest drawback, and the reason they
cause so much year -end panic, is the use -it
-or -lose -it rule. That rule is the primary
disadvantage. Any funds left unspent at the end
of the coverage period are typically forfeited
back to the employer. This forfeiture mechanism
historically resulted in employers rushing out
to buy huge inventories of supplies in December.
Right. The mad dash for dandates. Fortunately,
the IRS has allowed employers to mitigate this
strict rule, though they can only choose one
of the two options. That's right. The employer
can permit either a grace period of up to two
and a half months after the plan year ends to
use the funds, or they can allow a carryover
amount into the next. plan year. And that carryover
is $660 as of 2025. Correct. But they cannot
offer both the grace period and the carryover
simultaneously for the same plan year. It's one
or the other. Let's discuss the funding mechanism,
specifically for medical FSAs, which introduces
a definite risk for the employer. Pre -funding.
With a medical FSA, the entire annual contribution
amount the employee elected is made available
on day one of the plan year, even if they haven't
contributed that full amount yet via payroll
deductions. So it's front loaded. It is. And
that pre -funding is an employee benefit. So
if an employee utilizes the full annual amount
immediately and then separates from the company,
they do not have to repay the difference. That
is a direct realized risk for the employer. It
is, but it's often offset. The employer benefits
from the forfeited funds of other employees,
which can be substantial, estimated up to 14
% of total employee contributions, which helps
cover the risk incurred by the pre -funding rule.
And there are tax savings for the employer, too.
Yes, the tax savings the employer realizes from
reduced payroll taxes for all participating employees
is often much greater than the administrative
fees or occasional pre -funding losses. FSAs
aren't just for medical expenses. We have different
types, most notably the dependent care FSA. The
dependent care FSA is critical for working guardians.
It is used to cover expenses like daycare, summer
camps, or elder care costs that allow the guardian
to work. And the limit on that is going up. It
is. The federal limit is currently $5 ,000 per
household, but that is increasing significantly
to $7 ,500 per year as of January 1st, 2026.
And the Dependent Care FSA has a critical funding
difference compared to the medical FSA. Yes.
The Dependent Care FSA is not pre -funded. Employees
are only reimbursed up to the amount they have
already contributed so far during the plan year.
This completely removes the risk of an employee
overdrawing the account and leaving the job,
minimizing the employer's liability. One of the
most confusing regulatory aspects of FSAs has
been the constant change in eligibility for over
the counter drugs. We need to trace that regulatory
history. It was a chaotic journey. OTC drugs
were initially eligible in 2003. They became
ineligible without a doctor's prescription in
2011 following the Affordable Care Act. This
created massive friction for consumers and providers.
A huge headache. It was. Then, effective January
1, 2020, thanks to the CARES Act, OTC drugs,
along with menstrual care products, became eligible
again without requiring a prescription, restoring
their status and broadening the available spending
categories. And to manage that constantly shifting
list of eligible items at the register, there's
a technological solution required for compliance.
That is the IIAS, the Inventory Information Approval
System. system. This specialized technology is
mandated for most merchants accepting FSA debit
cards. It references a master eligibility list
and automatically distinguishes eligible health
items from ineligible items right at the point
of sale. So it does the sorting for you. Exactly.
It ensures compliance and provides automatic
verification for the debit card transactions.
Finally, a quick note on a specific state requirement
aimed at protecting employees from that use it
or lose it panic. Employers in California sponsoring
FSAs are required by state law to notify participants
working in California of the deadline to withdraw
their funds. This notice must be sent using at
least two different methods, and only one of
those methods is allowed to be electronic. So
they're really trying to make sure people know.
It's a legislative attempt to force clear communication
about fund deadlines. Finally, the Health Reimbursement
Arrangement, or HRA. This one is often the most
opaque because it isn't truly an account in the
typical sense of segregated... That's the key
legal distinction. An HRA is not a true account.
It's an employer -funded plan or agreement, a
contract, to reimburse employees for out -of
-pocket medical expenses and, in certain modern
variations, for insurance premiums. And unlike
the FSA and HSA, the funding rules here are strict
and one -sided. No employee contribution allowed.
HRAs must be funded solely by the employer. Employee
salary deductions are prohibited. This structure
means that if an employee separates from the
company, any unused dollars remain with the employer.
They don't follow the employee. They do not.
That's a major difference from the HSA. Post
-ACA, these HRAs also have rules about integration
with group plans. They must be integrated with
a qualified employer -sponsored group health
plan to avoid stiff excise tax penalties. The
advantage for both parties is significant. Reimbursements
for qualified medical expenses are tax -free
for the employee and tax -deductible for the
employer. And the funds can roll over. Crucially,
yes. Unused funds can typically be rolled into
future years, which is an advantage over the
traditional FSA model. The sources outlined a
few growing variations of the HRA. aimed at increasing
flexibility for employers. Yes. For small employers,
there's the QSEHRA, or Qualified Small Employer
HRA, established in 2016. It allows them to pay
for individual market premiums for their employees
instead of being forced to offer a traditional
group plan. And that's subject to IRS caps. It
is, such as 5850 for self -only coverage in 2023.
And the newest, most flexible model is the ICHRA,
which is driving enormous recent growth in the
HRA space. The ICHRA Individual Coverage HRA
became available in January 2020 and is open
to businesses of all sizes. It allows employers
to set monthly allowances and reimburse employees
for their individual insurance premiums and medical
expenses. The growth has been rabid, increasing
350 percent from 2020 to 2022. Why so much growth?
Primarily because it allows employers to scale
benefits across nine different employee classes.
It's very flexible. But there is a very important
regulatory restriction on offering the ICHRA.
An employer cannot offer employees in the same
classification a choice between the ICHRA benefit
and traditional group health insurance. It has
to be one or the other for a given class of employees.
And why is that? This rule is designed to prevent
adverse selection within the employer's plan
pool. Despite the recent popularity, the HRE
comes with a lot of complaints regarding its
administrative burden and complexity. Let's dive
into the compliance alphabet soup. HRAs are highly
regulated and must comply with the dense array
of federal rules designed for comprehensive health
plans. This includes COBRA rules regarding coverage
continuation, ERISA rules regarding plan funding
and fiduciary duty, and HAPA rules regarding
privacy and security. That seems like an enormous
administrative burden, especially for a small
business offering a QSC erasure. It is. They're
also subject to Medicare secondary payer reporting
requirements, which creates significant administrative
burden. and potential penalties for noncompliance.
Navigating this web of complex requirements makes
the HRA model very challenging to administer.
And it doesn't work for everyone. Right. Self
-employed persons and owners of S -corporations
are typically ineligible unless they legally
employ a spouse, severely limiting the utility
of the program for sole proprietors. We've built
the map of the mechanics and the funding instruments.
Now we move to the philosophical battlefield.
why these high -deductible systems, paired with
HSAs, were created, and what the real -world
impact is. This brings us to the core philosophy
of consumer -driven health care. Proponents view
the HDH -PHSA model as a necessary financial
reform intended to reduce systemic cost growth
and increase system efficiency across the board.
The core belief is that health care costs spiral
out of control because consumers are currently
too insulated from the true costs by traditional
low deductible plans. So the patient is essentially
being forced to become a rational economic actor,
a smart shopper in the health care marketplace.
Exactly. This model is supposed to accomplish
several things. Encouraging saving for future
health care expenses, allowing the patient to
receive needed care without a bureaucratic gatekeeper,
maximizing personal choice, and fundamentally
making consumers more responsible for their own
health choices by directly linting costs to their
bank accounts via the deductible. And the expected
market behavior change is that high deductibles
will push consumers to actively seek out and
choose lower cost options. That's the theory.
The thinking is that if you know you're paying
the first $12 ,000 yourself, you will diligently
shop for MRI prices, choose generic drugs, and
be vigilant against excess and fraud in the industry.
The model aims to achieve systemic efficiency
through consumer prudence. That is the compelling
argument for market efficiency. But critics argue
that this efficiency comes at a cost, benefiting
the wealthy and creating major equity concerns.
What are the major criticisms of the HSA -HDHP
model in practice? The primary criticism centers
on the fact that the system disproportionately
favors the healthy, the young or most critically
higher income people, those who can afford the
high deductible upfront and have the financial
stability to maximize the triple tax advantage
investment gains over decades. And there's data
to back that up. Yes. The Government Accountability
Office confirmed this, noting that tax filers
reporting HSA activity consistently had higher
average incomes than other tax filers. And for
those who aren't high income. The structure creates
agonizing dilemmas that pit health against financial
security. It creates an intense conflict for
families deciding whether to obtain necessary
medical treatment when it drains their savings
versus protecting their ability to manage future
tax liability and retirement savings. Right.
Critics argue that the tax breaks offered by
the HSA are too modest to persuade low -income
individuals to buy coverage when they are faced
with a potentially massive high deductible that
could wipe out their savings. And there's the
concern that this model. reduces the inherent
social redistributive element of insurance. By
heavily incentivizing healthy, financially secure
people to choose investment -focused HDHPs, it
potentially skews the risk pool. The pool of
traditional full -coverage plans is then left
with a disproportionately higher number of sicker
or older patients, which inevitably drives up
premiums for everyone who remains in those traditional
plans. There is also the inherent financial risk
tied to the investment nature of the HSA itself.
Participants follow the aggressive investment
strategy moving funds into stocks or other market
instruments. They must accept that those funds
are not FDIC insured and are subject to market
risk and potential capital loss. Which is a big
deal. For individuals who need stability and
quick access to their emergency medical funds,
this market exposure makes the investment -focused
HSA a significantly risky option. This highlights
the philosophical split. Is the HSA a retirement
strategy or a health crisis fund? And the user's
answer determines their entire financial path.
That's the core question. This philosophical
debate leads directly into the real -world results
regarding patient satisfaction and behavior.
And the results are complex and often contradictory.
In the early years, some reports showed high
satisfaction. For example, a 2005 survey by the
Blue Cross Blue Shield Association found widespread
satisfaction. However, the more comprehensive
long -term studies that followed painted a more
concerning picture regarding comfort and comprehension.
What did those later surveys find? Later surveys,
such as those from Towers Perrin and the Commonwealth
Fund, found that employees in high -deductible
plans were significantly less satisfied with
their plan's elements. They were less comfortable
with the level of financial risk and often struggled
to understand the mechanics of the plan or how
to use their associated accounts effectively.
But the most concerning finding relates directly
to access problems, linking back to the unintended
consequences of cost sharing. The research is
consistent. Participants in high deductible plans,
especially those with poorer health status or
lower incomes, are far more likely to delay or
entirely avoid getting needed care or to skip
medications because of that initial cost barrier.
They delay low -cost interventions because they
cannot afford the high deductible payment. So
the efficiency mechanism is actively undermining
necessary care. And if the system is built on
consumers acting as informed shoppers, how much
price and quality information do they actually
have? Very little. A general finding across multiple
studies highlights a massive information deficiency.
Few Americans in any health plan, only about
12 to 16 percent of insured adults, have the
necessary information about the quality or cost
of care provided by their doctors and hospitals
needed to make informed, consumer -driven decisions.
So the system requires that you shop, but the
prices and quality metrics are intentionally
hidden or simply unavailable. That creates a
huge fundamental gap between the theory of consumer
-driven health care and the patient's reality
in the marketplace. A huge gap, yes. We've covered
a vast amount of complex territory today. To
recap the core distinctions. The deductible is
the fixed amount you pay first. The copay is
the fixed transaction fee you pay for access.
And coinsurance is the percentage split that
kicks in after the deductible is met. And the
tax advantage accounts have distinct roles. The
HSA is the flexible, triple tax advantage investment
vehicle that requires a high deductible health
plan. The FSA is the use it or lose it account,
unless the employer permits the grace period
or carryover available with traditional plans.
And the HRA is the employer -funded agreement
that carries the strictest rules about funding
and rolls over funds at the employer's discretion.
And the consistent policy goal across all these
mechanisms is utilization control reducing unnecessary
claims by forcing the consumer to share financial
risk. But the evidence we found today profoundly
complicates that policy mechanism. We saw that
cost -sharing, while intended to curb frivolous
utilization, often ends up discouraging necessary
preventative care and medication adherence, leading
to worse long -term outcomes for chronic illness
and systemic failure in national experiments
like Germany's. This brings us to the ultimate
question for you, the learner, to consider as
you navigate your next benefits choice. We have
a system engineered for short term financial
efficiency aiming to discourage frivolous utilization.
Yet the evidence shows that this mechanism frequently
causes patients to delay low cost preventative
measures today, like taking daily maintenance
medication, which inevitably leads to high cost
emergency and catastrophic treatments tomorrow.
So the question is. How do we balance the efficiency
goals of insurance providers with the public
health reality that delaying necessary care now
simply guarantees greater cost and suffering
later, that trade -off efficiency versus necessity
is where the deep dive continues?