A Look at the Latest Controversy Brewing over the ACA: The Annual Limit on Out-of Pocket Costs

The latest dust up in Washington is a fight between the Obama Administration and employer groups over the Affordable Care Act provision that limits consumers’ annual out-of-pocket costs. Employers are concerned that recent administration guidance “clarifying” the rules to implement this policy will increase their costs, particularly for those that have employees in high deductible health plans.

What’s the issue? 

The ACA’s protection against catastrophic out-of-pocket health care costs is laudable and necessary.  Prior to the ACA, studies showed that even those who were insured could face costs that put many families into bankruptcy. Though the majority of Americans were insured, many fell into the category of “underinsured,” meaning their coverage didn’t provide adequate financial protection.

The drafters of the ACA wanted to improve the adequacy of health care coverage, and one critical element of that is the annual limit on out-of-pocket costs. Under the ACA, all non-grandfathered plans must cap annual out-of-pocket costs at $6,600 for self-only coverage and $13,200 for “other than self-only” coverage in 2015.  This limit is indexed to grow annually; the thresholds will be $6,850 and $13,700 in 2016. And the limits come with some potential holes: plans don’t have to count out-of-network care or services that fall outside of the Essential Health Benefits package toward the annual limit.

While it may not have been entirely clear what “other than self-only” coverage meant, the Administration clarified in the preamble to federal rules and again in Frequently Asked Questions released earlier this year that individuals could count on the self-only limit whether they were enrolled in an individual plan or as part of a family plan. Providing assurance to consumers that their own costs are capped at $6,600 per year, regardless of the plan in which they are enrolled, is what consumers could reasonably expect from the ACA provision. And it doesn’t disadvantage individuals simply because they are part of a family plan.

Why are employers concerned?

Employers are balking at federal regulators’ interpretation of how the annual limit must be applied. They assert that the interpretation is contrary to the text of the ACA as well as the federal agencies’ own rulemaking, and that it will be too difficult to implement separate limits for individuals within a family. Ultimately, however, their greater concern is that it would be disruptive for employers in the midst of finalizing their plan offerings for 2016.

In a comment letter to the administration, a coalition of employers notes that neither the statute nor federal regulations explicitly say that the self-only limit could apply to family coverage. It is only with the more recent “clarification” in guidance language that employers were put on notice that the self-only limit on out-of-pocket costs applies to individuals enrolled in a family plan. “HHS cannot expect those who seek to understand the cost-sharing limits in the future to read the preamble of every rule HHS has issued since 2013 to discover whether HHS has created a new cost-sharing limit that is not reflected in its regulation.”

The employers have a point here. The federal agencies need to do a better job making sure that those they regulate are given proper notice of the rules under which they must operate. That said, most employers won’t be significantly affected by having to use the lower threshold for individuals.  In fact, the federal rule is consistent with where most employer plans currently set annual limits on out-of-pocket costs. According to an annual survey of employer-sponsored coverage, 94 percent of workers in employer plans in 2014 were covered by an annual limit on out-of-pocket costs, and of those covered, the average limit was $3,011.

In practice, most consumers are not likely to hit their annual limit on out-of-pocket costs. A very small share of individuals account for total health care spending: in 2012, 5 percent of the population accounted for 50 percent of total expenditures. But for those who have significant health care needs, having a limit provides critical financial protection. To ask those individuals to pay up to $13,200 or more just because they are part of a family could cause significant financial stress – and the very underinsurance the drafters of the ACA hoped to eradicate.

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