Most health plan and health insurance policies include strategies that require persons covered under them to share in the costs that are paid. This strategy, often referred to as cost-sharing, serves two purposes. First, it provides an incentive to participants to be sure that the services they are receiving are necessary and cost-effective. It also reduces the amount that the plan has to pay out and, theoretically, the premiums that all participants have to pay for coverage.

The typical plan will include:

• A “co-payment,” which requires a participant or beneficiary to pay a fixed amount for certain services in order for the plan to pay the rest;
• A “deductible,” which is a sum of expenses that the participant must pay before the plan pays for any services; and
• “Co-insurance,” indicating the plan will pay only a percentage of expenses after the deductible is met. For example, a plan may pay 90% of the cost of a service once the participant has met the deductible.
• Many plans have historically also provided that once a participant has paid a specific amount of such expenses in the aggregate, often referred to as an “out-of–pocket maximum,” the plan or policy will pay 100% of the cost of services covered by the plan.

ACA provision caps out-of-pocket maximums

Among many other provisions, the Affordable Care Act imposes limitations on cost-sharing provisions and out-of-pocket maximums. Specifically, the ACA requires that all non-grandfathered plans limit the amounts that covered persons have to pay out-of-pocket to $6,600 for an individual and $13,200 for coverage levels other than individual coverage, such as family coverage. These out-pocket-maximums will increase in 2016 to $6,850 and $13,700, respectively. It should be noted that these maximums do not apply to grandfathered plans.

2016: Individual maximums implemented, regardless of coverage level

Just recently, the federal government announced that employer group health plans will be required to implement individual out-of-pocket maximums at all tiers of coverage beginning in 2016. The government refers to this requirement as “embedding” the individual out-of-pocket maximum in each level of coverage.

What this means is that if one member of a family incurs covered medical costs that exceed the individual out-of-pocket limit, the group plan will have to pay 100% of that family member’s expenses, even if family coverage was elected and the out-of-pocket maximum for family coverage has not yet been reached.

Coverage Example

Here’s an example of how the new out-of-pocket maximums would work in 2016:

Employee Robert enrolls in his group health plan and selects coverage for himself and his spouse. His plan has a $500 individual deductible, and the plan pays 80% of the expenses in excess of the deductible. In 2016, before other health expenses have been incurred, Robert has a medical procedure and incurs $50,000 in covered expenses. He pays his deductible of $500 and then his plan pays 80% of $49,500 (the costs in excess of the deductible.). Thus, if there were no out-of-pocket maximum, Robert would need to pay $9,900 (20% of $49,500.)

• Prior to the new rule, the plan could require that Robert pay the entire $9,900 because he chose family coverage and his family out-of-pocket maximum of $13,700 had not been met. Thus the total Robert would pay for the procedure is $10,400 ($500 deductible plus $9,900 in cost-sharing.) The plan would have to pay $39,600.
• Under the new rule, the plan would have to use the individual out-of-pocket maximum for all persons regardless of the level of coverage they choose. In this case, that would mean that Robert would only have to pay a total of $6,850, which is the individual out-of-pocket maximum, and the plan would have to pay $43,150.

This new rule, considered by the government to be a “clarification,” is effective as of January 1, 2016.

Next steps for employers

Employers who sponsor non-grandfathered self-funded health plans will need to evaluate their plan designs to determine how to implement this new rule, amend plan documents to expressly include the application of the requirement, amend and/or ensure summary plan descriptions (SPDs) are consistent with this new rule, and then determine the impact of this new rule on plan costs and, therefore, premiums. Employers with fully-insured plans will need to confirm with their third-party administrators that their providers are fulfilling these same compliance requirements.