The final 2016 Notice of Benefit and Payment Parameters released by the Department of Health and Human Services (HHS) set the out-of-pocket limits for essential health benefits (EHBs) in 2016. The notice also included a “clarification” indicating that the annual self-only, in-network out-of-pocket maximum (OOPM) applies to each individual, even those enrolled in family coverage.

At first, it wasn’t entirely clear whether this embedded individual OOPM requirement applied to large fully insured and self-insured health plans. But on May 26, HHS, the Department of Labor (DOL) and the IRS (the departments) jointly issued a frequently asked question (FAQ) confirming that the embedded individual OOPM applies to large and self-insured group health plans (but not to grandfathered or retiree-only plans).

The OOPM clarification applies to plan years beginning on or after January 1, 2016.

Background

For plan years beginning on or after January 1, 2014, the Affordable Care Act (ACA) required all non-grandfathered group health plans, including self-insured plans, to establish an annual OOPM for in-network EHBs within prescribed dollar limits. For this purpose, out-of-pocket expenses include deductibles, coinsurance, copayments or similar charges, and any other required expenditure for covered EHBs.  

To determine which benefits are EHBs for purposes of complying with the ACA, HHS considers a self-insured group health plan to have used a permissible definition of EHBs if the definition is authorized by HHS (including any available state benchmark option). Thus, many self-insured group health plans have selected a state benchmark plan to define EHBs for the purpose of cost-sharing limits (along with the ACA prohibition against annual/lifetime dollar limits). Self-insured health plans that fail to adopt a permissible definition of EHBs must include all covered expenses in the cost-sharing limit required by law.

HHS final 2016 Notice of Benefit and Payment Parameters

The HHS notice addressed a variety of benefit provisions for 2016 affecting both the small group and individual health plan markets. As described above, the ACA requires that all non-grandfathered group health plans adopt an annual OOPM for covered, in-network EHBs for self-only coverage ($6,600 in 2015 and $6,850 in 2016) and family coverage ($13,200 in 2015 and $13,700 in 2016). Many group health plan administrators apply one OOPM for self-only and another aggregate OOPM for family coverage, so for an employee enrolled in family coverage, the higher limit applies to the family as a whole, regardless of the out-of-pocket expenses incurred by any covered individual.

Under the HHS notice, however, group health plans must “embed” an individual OOPM within any “other than self-only” coverage limit. So, if one family member incurs costs for EHBs that exceed the statutorily required OOPM for self-only coverage, the plan must pay 100% of that family member’s remaining expenses, even if the aggregate out-of-pocket expenses of all family members have not reached the cost-sharing limit for family coverage.

Plan design implications for 2016

Group health plan sponsors will need to appropriately credit incurred eligible health expenses toward the plan’s OOPM. They must also consider whether to separate EHBs from non-EHBs or use one in-network OOPM for all health benefits. 

To apply the embedded OOPM only to in-network EHBs, the plan sponsor must clearly define which expenses will be considered EHBs for purposes of the plan. However, many employers, insurers and third-party administrators (TPAs) would find this difficult, if not impossible, to administer. As a result, many employer-sponsored group health plans are expected to apply the OOPM to both in-network EHBs and non-EHBs to avoid the administrative burden of separating them out.

Group health plans may have a higher cost-sharing limit for family coverage (i.e., up to $13,700 in 2016), but the OOPM cannot exceed $6,850 per covered individual in a family tier of coverage in 2016.

How the embedded individual OOPM will work

 Let’s assume, for example, that a hypothetical group health plan has the following design:

  • Single coverage OOPM in 2016: $6,850
  • Family coverage OOPM in 2016: $13,700

An employee enrolled in family coverage incurs $7,000 in expenses, then the spouse incurs $5,000, and then the child incurs $2,000. According to the embedded individual OOPM rule, and ignoring the effect of any plan deductibles, covered participants and beneficiaries would be responsible for the following:

  • Employee incurs $7,000 expense. Employee pays $6,850 (because he or she reached the maximum allowable $6,850 individual OOPM); the plan pays $150.
  • Spouse incurs $5,000 expense. Employee/spouse pays $5,000 (because $6,850 + $5,000 is still less than the $13,700 family OOPM); the plan pays $0.
  • Child incurs $2,000 expense. Employee pays $1,850 (because $6,850 + $5,000 + $1,850 reaches the $13,700 family OOPM). The plan pays $150.

Group health plans with a family OOPM of $6,850 or less do not have to adopt the embedded individual OOPM because no family member’s out-of-pocket expense could exceed $6,850. For example, if the family OOPM were $5,000, no embedded individual OOPM would be necessary.

Also note that the embedded individual OOPM is based on the statutory limit for self-only coverage rather than the out-of-pocket limit for self-only coverage established under the plan. For example, if the plan’s OOPM limits were $3,000 single/$7,000 family, the embedded individual OOPM in the family coverage tier could still be $6,850, not $3,000 (although the plan could always choose to impose a lower limit).

Embedded individual OOPM rule applies to HSA-qualifying HDHPs

According to a FAQ from HHS and the FAQ recently issued by the departments, the embedded OOPM also applies to non-grandfathered HSA-qualifying high-deductible health plans (HDHPs), and an employer can offer an HDHP that complies with both the applicable IRS HDHP limits and the embedded OOPM. 

The HHS FAQ presents a scenario where, for 2016, a plan offers an HDHP with a $10,000 family deductible. This plan design would meet the applicable rules as long as it applies an annual OOPM of $6,850 to each individual in the plan, even if the family $10,000 deductible has not yet been satisfied. HHS clarified that this standard does not conflict with IRS rules for HSA-qualifying HDHPs.

Moreover, with the exception of preventive care, an HDHP may not provide benefits until the participant meets the annual minimum deductible, which is $2,600 for a family in 2016. HHS states in the FAQ that, because the $6,850 self-only OOPM will exceed the 2016 minimum annual deductible amount for family HDHP coverage, it will not cause the plan to fail to satisfy the requirements for an HSA-qualifying HDHP.

Keep in mind that, for 2016, the embedded OOPM limits are different from the IRS HDHP limits, which are $6,550 for self-only and $13,100 for family coverage. So, an HDHP participant with self-only coverage could have an OOPM of $6,550, while an individual with family coverage in the same HDHP could have an OOPM limit of $6,850 (assuming the plans are using the maximum limits).   

Going forward

Employers should review their group health plan(s) before finalizing 2016 designs and pricing to ensure that the OOPMs conform to the law and the recent guidance. They also should discuss administration and implementation of the embedded OOPM with TPAs and/or carriers. Some vendors are reportedly concerned about having enough time to implement the changes by 2016. Employers will likely want to explore all available options with their vendors.