The Affordable Care Act (ACA) limits the amount of annual cost sharing that small group and individual health plans can impose on an enrollee for essential health benefits (EHBs). Cost sharing under the ACA includes deductibles, co-insurance and co-payments for in-network providers. Out-of-pocket maximums for self-only coverage must also incorporate a carve-out benefit such as prescription drugs.

The federal government recently affirmed that for 2016 the annual self-only, in-network out-of-pocket maximum (OOPM) applies to each individual enrolled in a plan, even those enrolled in family coverage. This "embedded" individual out-of-pocket maximum is designed to prevent consumers from being penalized for purchasing family coverage instead of self-only coverage.

Stated differently, this rule means that no individual can be required to pay more in annual cost sharing than the ACA self-only out-of-pocket limit, even under a family coverage plan that is subject to a higher overall OOPM. This has the effect of "embedding" the self-only ACA out-of-pocket maximum in any type of insurance coverage (other than self-only) selected by an employee.

This rule affects the design of many employer-sponsored plans—even self-funded and large group plans, and particularly high deductible health plans (HDHPs) with higher out-of-pocket limits. As of January 1, 2016, a standard high deductible plan with a family deductible greater than $6,850 must have an embedded self-only deductible limit that does not exceed that amount. 

Embedded Individual Out-of-Pocket Maximum Illustrations

The Department of Labor published the following example to help illustrate how the new rule would work.

• A family of four individuals is enrolled in family coverage under a group health plan in 2016 with an aggregate annual limitation on cost sharing for all four enrollees as $13,000.
• Individual #1 incurs claims associated with $10,000 in cost sharing.
• Individuals #2, #3, and #4 each incur claims associated with $3,000 in cost sharing. 
• Under the new rule, the self-only maximum annual limitation on cost sharing ($6,850 in 2016) applies to each individual. Cost sharing for individual #1 for 2016 is limited to $6,850, and the plan is required to bear the difference between the $10,000 in cost sharing for individual #1 and the maximum annual limitation for that individual, or $3,150 ($10,000 - $6,850 = $3,150).
• The aggregate $15,850 ($6,850 + $3,000 + $3,000 + $3,000) in cost sharing that would otherwise be incurred by all four individuals is limited to $13,000, the annual aggregate limitation under the plan, and the plan must pay the difference between the $15,850 and the $13,000 annual limitation, or $2,850. 

Contrary to this example, many HDHPs currently have an overall family deductible without an embedded self-only OOPM. Where an HDHP has a deductible of $5,000, for example, for self-only coverage and a deductible of $12,000 for family coverage, an individual enrolled in the plan's family coverage could incur out-of-pocket costs up to $12,000. Since a plan's deductible counts toward its OOPM, this type of HDHP plan design would not be permitted in 2016 if the HDHP's family deductible were greater than $6,850. For 2016, this plan's family deductible must include an embedded individual OOPM of $6,850.

Another example:

• A plan has self-only coverage with an OOPM in 2016 of $6,850 and a family coverage OOPM of $13,700. 
• An individual employee enrolled in family coverage incurs $8,000 in expenses. The employee's spouse incurs $6,000 in expenses, and the employee's child incurs $3,000 in expenses. 
• According to the new rule, the employee would pay $6,850 of the $8,000 in expenses while the plan would be responsible for $1,150 ($8,000 - $6,850 = $1,150). 
• Since the spouse incurred $6,000 in expenses, the spouse is responsible for paying $6,000 since this amount plus the employee embedded amount is less than the $13,700 family OOPM ($6,850 + $6,000 = $12,850, or less than the $13,700 family deductible). 
• The plan must pay $0 for the spouse's expenses.
• The employee must pay $850 of the child's $3,000 in expenses, because that is all that remains before the family deductible is met ($13,750 family deductible - $12,850 already paid for employee and spouse expenses = $850).
• The plan pays $2,150 for the child.

It should be noted that group health plans with a family OOPM of $6,850 or less do not have to adopt the embedded individual OOPM since no member's out-of-pocket expense could exceed $6,850. The embedded individual OOPM is based on the statutory limit for self-only coverage, rather than the OOPM 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 would still be $6,850, not $3,000. The plan could, however, choose to impose a lower limit. 

Requiring an embedded out-of-pocket maximum in 2016 is a significant development for self-funded and large group plans. Group health plan sponsors will need to appropriately credit incurred eligible health expenses toward a plan's OOPMs. Sponsors of group health plans that feature a family deductible or OOPM that is greater than $6,850 should consult with their benefits advisors to ensure that plans are designed to appropriately incorporate the new embedded OOPM rule.