Consumer Directed Healthcare PlansWhat they are and how they work Presented by the Southeast Service Cooperative Bill Colopoulos, Health Benefits Consultant firstname.lastname@example.org (612) 987-4155 June 2009
Consumer Directed Healthcare Plans Defined • Consumer Directed Healthcare Plans (CDHPs) are account-based health insurance plans that: • Couple personal healthcare savings accounts to lower cost health plans. • Empower employers and employees to preserve the value of insurance premium for future application of healthcare expenses. • Allow individuals to purchase more affordable health plans that reflect their true insurance needs. Pay less to insurance plan; invest in your own healthcare savings account
CDHP: Provides Choice Traditional Plans: • High up front premium cost. You pay more $ whether you have claims or not. • Lower out of pocket expenses IF you have claims. CDHPs: • Splits premium costs into two buckets: • A lower up front premium paid to insurance company + money put into a health savings account that you own. • Personal control over one of the “buckets”; (your savings account) you manage payment of claim costs IF you have them. If not, money stays with you. CDHP helps you save money for future claim costs
Types of CDHPs • Four basic types of personal healthcare savings accounts: • Flexible Savings Accounts (FSAs) • Health Reimbursement Arrangements (HRAs) • VEBA-funded HRAs • Health Savings Accounts (HSAs) FSAs: “Use or lose”; HRA/VEBA and HSAs: “Use or keep”.
Flexible Spending Account • Funded by employee; pre-tax through payroll deduction. • Health care account can be used to pay for unreimbursed 213 d healthcare expenses – as liabilities are incurred. • Non-portable. • Must “use or lose” monies set aside for one year’s expenses must be applied to those expenses. • Has dependent care account feature; maximum of $5,000 per year. • Maximums set by employer for health insurance FSA.
Health Reimbursement Arrangements • Funded only by employer. • Agreement to pay up to a specified amount of a deductible and/or out of pocket liability for a health plan OR unreimbursed 213 d healthcare expenses – as liabilities are incurred. • Non-portable. • No expenses, no value. • Employer may or may not carry forward unused HRA funding. • HRAs usually tied to an underlying plan design chosen by the employer. • HRA can be used in addition to a FSA.
VEBA Funded HRAs - Second Generation CDHPs • Funded only by employer. • The VEBA is an actual cash account set up for each participating employee that is owned by the employee. • Employer contribution is made to the cash account. • Account funds can be used to pay for unreimbursed 213 d healthcare expenses at the employees’ discretion. • Unused VEBA HRA balances carry forward from year to year: no “use or lose” as is the case with FSA. • VEBA is portable; owned by the employee and transferable. • VEBA pays interest on accumulated funds. • VEBA funded HRAs usually tied to an underlying plan design, selected by the employer. • VEBA funded HRA can be used in addition to an FSA.
Health Savings Account Plans - Second Generation CDHPs • HSAs can be funded by either employer or employee or both (up to annual maximums defined by the IRC – 100% of deductible, up to $3,050 single or $6,150 family + $1,000 “catch up” contribution for employees over 55)*. • The HSA is a cash account set up for each participating employee that is owned by the employee. • Account funds can be used to pay for unreimbursed 213 d healthcare expenses at the employees’ discretion. • HSAs pay interest on accumulated funds. • HSAs are portable. • HSAs must be set up with a IRC-defined High Deductible Health Plan (HDHP) that includes minimum deductibles ($1,200 single; $2,400 family) and maximum out of pocket liability limits (single $5,950; family $11,900)*. • Pharmacy expenses must be subject to HDHP. • Limited FSA (dependent care, vision, dental) only. * these amounts apply to 2010, per IRS regulations.
Second Generation CDHPs - Pros and Cons • HSAs (Pros) • Allow carry forward account equity with both employer and employee contributions. All balances remain tax free while they are unused and can be used tax free for 213 d expenses. • Employee can choose their own HSA account administrator and decide how they want to invest their unused HSA account balances. • The combination of HSAs and HDHPs often are the most cost-effective premium option for the younger, healthier employee. • HSAs can be used for non-medical expenses (subject to 10% penalty and income tax prior to Medicare eligibility age; subject only to income tax once eligible for Medicare). • HSAs (Cons) • Limits on contributions and plan design dictated by IRC. • Plan design does not allow for separate co pay or deductible pharmacy plan or standard FSA. • Most HSAs are sold with HDHPs that require a family deductible that applies to all claimants (no single deductible when electing family coverage). • Cannot use HSA funds to pay for Medicare supplemental coverage premiums.
Second Generation CDHPs - Pros and Cons • VEBA-Funded HRA (Pros) • Allow carry forward account equity with employer contributions. • All balances remain tax free while they are unused and can be used for 213 d expenses tax free. • Health plan design is totally flexible. • Can use VEBA funds to pay for Medicare supplemental coverage premiums. • VEBA Funded HRA (Cons) • Allows only employer contributions. Employees may not contribute. • VEBA account administration and interest earning vehicles provided by and determined by health plan administrator. • VEBA funds can only be used for 213 d expenses. They are not a retirement savings account. • Unused VEBA balances can only be transferred to dependent beneficiaries when the employee dies; if no dependent, the balance reverts to the group’s plan fund.
Is a CDHP the right choice for you? • Yes if, • Your annual healthcare expenses are low to moderate. • Are one of the 80% of a typical group that accounts for less than 20% of the groups total medical costs. • Like the idea of accumulating savings in your own account rather than being subject to annual changes in plan design – and your out of pocket liabilities. • Would prefer to buy less (and spend less) on a more basic insurance policy rather than an expensive “everything is covered” policy that you may not use. • No if, • Your annual healthcare expenses are high and would exceed any annual contribution either you or your employer would make to your healthcare savings account PLUS any difference in premium costs between your current plan and the CDHP. • Prefer to pay more up front in premium and then have the insurance pay more when you do incur claims.
CDHP: Fact and Fiction • FICTION: • CDHP will only make sense for a few, young people. • FACT: • CDHPs actually work best for the majority of employees and their families. The reason is simple: typically 70-80% of the plan members of any group incur 20 - 30% of the group’s total medical expenses. • Most people do not know whether it is worthwhile to pay more for their insurance upfront. Claims vs. premium value is hard to predict. • FACT: • CDHPs also provide low cost, adequate protection for the 20-30% who do require greater amounts of healthcare. CDHP helps employees choose the right amount of insurance protection
CDHP: Fact and Fiction • FICTION: • CDHPs discourages people from getting the healthcare they need. • FACT: • CDHPs actually improve the health of the group, since most CDHP members are more inclined to exercise, use wellness and prevention resources and follow their prescribed therapies more closely than traditional plan members.
CDHP: Fact and Fiction FICTION: • CDHPs are complex and difficult to understand and require more paperwork. FACTS: • CDHP communications and administration have become so commonplace that advanced administration and communication tools are available that make personal account access and administration easy and practical. • CDHPs do require individual planning and monitoring of their healthcare expenses. • CDHPs administration now allows for reduction of paperwork and offers automatic claim processing. New administrative flexibilities helps streamline processes.
CDHP: Fact and Fiction • FICTION: • CDHPs simply shift more costs to me and my family. • FACT: • A properly designed CDHP can actually give you greater value over time. The key is to think of your healthcare expenses terms of years rather than just one year. As the value of your personal healthcare savings account grows, the amount of insurance you need declines along with your out of pocket expense exposure if and when you do become ill or injured. Over time, your CDHP can be of far greater value to you than a traditional plan and can provided added security against your deductible cost exposure. Multi-plan year thinking reveals true advantages of CDHP