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Consumer-Directed Health Plans Gary Claxton Vice President and Director, Health Care Marketplace Project Kaiser Family Foundation June 2006 Figure 1 What is a consumer-directed health plan (CDHP)?

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Consumer directed health plans l.jpg

Consumer-Directed Health Plans

Gary ClaxtonVice President and Director,

Health Care Marketplace ProjectKaiser Family Foundation

June 2006


What is a consumer directed health plan cdhp l.jpg

Figure 1

What is a consumer-directed health plan (CDHP)?

  • Core concept is to increase consumer awareness about health care costs and provide incentives for consumers to consider costs when making health care decisions

  • Health plan with a high deductible accompanied by a consumer-controlled savings account for health care

    • High deductible health plan (HDHP) typically has deductible of at least $1000 for single coverage, but can be much higher

    • Two primary types of health care savings accounts

      • Health Savings Accounts (HSAs)

      • Health Reimbursement Arrangements (HRAs)


Why consumer directed health plans l.jpg

Figure 2

Why consumer-directed health plans?

Average Annual Premium for Single Beneficiary, by Year

  • Continuing rise in health care costs

  • Intended to make consumers more cost-conscious and use less health care

    • Lower future increases in premiums

    • Higher deductibles

    • Lower premiums mean lower short-term costs for employers

    • Potential high out-of-pocket spending for consumers

2000 2003 2005

Year

Source: Kaiser/HRET Employee Health Benefits Surveys 2000-2005.


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Figure 3

Principles of CDHPs

  • Departure from previous health care financing principles

  • Consumers have greater responsibility for cost containment

  • Emphasize individual responsibility and ownership


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Figure 4

High Deductible Health Plans

  • Consumer responsible for costs up to specified deductible level – can pay out of pocket or with funds from savings account

  • Plan begins to pay for services after consumer has reached deductible

  • Many plans require cost sharing after deductible is met, up to out-of-pocket max

  • Plans may pay for “preventive” benefits (i.e. annual physical, mammogram, pap test) before deductible is met


Consumer directed savings accounts l.jpg

Figure 5

Consumer-Directed Savings Accounts

  • Account to pay for expenses subject to the deductible or not covered by the plan

    • Employers and/or individuals can contribute to the account

    • Employer contributions typically much less than the deductible

    • Individuals can also contribute to accounts - tax preferred

    • Unspent funds in the account can be rolled over for future health care needs

    • Provides consumers with incentives to spend account wisely


Providing the consumer with information l.jpg

Figure 6

Providing the consumer with information

  • Provide information about diseases, treatment options, quality indicators

  • Some information on costs for different providers and treatment options

  • Financial information often general and does not include out-of-pocket costs


Hras and hsas what s the difference l.jpg

Figure 7

HRAs and HSAs:What’s the Difference?

  • HRAs have been in existence longer than HSAs, but HSAs growing in prevalence

  • HRAs only offered in employer market; HSAs available to people who get coverage from their employer or buy it on their own

  • Structure, legal requirements and patient incentives can vary significantly between HRAs and HSAs

  • HRAs and HSAs are intended to work with health plans, but they are separate accounts; HSAs often administered by financial institution, not health plan


Health reimbursement accounts l.jpg

Figure 8

Health Reimbursement Accounts

  • Employer-established accounts that provide non-taxed funds that employees can use for medical expenses

  • Funded exclusively by the employer

  • Nominal accounts – employers do not add funds to account until liabilities are incurred

  • Employer may restrict the types of services for which HRA funds can be used

  • Unused balances may be rolled over for use in future

  • Not portable if employee leaves job

    • Unused balances often revert to employer

    • Employer plan can stipulate that funds can be used for health care expenses (but not as cash) incurred after retirement or termination


Health reimbursement accounts cont d l.jpg

Figure 9

Health Reimbursement Accounts (cont’d)

  • Can be used to pay for premiums for medical plan, including COBRA coverage

  • Generally no limit on employer contribution to HRA (nondiscrimination rules apply)

  • HRAs often offered with a HDHP, but not required

    • Can be offered without a health plan at all (‘Defined contribution”)

    • May be limited to retiree benefits or other uses


Health savings accounts l.jpg

Figure 10

Health Savings Accounts

  • Tax-exempt accounts established by an eligible individual

  • Eligibility criteria:

    • Covered under a HDHP that meets federal requirements

    • Not covered by other plan that is not HDHP (some exceptions)

    • Not entitled to benefits under Medicare

    • May not be claimed as dependent

  • Individual, employer, others can make contributions to HSA

  • Funds can be used for qualified expenses of individual/ dependents

  • HSAs belong to individual and are portable if change in job

    • Contributions can continue only as long as eligibility

    • Individual is beneficiary of investment income

  • HSA funds generally cannot be used to pay for health insurance premiums, except COBRA, LTC, when individual is unemployed, or coverage for people over age 65 other than Medigap


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Figure 11

Requirements for HDHPs Offered with HSAs, 2006

  • Deductible of at least $1,050 for single coverage and at least $2,100 for family coverage

  • Annual limit on out-of-pocket expenses (for in-network services) of $5,250 for single and $10,500 for family coverage

  • Cannot cover services before deductible has been satisfied (other than preventive care)

    • IRS has been liberal in permitting services (including some maintenance prescription drugs) to be considered preventive

  • Can be provided by an employer or purchased directly from an insurer (non-group health insurance)


Contribution rules differ for hras and hsas l.jpg

Figure 12

Contribution Rules Differ for HRAs and HSAs

  • HSAs have strict limits on contributions

  • Maximum contribution to HSA is 100% of annual deductible, up to $2,700 for self-only coverage and $5,450 for family coverage

  • Individuals 55 to 64 can make additional ‘catch up’ contributions


Tax treatment of cdhc accounts l.jpg

Figure 13

Tax Treatment of CDHC Accounts

Contributions

  • Employer contributions not taxable to employees

  • Individuals can deduct amount of contribution to HSA or HRA from taxable income when computing income taxes

    Payments

  • Funds from HRAs or HSAs used for medical expenses of beneficiary or dependents not taxable income

  • HSA payments used for non-medical expenses are includable income - subject to additional 10% penalty.

    • No penalty if beneficiary dies, becomes disabled, or reaches age 65

  • Interest earned on HSA balances not taxed


Mary s consumer directed health plan l.jpg

Figure 14

Mary’s Consumer-Directed Health Plan

$1,200

  • PPO High Deductible Plan with an HSA

  • $2,000 Deductible

  • 100% of preventive care covered before deductible

  • 80% cost sharing for in-network – after deductible

  • Out of pocket maximum: $4,000

Mary’s

Contribution

Employer’s

Contribution

Year 1


Mary s health care expenses year 1 l.jpg

Figure 15

Mary’s Health Care Expenses – Year 1


Over the year l.jpg

Figure 16

Over the year …

$1,200

Mary

(Tax deductible)

-

=

Employer

$385

Health Expenses

$825

$10 Interest

Residual

HSA

HSA


Mary s hsa contributions year 2 l.jpg

Figure 17

Mary’s HSA Contributions - Year 2

$1,585

Year 2

Employer contribution

Year 2

Mary’s contribution

Year 1 Rollover

- Year 2


Mary s chdp year 2 expenses l.jpg

Figure 18

Mary’s CHDP – Year 2 Expenses


So how much does mary spend it s complicated l.jpg

Figure 19

So How Much Does Mary Spend…It’s complicated!

Total Year 2 Expenses = $14,700

Recognized expenses (paid from HSA)

Plan coverage

Mary’s Total OOP Expenses = $4,300

Recognized expenses ( not from HSA)

Unrecognized expenses

(not from HSA)


By the end of the year l.jpg

Figure 20

By the end of the year…

  • Mary spent $4,300 on health care

    • $1485 from her HSA

    • $2815 directly out-of-pocket

  • Mary has no money left in her HSA

  • Mary can deduct her $400 HSA contribution from her taxable income when calculating her income taxes


Points to consider l.jpg

Figure 21

Points to Consider

  • Employers and individuals often contribute monthly to HSAs, entire amount contributed for a year may not be available for expenses incurred earlier in the year

    • Individuals can pay the amounts out-of-pocket and be reimbursed by their HSA after making contributions

    • Individuals can increase contributions – larger tax deduction

  • Only services covered by plan are counted towards deductible

    • Plan only counts what is considered “reasonable amount”


Out of pocket oop spending l.jpg

Figure 22

Out-of-Pocket (OOP) Spending

  • Important to consider total OOP spending limit, not just deductible amount

    • HSA plans - out-of-pocket maximum limit applies to all services covered by providers in the network

    • HRA and traditional plans – limits may not apply to all cost-sharing; often exclude mental health and Rx OOP costs

  • OOP limits may not apply to services from out of network providers, or a higher limit may apply

  • Specific services may have separate benefit limits

    • Plan may only pay for certain number of visits or up to maximum dollar level; consumers pay any additional costs

    • These costs can be paid from an HSA, but this spending will not count towards deductible or plan’s out-of-pocket limit


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Figure 23

Large Employers Most Likely to Offer HDHPs

Share of Firms Offering HDHP, By Firm Size, 2005

HDHP has annual deductible ≥$1,000/ individual and $2,000/family. Prevalence shown is for all HDHPs, regardless of offer with HRA, HSA qualified, or neither.

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005.


Features of hdhps 2005 l.jpg

Figure 24

Features of HDHPs, 2005

‡ Employers reported no maximum OOP limits for 3% of workers enrolled in HDHP/HRAs, who are excluded from calculation. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005.


Average annual costs of cdhps compared to all plans 2005 l.jpg

Figure 25

Average Annual Costs of CDHPs Compared to All Plans 2005

For Single Coverage:

Estimate is statistically different from All Plans at p<.05. ‡ All Plans refers to all conventional, HMO, PPO, and POS plans in the survey, not just HDHP/HRAs or HSA qualified HDHPs. The average firm contributions to HRAs and HSAs cannot be calculated from this chart.

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005.


Slide27 l.jpg

Figure 26

HDHPs Likely to Grow in Employer- Sponsored Insurance Market

Among firms not offering an HSA-qualified HDHP, share saying they are likely to offer one in 2006:

*Estimate is statistically different from All Firms at p<.05.Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005.


Cdhps growing in the non group market l.jpg

Figure 27

CDHPs Growing in the Non-Group Market

Enrollment in Non-Group

Qualified HDHPs

(in thousands)

Source: Survey of insurers by America’s Health Insurance Plans http://ahip.org/content/default.aspx?docid=15302


Policy considerations l.jpg

Figure 28

Policy Considerations

  • Financial incentives and health information

    • Try to provide consumers more control over their health care and incentives to stay healthy and choose efficient treatment options

    • Departure from more top-down rules used by managed care organizations

  • Possibility for adverse selection

    • If CDHPs attract healthier people, prices for more traditional insurance will rise because they will be left with disproportionate share of sicker enrollees

  • Higher cost-sharing in CDHPs

    • May result in lower premiums for CDHPs

    • Can deter beneficial (preventive, diagnostic, treatment) as well as unnecessary services

    • Impact on health outcomes unclear


Impact on health care costs l.jpg

Figure 29

Impact on Health Care Costs?

Concentration of U.S. Health Spending, 2003

  • CDHPs could lower spending, but magnitude unclear

  • Most health care spending is on relatively few people who are very ill

  • Spending for ill often exceeds deductible levels in CDHPs

  • Traditional insurance already has significant cost sharing - incremental difference with CDHPs may be modest

  • Overall impact on health spending yet to be determined

Note: Population includes those without any health care spending. Health spending defined as total payments, or the sum of spending by all payer sources.

Source: KFF calculations using data from Agency for Healthcare Research and Quality, MEPS, 2003.


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