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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

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

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

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


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

principles of cdhps

Figure 3

Principles of CDHPs
  • Departure from previous health care financing principles
  • Consumers have greater responsibility for cost containment
  • Emphasize individual responsibility and ownership
high deductible health plans

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

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

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

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

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

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

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
requirements for hdhps offered with hsas 2006

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

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

Figure 13

Tax Treatment of CDHC Accounts


  • Employer contributions not taxable to employees
  • Individuals can deduct amount of contribution to HSA or HRA from taxable income when computing income taxes


  • 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

Figure 14

Mary’s Consumer-Directed Health Plan


  • 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





Year 1

over the year

Figure 16

Over the year …



(Tax deductible)





Health Expenses


$10 Interest




mary s hsa contributions year 2

Figure 17

Mary’s HSA Contributions - Year 2


Year 2

Employer contribution

Year 2

Mary’s contribution

Year 1 Rollover

- Year 2

so how much does mary spend it s complicated

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

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

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

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
large employers most likely to offer hdhps

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

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

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.


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

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

policy considerations

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

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.