Introduction
Consumer-driven health plans (CDHPs) are intended to decrease national health care spending and encourage people to make more conscious medical choices. Their benefits and risks for different groups of population vary based on their level of income and health care spending. Whether a particular plan will be successful for a consumer depends on their knowledge of available options and the ability to make an informed choice. The purpose of this paper is to analyze the types of CDHPs, their benefits for different groups of the population, and recommendations to consider when choosing a CDHP.
What CDHPs Are
CDHPs are insurance plans that allow their members to make decisions about their health care. They come in various forms, but most often offer a high-deductible health plan paired with a health savings account (HSA), health reimbursement account (HRA) or similar medical savings accounts for paying routine healthcare expenses. The plans generally have a three-tier structure: first, health care costs are deducted from the funds from an HSA or HRA provided by the employer. Once this amount is used up, the consumer pays for medical care until the deductible is reached, and after this point, the insurance plan covers all further expenses.
History of CDHPs
The first CDHPs were introduced by health ventures in the late 1990s to create a more efficient health care market. The initial idea was to engage consumers more directly in health care purchases by making cost and quality information more evident (Consumer-driven health plans, 2016). For employers, it was intended to be a cost-savings and cost-containment strategy. The CDHPs have been on the rise since the early 2000s and evolved towards an approach that couples a high deductible health care plan with an HSA or HRA.
The HSAs have been a part of the political agenda since 2004 when they were included in the health reform package as a solution to the high rate of health care inflation and reducing the number of uninsured clients. The 2003 Medicare Prescription Drug, Improvement, and Modernization Act expanded medical savings accounts, empowered banks to create HSAs, and introduced tax incentives to encourage the adoption of high-deductible health plans (Consumer-driven health plans, 2016). The goal of CDHPs was to make people more cost-conscious about medical care by making them pay more out of pocket than in regular health plans. Such consumers were expected to demand lower-cost and higher-quality services and use less unnecessary care, thus decreasing overall medical spending.
Further changes to CDHPs were introduced in 2007 in the combination of tax breaks for premiums and the HSAs and tax subsidies for low-income individuals. It has boosted the popularity of CDHPs, and by April 2007, over 4.5 million Americans were involved in HSAs or HPAs (Consumer-driven health plans, 2016). From 2010 to 2016, the number of employees with employer-sponsored health insurance has risen from 13% to 29%, and the number of employers offering CDHPs has grown from 10% to 24% (Consumer-driven health plans, 2016). Increasingly more companies now look at CDHPs as an attractive alternative to other health care plan options.
Types of CDHPs
There are three types of savings accounts generally available under a CDHP together with an HDHPs: a health savings account (HSA), a flexible spending account (FSA), and a health reimbursement arrangement (HRA). An HSA is an employee-owned account aimed to work specifically with a qualified high-deductible health plan to allow tax-free payments of medical expenses (Health account comparison, n. d.). It functions as a typical bank account, and its owner can even get an HSA debit card, but to take full advantage of its benefits, the money should only be used for medical expenses (Health account comparison, n. d.). An HSA can be funded by both employers and employees. The unused amounts are passed on to the next year without a penalty and can be invested in stocks.
The recent example of the HSA is the Unqualified Small Employers Health Savings Account (QSEHSA), intended for small companies that are unable to offer attractive employee benefits packages. It allows them to reserve any amount of money to put to employees’ health benefits for the year, and employees can purchase their healthcare plan through the New York Exchange. If the employee does not want to purchase insurance, they can use the money for various medical expenses.
An HRA is an account that is owned and funded by the employer and works together with an integrated employer-provided health care plan. Under an HRA, employees benefit from tax-free reimbursements of qualified expenses up to a limit set by the employer (Health account comparison, n. d.). It is not truly an account but an agreement under which an employee can submit qualified tax expenses to the employer for reimbursement (Health account comparison, n. d.). The funds from an HRA can only be used for health care needs and cannot be invested. At the end of each year, the unused funds are passed on to the next period. An HRA has an advantage over an HSA in that the enrollee does not need to have an HDHP or any other health care plan to participate (Health account comparison, n. d.). An example of an HRA is a QSEHRA, a qualified small employer health reimbursement agreement, which allows owners of small businesses to provide tax-free reimbursements of employees’ medical expenses, including premiums.
An FSA is an account owned by the employer, funded with the employee’s pretax income, and used for qualifying health care expenses, such as copayments and prescriptions. Initially, a significant disadvantage to using an FSA was that the funds not used by the end of the plan year were forfeited to the employer (Health account comparison, n. d.). Under the terms of the Affordable Care Act of 2017, an FSA now permits the employee to carry over up to $500 into the following year without losing the funds. While HSAs and HRAs are almost exclusively used as components of a CDHP, FSAs are offered with more traditional health care plans as well (Health account comparison, n. d.). The most common type of FSA is used to pay for medical services not paid for by insurance, usually deductibles, copayments, and coinsurance for the employee’s health plan.
Benefits of CDHPs to the Population
The general idea behind CDHPs is to decrease overall healthcare spending by making people more conscious about their health care choices. Several studies have been conducted that analyze the benefits and financial risks of CDHPs for lower-, middle-, and high-income groups of population based on the level of their health care spending (Analysis of high deductible health plans, n. d.). The results showed that CDHPs are most beneficial for consumers with low health care expenses, and least beneficial to people with middle to high health care costs, particularly those with chronic diseases.
Increased cost-sharing under CDHPs eases the financial pressure on younger and healthier employees because they usually spend less on medical care. Individuals with extensive health care needs and high health spending benefit from CDHPs because of lower out-of-pocket maximum liabilities (Analysis of high deductible health plans, n. d.). People with medium to high levels of medical spending, which include chronically ill, are likely to be more financially disadvantaged under a CDHP than a traditional health care plan.
For lower-income groups, CDHPs have both advantages and disadvantages. Before the introduction of the Affordable Care Act of 2007, poor families were less likely to have private health insurance at all. One of the big advantages of CDHPS is that the premium is lower, which makes coverage more affordable. On the downside, people have to pay more out of pocket, with a larger proportion of their earnings being spent on medical care in comparison to higher-income consumers. The survey shows that individuals in plans with high deductibles, who have lower incomes or health problems, are more likely to have medical debts of difficulty paying medical bills than in plans with low deductibles (Haviland et al., 2011). It means that low-income people may be significantly disadvantaged by the cost-sharing under CDHPs.
Incentives for Providers for Efficient Delivery of Health Care Services
For employers, CDHPs offer a generally beneficial solution to the effective delivery of health care services to employees. CDHPs are believed to increase employee satisfaction by providing them with additional health care choices that are fitted to their needs. A CDHP model offers more flexibility in plan design options and encourages greater employee accountability and a more conscious approach to health care.
The incentives that CDHPs create for employers are primarily financial. First, they provide businesses with a more cost-effective health care option. Second, they allow employers to save on premium costs, as, in general, premium costs associated with CDHPs are lower than they are with other health care plans. The National Survey of Employer-Sponsored Health Plans ranged the factors that influence employers’ decisions to switch to CDHPs based on their importance (cited in Analysis of high deductible health plans, n. d.). It showed that 72% of employers choose CDHPs because they allow them to reduce health benefits costs. 59% of employers said that they use it to provide a low-cost plan for newly eligible employees. 57% and 55% named providing a tax-effective savings vehicle and promoting health care consumerism as benefits. 35% of business owners reported that they use CDHPs to avoid the exercise tax on high-cost plans (cited in Analysis of high deductible health plans, n. d.). Overall, employers now feel more pressure to address rising health care costs, and CDHPs allow them to reduce this pressure by sharing the responsibility with employees.
CDHPs also is a beneficial solution for small business owners. It can be difficult for small companies to offer insurance to employees, and the combination of an HDHP and HSA allows them to fit insurance into their budgets. HSA provides an attractive tax-savings component, and all that employers have to do is get a low-cost HDHP and voluntarily contribute to the employee deductible. With a carefully chosen plan, small business employers end up having to pay less in terms of their required cost-sharing contributions, which results in considerable savings.
Under CDHP, financial risks are shared between employers and employees. For employees, the risks depend on their overall health and level of medical spending. Although CDHPs generally offer protection against catastrophic risks with lower premiums, consumers may be at higher financial risk from the high upfront out-of-pocket premiums than members of other health care plans (Analysis of high deductible health plans, n. d.). Raising risk awareness both within the company’s management and employees should be the responsibility of employers providing CDHPs.
Recommendations for Patients Considering a CDHP
When considering which health care plan to choose, several factors need to be taken into consideration. The first is eligibility that depends on the type of employment and insurance requirements. For an HSA, an employer must provide an employee with an eligible high-deductible health plan (HDHP). HRA is available for all full-time employees and some part-time employees, with owner eligibility dependent on corporate structure (Health account comparison, n. d.). For an HRA, the purchase of insurance is not required; however, the purchase of minimum essential coverage allows an employee to receive reimbursements free of income taxes (Health account comparison, n. d.). For an FSA, most full-time employees are eligible, who are not self-employed, and insurance requirements depend on the type of FSA. Both FSA and HRA cannot be maintained if the employee is no longer working for the employer, so for those who tend to switch jobs, an HSA is the best possible choice.
A choice between HSA, HRE, and FSA should also be made dependent on the general level of an employee’s health care expenses. An HSA, together with an HDHP, allows an employee to save money at the moment and create savings for long-term expenses. If an employee builds money into an HSA for several years, they save enough to compensate for the HDHP and cover the overall health plan. Thus, an HSA is the best choice for people who do not have high medical out-of-pocket expenses; it allows them to build money over time so that if in case of emergency, and access to medical funds is required, they can use them freely.
FSAs cannot be used for long-term savings; however, they are also tax-free, so if an employee does not qualify for an HSA and does not have an HDHP, an FSA is a good choice. An FSA provides access to the entire annual amount of health care funds at the beginning of the plan year (Health account comparison, n. d.). So it can also be considered an attractive option for individuals with lower incomes.
Conclusion
CDHPs provide benefits both for employers and employees, helping them to rationally plan their health care expenses and avoid unnecessary spending. The choice between HSA, HRE, and FSA depends on several factors, including the options provided by the employer, the employee’s level of income, and their level of health care costs. The planning requires good knowledge of available options, an understanding of an individual’s medical needs, and careful consideration of unforeseen expenses. For lower-income individuals, the choice can be especially difficult, and a carefully selected strategy is required to avoid unnecessary spending.
References
Analysis of high deductible health plans. (n. d.). Rand. Web.
Consumer-driven health plans: A cost and utilization analysis. (2016). Health Care Cost Institute. Web.
Haviland, A., Sood, N., Mcdevitt, R., & Marquis, S. (2011). How do consumer-directed health plans affect vulnerable populations? Forum for Health Economics & Policy, 14(2), p. 3. Web.
Health account comparison. (n. d.). Optum Bank. Web.