What Is a Consumer-Directed Healthcare Plan?
A consumer-directed health plan combines high-deductible health insurance with a health fund feature to save on premium costs and give members more control over their budget and network of doctors. People can typically secure these policies as part of the group health insurance offered by their employer.
While high deductible health plans (HDHPs) require more money out-of-pocket before your insurance coverage officially kicks in, they require lower annual premiums. Further, by combining health funds like an HSA or HRA with an HDHP, eligible employees can use the untaxable savings in these accounts to pay for qualified medical expenses not covered by their policy.
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Improving Group Health Insurance
As of 2021, nearly 50% of the United States population has employer-sponsored group health insurance. Company insurance has consistently helped businesses of all sizes recruit and retain workers. However, due to the increasing cost of providing group coverage, many employers have begun adopting CDHPs to reduce the annual premium rates split between them and their employees.
How Do CDHPs Work?
CDHPs started popping up in the 1990s to engage more customers directly with their healthcare purchases by making cost and quality information more accessible. Since then, CDHPs have only evolved and become more popular. They now provide affordable healthcare by coupling high deductible plans with health funds, giving customers more control over their policy terms and premium costs.
Who Can Get A CDHP?
To qualify for a consumer-directed health plan, your employer must offer an HDHP through their group insurance coverage. Due to the tax advantages presented by CDHPs, the IRS will not allow you to enroll in one if any of the following apply:
- You or your spouse currently have a Flexible Spending Account(FSA).
- You have Medicaid, Medicare, TRICARE, or any comprehensive medical plan other than an HDHP.
- Someone else claimed you as a dependent on their tax return.
You typically must purchase a CDHP through your employer’s group health insurance, except with certain stand-alone HRAs. CDHPs resemble PPOs, albeit with higher deductibles, lower premiums, and binding health funds.
How Does the Health Fund Work
Health funds are tax-exempt savings accounts that help members pay for qualified medical expenses. These funds define the CDHPs they come with. Health funds have markedly grown in popularity since the COVID-19 pandemic, providing for an 8% growth in HSAs alone. The four primary health funds include:
- Health Savings Accounts (HSA)
- Health Reimbursement Arrangement (HRA)
- Flexible Spending Accounts (FSA)
- Medical Savings Accounts (MSA)
Patients can use the tax-free cash saved in these accounts to offset the high deductible costs incurred by their HDHP. Some funds may allow unused contributions to roll over into future years and gain interest.
Are CDHPs ACA Compliant?
Indeed, most CDHPs meet ACA standards, given that both composite plans comply with the program’s bylaws. Under the Affordable Care Act, HDHPs must offer free preventative care, even before patients meet their deductible. For use with an HSA in 2023, these HDHPs must impose a minimum deductible of $1500 and a maximum out-of-pocket limit of no more than $7500 per individual.
What Can You Use the Health Fund For?
You can deduct any money deposited into a health fund from your federal income tax and withdraw these funds later to pay for a variety of qualified medical expenses, including, but not limited to:
- Deductibles, copays, and coinsurance
- Other qualified primary health expenses
- Qualified dental and vision care
- Child care expenses
- COVID-19 tests and personal protective equipment
- Insulin products
- Menstrual care and feminine hygiene products
- OTC and prescription medication
Usually, you can only contribute to a health fund if you already have an eligible HDHP. Funds withdrawn for non-medical expenses before you turn 65 can result in a 20% fee.
What Types of CDHPs Are There?
Your employer can offer an HSA, HRA, or FSA with their CDHP. Though these all help individuals and their families save on taxes and reduce the cost of healthcare, each plan presents unique benefits and criteria.
Health Savings Accounts (HSA)
Health savings accounts work with group insurance HDHPs, allowing members to pay for qualified medical expenses without taxation. The employer, employee, or both can contribute IRS-approved deposits into these accounts. Employees own HSAs, not their employers.
HSA funds roll over yearly, and the accrued interest in these accounts retains tax-exempt status. You can eventually use funds for anything you want after you turn 65, though withdrawals for non-medical expenses would now be subject to taxation.
While the tax benefits of HSAs alone would benefit many people, the conjoined high-deductible plans may not suit individuals who need frequent medical attention.
Flexible Spending Accounts (FSA)
While similar to HSAs, flexible savings accounts do not allow funds to roll over from year to year, resetting your balance annually. Both you and your employer can deposit pretax money into your FSA for use on qualified medical expenses, though your employer would retain sole ownership of the account. If you leave your job, you lose your FSA.
FSAs allow members to access their funds immediately on the day they enroll, even if they have not paid in yet. However, because of their “use it or lose it” nature, FSAs make the most sense for people who know they’ll require frequent medical attention for years to come.
Health Reimbursement Arrangements (HRA)
With a health reimbursement arrangement, your employer owns your account, and only they can deposit funds into it. Your employer decides what your plan pays for and how and when it reimburses you. Furthermore, they claim all reimbursements made to you for medical care as corporate tax deductions and can choose whether unused funds in your account roll over into future years.
You do not need to enroll in an HDHP to become eligible for an HRA, though you will need some kind of group or private health coverage. HRAs make the most sense for individuals who want less involvement with the inner workings of their healthcare policy.
Medical Savings Accounts (MSA)
Some private companies working with Medicare offer consumer-directed Medicare Advantage plans called medical savings accounts that closely resemble the HSAs available in the private sector. Medicare MSA plans utilize an HDHP and deposit government money into a separate fund that you can use to pay for Medicare-covered expenses due after your deductible.
With an MSA, you get to choose your health services and providers. Medicare MSA plans must cover all the same benefits as Original Medicare and occasionally offer extras like dental or vision coverage. However, medical savings accounts do not cover prescriptions; you still need to join Medicare Part D for drug coverage. To secure an MSA, you must qualify for Medicare.
How Much Do CDHPs Cost?
The average HDHP deductible in 2022 was $2,925 for those linked to HRAs and $2,458 for HSAs. During the same year, HSA-qualified HDHPs reduced premiums by nearly $1000 per individual and $2000 per family, with average annual premiums of $7,170. As of 2023, annual HDHP deductibles must reach $1500 to qualify for use with a health fund.
The IRS imposes an annual contribution limit of $3,850 per individual HSA and $7,750 per family. Alternatively, HRAs occasionally do not set limits on employer deposits. The money in either of these accounts could go toward prescriptions, medical equipment, copayments, coinsurance, and much more.
The amount you can save through a consumer-directed health plan entirely depends on who you are and your policy type. Though all health funds allow you to deduct medically related withdrawals from your taxes, HSAs alone guarantee rollover funds. Only relatively healthy people who do not require consistent medical care can truly save money through a CDHP.
How To Get A CDHP
If you qualify for a CDHP, you can enroll in one through your employer’s group health insurance, either on the date of your hire, during their open enrollment period, or during any special enrollment period. If you cannot access an employer-sponsored plan or government coverage like Medicare or Medicaid, you can apply for an HSA-qualified HDHP through the ACA marketplace.
When purchasing a CDHP on your own, ensure that your HDHP meets your desired health fund’s eligibility and that you check all the necessary IRS requirements. ACA open enrollment occurs between November and January, though exact dates vary between states.
Who Should Consider a CDHP?
CDHPs allow employers to provide health insurance for a cost both themselves and their employees can afford.
Consider a CDHP If…
- You want health care and have few medical expenses that could result in repeat deductible payments.
- You intend to deduct CDHP funds from your taxes.
- You are an employer who wants to reduce your share of premium costs and increase employee satisfaction.
- You want to exercise more control over your healthcare service options.
- Contributions to health funds occur pretax and get distributed tax-free for qualified medical expenses.
- Depending on your health fund, unused savings can carry over for years. Interest on savings remains tax-free.
- You can save money on premium costs and out-of-pocket healthcare fees like copays.
- CDHPs are easier to budget than most health plans and encourage employees to make informed healthcare decisions.
- People who require frequent medical attention will pay more in deductible charges and quickly eat through the savings in their health fund.
- CDHPs require you to practice frugality with your care level and balance your own budget, which many people may feel unqualified or uninterested in doing.
- Only some accounts allow rollover funds.
- Withdrawals for non-medical expenses can result in heavy fines.
Alternatives to CDHPs
If you require frequent medical attention and believe an employer-sponsored CDHP would not directly benefit you, you can purchase your own health insurance or seek government assistance.
ACA Marketplace Plans
The Affordable Care Act of 2010 set up the Health Insurance Marketplace, a medical insurance network and enrollment portal, to make it easier for more Americans to secure health insurance. Marketplace plans break coverage down into four tiers: platinum, gold, silver, and bronze. Each level determines how you and your insurer split the cost of health care. Unlike a CDHP, you can choose a plan with the lowest possible deductible.
All ACA plans must cover preventative-care services, like mammograms and cholesterol tests, for zero out-of-pocket costs and cannot deny coverage to individuals with pre-existing conditions. Furthermore, ACA plans subsidize many health expenses for lower-income households. Anyone can enroll in a marketplace plan online during the ACA annual open enrollment period.
Government Subsidized Healthcare
Government-subsidized healthcare offers an excellent alternative for individuals and families who meet eligibility requirements. Medicare offers comprehensive health insurance for people over the age of 65. Medicaid provides healthcare for lower-income Americans of any age on a state-by-state basis. CHIP offers low-cost insurance for children in families that cannot afford private insurance but make too much to qualify for Medicaid.
Unlike CDHPs, these plans require little to nothing in premium payments and often waive deductibles for essential procedures. Though you must wait til the annual Medicare enrollment period to apply for Medicare, you can enroll in Medicaid or CHIP any time of year, online or through your local Human Services Department.
Short Term Health Insurance
Short-term insurance offers temporary coverage to people in between policies or enrollment periods. Short-term policies set significantly higher deductibles than traditional plans and do not need to abide by ACA guidelines, meaning they can deny coverage or charge higher rates for people with preexisting conditions.
The extent of coverage and cost of care will vary widely depending on your chosen plan. Since you can cancel coverage without penalties, relatively healthy individuals should only utilize short-term health insurance as a temporary stop-gap before securing permanent coverage through their employer, the government, or the ACA marketplace.
Putting It All Together
While CDHPs increase patient risk, higher deductibles cut premium costs for employers and their employees. The tax-exempt health funds in CDHPs also help patients pay for medical expenses not covered by insurance. Certain accounts like HSAs allow unused savings to accrue and gain interest, ultimately saving their members even more money.
Consumer-directed healthcare makes sense if you want more control over your benefits and do not require frequent medical attention that could rack up deductible fees and drain the savings in your health fund. Determine your immediate and future needs, and mull over the details of your employer’s CDHP group insurance before enrolling.