In the complex and turbulent health care coverage universe, Consumer-Driven Health Plans (CDHP), also known as Consumer-driven healthcare (CDHC), is relatively new.
In 2003, the passage of federal legislation provided tax incentives in the form of Health Savings Accounts (HSAs) for those who choose a CDHP. That year, the Medicare Prescription Drug, Improvement, and Modernization Act, also called the Medicare Modernization Act or MMA, became federal law and enacted the largest overhaul of Medicare in the program’s history.
One component of the law provided a new Health Savings Account (HSA). This law replaced and expanded the previous Medical Savings Account law by expanding allowable contributions and employer participation.
Like all legislation, the HSAs have both advocates and detractors.
Proponents have argued that most consumers will pay less over time with a CDHP because of lower monthly premiums and because of HSAs and other products foster competition in the healthcare system, which lowers prices and improves service.
Critics of CDHP and the HSAs contend that they cause consumers to avoid needed and appropriate healthcare, particularly lower-income and less educated consumers, because of the cost burden and the inability to make informed healthcare choices.
Understanding Consumer-Driven Health Plans
Essentially, consumer-driven health plans (CDHP) are health insurance plans that have high deductibles to protect members from more costly medical expenses. The deductible costs can be covered, partially or in whole, when members use health savings accounts (HSAs) or similar medical payment accounts to pay routine healthcare expenses directly.
According to HSACenter.com,
“Your HSA dollars can be used to help pay the health insurance deductible and qualified medical expenses, including those not covered by health insurance, like dental and vision care.”
Plan members can keep any unused balance or “rollover” at the end of the year to increase future balances or to invest for future expenses. Once the calendar-year deductible is met, the health insurance plan pays the remaining covered expenses based on the terms of the plan. Some plans pay 100 percent of covered expenses after the calendar-year deductible is met.
Consumer-driven health plans are subject to the requirements of the Affordable Care Act, which mandates that routine or health maintenance claims must be covered, with no cost-sharing (i.e. copays, co-insurance, or deductibles) to the patient.
A report published by the U.S. Bureau of Labor Statistics explains how these plans work for users:
“In terms of payment methods, CDHPs are often referred to as three-tier payment systems, consisting of a savings account, out-of-pocket payments, and an insurance plan. The first tier is a pretax account that allows employees to pay for services using pretax dollars. The account may be funded by the employer or the employee, depending on the type of account. The funds from this account can be used to satisfy the insurance plan deductible. The second tier is the difference, or the “coverage gap,” between the amount of money in the individual’s pretax account and the deductible. The amount that is not covered by the pretax account must be covered by the insured. If health care expenses exceed the deductible amount, then the third tier, the high-deductible health insurance plan, kicks in.”
Once the out-of-pocket maximum is reached, CDHPs operate similar to a typical PPO plan with the health plan paying all further costs.
[h3] The Benefits of Consumer-Driven Health Plans
Opting for a consumer-driven health plan (CDHP) can provide benefits for both employees and their employers. Although this type of plan is likely not a best fit for many employees, having it available for healthy, younger individuals with higher health literacy and a desire to control more of their spending may be a positive choice.
For employers, providing an option of consumer-driven health plans (CDHP) can bring the following benefits:
- Increased employee satisfaction: Participants who don’t typically require medical care may pay less for a CDHP. And when an employee pays less for coverage, there’s more money in their paycheck.
- Save on premium costs: Generally speaking, premium costs associated with CDHPs are lower than other types of healthcare plans. With a lower premium cost per employee, more money remains with the company.
- Reduced medical costs: Participants share in out-of-pocket costs, which allows them to understand the cost of health care. Subsequently, this encourages them to make more informed decisions regarding the care they receive.
- Better informed health care choices: CDHP users are more likely to participate in health risk assessments and health promotion programs than traditional plans.
According to BlueCross BlueShield of Massachusetts,
“Consumer-directed health plans combine financial engagement and comprehensive support to move employees toward becoming empowered consumers of health care services. This approach can help your company manage costs over the long term and be an effective strategy for delivering quality, sustainable coverage for your workforce.”
Although being enrolled in a CDHP requires greater deductible costs and out-of-pocket maximum expenses, high-deductible health plans also provide the advantage of having lower monthly premiums, as well as potential tax savings by reducing taxable income through Health Savings Accounts or HSAs.
In fact, an HSA provides employees with several opportunities for tax savings:
- HSA contributions are tax-deductible
- HSA funds used to pay for qualified medical expenses can be withdrawn tax-free
- HSA account funds generally grow tax-free each year
In addition, because of the lower employee premiums available through CDHP coverage, small business employers pay less in terms of their overall required cost-sharing contributions, which can result in considerable savings.
Choose a Local Expert for Your Health Insurance Needs
JC Lewis Insurance is a firm made up of expert brokers offering California employers health insurance plans only from leading health insurance carriers licensed to do business in California.
In addition, we are licensed and certified by each of these insurance carriers to offer coverage to individuals, families, and small group employers in addition to Medicare supplemental and prescription drug plans for Seniors. We assist small business employers with the initial set-up, annual renewal, and on-going maintenance needed.
If you’re a small business owner looking to provide insurance coverage for your employees, you likely have many questions and concerns. Bring your questions about small group insurance and you can be confident that JC Lewis Insurance Services will help you find the right solution.