≡ Menu

Consumer-Directed Health Plans and Health Savings Accounts

Driven by health care consumers, or are they just along for the ride?

Consumer-Directed Health Plans, sometimes known as Consumer-Driven Health Plans, are confusing. Not only do they go by two different names, but then they are referred to by other acronyms as well: HDHPs, HSAs, HRAs, FSAs and so on.

The idea behind CDHPs is that you can both save or invest money that earns interest AND have health insurance.

Sounds good, doesn’t it?

Let’s take a closer look at CDHPs and find out.

WHAT ARE CONSUMER-DIRECTED HEALTH PLANS and HEALTH SAVING ACCOUNTS?

  • Consumer-Directed Health Plans (CDHPs) consist of two components:
  1. A High-Deductible Health Plan (HDHP) is a health insurance policy that requires you to pay a large amount of money – the “deductible – before coverage kicks in. The goal of the HDHP is to cover more expensive, emergency medical care. Monthly premiums are lower than those in traditional health plans. (HDHPs can also be purchased outside of CDHPs.)
  2. A medical savings account to cover routine medical costs. The savings accounts can be HSAs, HRAs or FSAs, but typically they are HSAs (Health Savings Accounts).
  • To be eligible for an HSA, you must have a HDHP with a deductible set by Federal Law at a minimum of $1,100 for an individual and $2,200 for a family plan. If you have an HSA, you cannot carry a traditional plan at the same time.
    • Health Savings Accounts (HSAs) are private tax-free savings accounts that can:
      • earn typical savings interest at 1%-4%, depending on the bank that sponsors it;
      • be invested in stocks, bonds or mutual funds.
    • The money in your HSA is to be used to pay for:
    1. medical expenses until the health plan’s deductible is met; and
    2. out-of-pocket expenses once the plan starts paying its portion of your health care bills. The maximum amount of out-of-pocket expenses for which an HSA-qualified HDHP holder is liable:
      • $5,500 for an individual
      • $11,000 for a family
    3. Or, you can set aside these savings for future health care needs.
    • HSAs are designed to be used to pay for “qualified medical expenses”, expenses “primarily” used for medical care that is not covered by the HDHP. You are responsible for determining what expenses are qualified and must save receipts in case you need to defend the spending in an audit. Inappropriate uses of funds are subject to a 10% tax penalty.
    • HSAs are “portable” – they can be retained even if you leave that job, much like a 401k. Any money that goes unused automatically rolls over year to year.
    • HSAs can be set up by you or by your employer. The amount of money your employer contributes for you or that you elect to deposit can be subtracted from your salary, pre-taxation – putting you into a lower tax bracket.
    • HSAs can be used to pay for a family member’s medical expenses.
    • You can retain your HSA after you lose an HDHP, but you can no longer contribute to it.
    • The amount you can contribute to your HSA annually is no longer limited to the amount of the accompanying HDHP deductible. As of December 2006, the Tax Relief and Health Care Act set the new contribution limits at $2,850 (individual) or $5,650 (family).

    HOW DO HEALTH SAVINGS ACCOUNTS COMPARE WITH OTHER SAVINGS ACCOUNTS FOR MEDICAL CARE?

    Medical savings accounts have been offered in one form or another (Medical IRA’s, FSA’s, HRAs, HSAs) since the late 1970s.

    CDHPs were first offered in 2000, combining a medical savings account with a high-deductible health insurance policy, such as an HRA and a high-deductible plan. HRAs are the second most common medical savings account and mainly differ from the popular HSA in that only employers can contribute to it and the money is forfeited if you leave your job.

    There are 4 common types of savings accounts in use today to cover medical expenses:

    Click here to see a comparison chart of the 4 common types of health savings accounts

    WHO SUPPORTS CONSUMER-DIRECTED HEALTH PLANS?

    In 2007, 2% of privately insured Americans ages 21-64 (2.3 million people) were enrolled in a consumer-directed health plan (CDHP), up from 1% in 2006 and 2005. In general, the biggest supporters of HSAs and CDHPs are people who think that the rising cost of health care is due to people using too much of it by going to the doctor too often, taking too many prescriptions, or getting too many procedures because they’re spending insurance companies’ money and not their own. They believe health care costs will be lower due to competition if consumers are pushed to shop around for better prices.

    Specifically, likely promoters and users are:

    • People with few health care needs and higher incomes who are able to use HSAs as a tax shelter. (
      • CDHP enrollees in 2005 had an average gross income of $139,000 compared to $57,000 for other taxpayers.
      • Only 41% of those who contributed to an HSA in 2005 withdrew any money for health expenses.
    • Youth, who may have low incomes, but see themselves as being very healthy and not likely to need health care.
    • Investors and Wall Street, who benefit when medical savings accounts smooth the way for investment.
    • Employers who appreciate how CDHPs help shift health care costs onto employees while saving money on taxes.
    • Some small businesses, which don’t have enough employees to make group coverage affordable, are starting to take to CDHPs as a way to offer health benefits.
    • Employers of all sizes are waiting for proof that CDHPs will actually save them money in the long-run.
    • Some employers are resisting the switch for fear that the higher costs CDHPs place on employees will kill morale and lead to high turnover – a cost in itself.

    WILL CONSUMER-DIRECTED HEALTH PLANS WORK?

    It depends on what you think the goals of our health care system should be.

    If the goal is to raise your awareness of how much you spend on health care, CDHPs will do that.

    If the goal is to limit the costs while improving our nation’s health care, CDHPs cannot do that alone.

    DO CONSUMER-DIRECTED HEALTH PLANS SOLVE THE PROBLEM OF RISING HEALTH CARE COSTS AND UNINSURANCE?

    The thinking behind CDHPs is that if you’re spending your own money, you will think twice about whether a visit to the doctor or a treatment is really necessary and/or you will bargain shop for your health care.

    Additionally, people think that the lower monthly premium costs of the HDHP in CDHPs will make insurance accessible to the under- and uninsured who previously couldn’t afford it.

    The problem is in these underlying assumptions:

    • that people spend so much on health care only because they don’t see it as “their” money but insurance money;
    • that it’s possible for people to shop around for health care and once they do, this will force providers to compete with each other and offer better care at lower cost;
    • that CDHPs cost less than traditional health plans and result in less spending.

    Let’s examine these assumptions:

    Question: Will CDHPs really limit consumer health care spending?

    Answer: No. According to the Tax Policy Center, 95% of all medical expenditures from insured households would exceed HSA deductibles. If the vast majority of costs come after the deductible has been met, there is no longer any incentive to keep down costs. Furthermore, the average cost of premiums + deductibles in high-deductible policies exceeds the average cost of premiums + deductibles in traditional plans. So even if everyone used CDHPs, spending on health care will not decrease.

    Question: Are people truly happy to spend money on health care they don’t need?

    Answer: People don’t want MORE health care – more invasive procedures, more expensive medicines – they want BETTER HEALTH. What we are beginning to find is that when people have to pay more for health care (think high deductibles), they do limit its use – by delaying necessary treatment or foregoing needed medicines, which can turn a small symptom into a serious problem, which drives up health care costs in the long-run for everyone.

    Question: Are CDHPs more efficient? Would they reduce administrative paperwork?

    Answer: No. They increase administrative paperwork: HSA plans require consumers to fill out forms justifying withdrawls from their account every time they need money to pay a medical bill or medical-related expense. Your spending must be verified by the HSA corporate manager and the insurer.

    Question: Do you want to spend time finding the cheapest medical care, or good medical care?

    Answer: How much cost information is out there? Could you locate a less expensive cardiologist while in an ambulance on your way to the hospital, or a better price on chemotherapy while you’re dealing with cancer? Will you change your family physician every year for one that charges less?

    Question: Will CDHPs protect me and my family from high costs if one of us gets really sick?

    Answer: It depends upon the policy. The terms of the HDHP need to be very carefully read to understand what exactly will be paid for because the details of a plan’s coverage for specific services are not always clear. A consumer research firm recently found most of the Web sites of companies that offer health savings accounts don’t help a potential customer decide if such an account is right for them.

    • You need to make sure that the plan will cover unpredictable health care needs, such as surgical complications, accidents or cancer. Even care that you would expect would be covered – like routine maternity care, including normal labor and delivery – or would hope would be covered – like mental health or substance abuse services – rarely is.
    • Usually nothing is covered until the deductible is met, and this can range from $2,500 to $10,000.
    • The high deductible, co-payments, coinsurance and uncovered costs may lead to large out-of-pocket costs. There are patients who have been bankrupted well below the “catastrophic” thresholds – the upper limits on consumer health care spending – outlined in some HSA’s high-deductible plans.
    • For those who only make enough to pay for rent, food and transportation, setting aside savings for health expenses and paying off a high deductible before insurance coverage kicks in will be very difficult.

    Question: Are CDHPs a good solution to solving the problem of the numbers of uninsured Americans?

    Answer: Uninsured households typically have less financial assets than the insured do. This raises the question of whether lower-income families can afford to pay the relatively high cost sharing required by CDHPs if the need for serious health care treatment arises. The point of health coverage is to protect people from the financial burden of health care and allow them access to services they otherwise couldn’t afford. Expecting the bulk of the uninsured to embrace a policy that demands they pay a high percentage of their cost of care seems unlikely. In fact, in 2007, roughly 4 times as many uninsured people purchased comprehensive health coverage than CDHPs. If you were in the market for health insurance and had the money to cover the costs of CDHPs, wouldn’t you rather use it to buy a policy that offers more protection?

    BOTTOM LINE

    CDHPs do offer a way for people to save or invest money – by betting on their own health and luck, taking the risk they won’t get really sick or injured and actually need full insurance coverage.
    CDHP’s do not address any of the underlying issues of our health care crisis.

    This article was written by Emily Cleath.