As healthcare costs continue to rise, your company may be seeking alternatives to minimize the financial strain. One effective cost management strategy is to expand your company’s health insurance offerings to include a consumer-driven health plan (CDHP) and to promote education and awareness about the benefits of enrollment in CDHPs to its employees.
CDHPs are health insurance plans that leverage the consumer’s (i.e. employee’s) use of tax-advantaged health spending accounts to pay for health expenses, combined with a high deductible health plan (HDHP) that limits the consumer’s out of pocket spending for medical expenses. CDHPs get their name from the need for the consumer to be actively involved in the decision-making process about what health care services they will receive, and for planning, saving, and spending for such health care services. In a CDHP, health care costs are first paid for by an allotment of money that is funded by the employee, the employer, or a combination of both, in a health spending account. Once funds from health spending accounts are depleted, the consumer is responsible for the cost of health services up to the plan’s deductible. After the plan’s deductible is met, the costs for health services in excess of the deductible are covered by the insurance payer in a manner that is similar to traditional health insurance plans. As with traditional plans, costs for health services in an HDHP are limited to a predetermined out-of-pocket maximum for a plan year.
One of three types of health spending accounts is typically paired with an HDHP as part of a CDHP offering. These include a health savings account (HSA), flexible spending account (FSA), or health reimbursement arrangement (HRA). An HSA is an employee account designed to be paired with an HDHP to allow tax-free payments of current and future qualified medical expenses. Employees, the employer, or both may contribute to HSAs subject to annual IRS limits. Employee contributions to an HSA can be made pretax. An FSA is an employee account in which pretax income is saved for qualifying healthcare expenditures. Employees may contribute to FSAs subject to annual IRS limits. Employers may also contribute to FSAs. At the end of each plan year, a limited amount of unused funds may be rolled over to the next year, while the employee will lose any remaining unused balances that haven’t been spent on qualified medical expenses by the end of the plan year. An HRA is an employer-owned account that is solely employer-funded. Employees are reimbursed for qualified expenses on a tax-free basis from an HRA, up to a limit set by the employer.
Consumer benefits of enrollment in CDHPs include the following:
- HDHPs generally have lower monthly premiums than traditional insurance plans, meaning the employee’s contribution per paycheck to the monthly premium is generally lesser.
- Employee contributions to HSAs and FSAs are made pretax, which reduces an employee’s gross income and results in tax savings for the employee.
- Distributions from HSAs, FSAs, and HRAs for qualified medical expenses are tax-free to the employee.
- Unused employee contributions to HSAs in a given year may be carried over to future years instead of being lost. Employers, at their discretion, may offer carryover of employer-funded HRA contributions.
The potential benefits of CDHP to the employer are manifold, and include the following:
- Most insurance carriers require the employer to cover a percentage of the employee-only portion of the monthly insurance premium. Since HDHPs generally have lower monthly premiums than traditional insurance plans, the employer’s portion of costs per employee in an HDHP plan will, in turn, be lesser compared to a traditional insurance plan.
- Employer contributions to health spending accounts are tax-deductible.
- Offering predetermined employer contributions to health spending accounts provides a way for employers to predict and control their annual healthcare costs.
- Since participants in a CDHP are more accountable for the cost of health services, they tend to make more informed and economical decisions when accessing health services. This tends to reduce the overall cost of medical services accessed through a CDHP compared to a traditional health plan. Such cost savings are transferred to the employer by way of reduced spending of the employer contributions to health spending accounts, particularly HRAs
- CDHPs may be preferred by employees who value more control over health care spending, are more budget-conscious, are generally healthier and therefore low utilizers of health care services, and who prefer to spend less on monthly premiums. Employers may be more able to attract and retain such employees by offering a CDHP option among its array of health care offerings.
While the potential benefits of CDHPs to both employees and employers are manifest, it is incumbent on employers to weigh all relevant factors in deciding if such a plan offering is a good fit for their company. Such factors include the number of employees, the overall health of your staff, the current and projected cost of health benefits under a CDHP versus your current plan offerings, and the desired richness of benefit. As each employee has unique healthcare needs, a one size fits all approach may not be the answer. However, including a CDHP as an alternative in your company’s array of health offerings may be a win-win for both employees and the bottom line.