Consumer-Directed Health Plans Gary Claxton Vice President and Director, Health Care Marketplace Project Kaiser Family Foundation June 2006 Figure 1 What is a consumer-directed health plan (CDHP)? • Core concept is to increase consumer awareness about health care costs and provide incentives for consumers to consider costs when making health care decisions • Health plan with a high deductible accompanied by a consumer-controlled savings account for health care – High deductible health plan (HDHP) typically has deductible of at least $1000 for single coverage, but can be much higher – Two primary types of health care savings accounts • Health Savings Accounts (HSAs) • Health Reimbursement Arrangements (HRAs) Figure 2 Why consumer-directed health plans? Average Annual Premium for Single Beneficiary, by Year • Continuing rise in health care costs $4,024 $4,000 • Intended to make consumers $3,383 more cost-conscious and use less health care $2,424 – Lower future increases in premiums $2,000 – Higher deductibles – Lower premiums mean lower short-term costs for employers – Potential high out-of- pocket spending for $0 consumers 2000 2003 2005 Year Source: Kaiser/HRET Employee Health Benefits Surveys 2000-2005. Figure 3 Principles of CDHPs • Departure from previous health care financing principles • Consumers have greater responsibility for cost containment • Emphasize individual responsibility and ownership Figure 4 High Deductible Health Plans • Consumer responsible for costs up to specified deductible level – can pay out of pocket or with funds from savings account • Plan begins to pay for services after consumer has reached deductible • Many plans require cost sharing after deductible is met, up to out-of-pocket max • Plans may pay for “preventive” benefits (i.e. annual physical, mammogram, pap test) before deductible is met Figure 5 Consumer-Directed Savings Accounts • Account to pay for expenses subject to the deductible or not covered by the plan – Employers and/or individuals can contribute to the account – Employer contributions typically much less than the deductible – Individuals can also contribute to accounts - tax preferred – Unspent funds in the account can be rolled over for future health care needs – Provides consumers with incentives to spend account wisely Figure 6 Providing the consumer with information Dr. John Doe Provide information Address 1234 Main Street about diseases, Compare and Alexandria, VA 22314 treatment options, Save (703) 555-1111 quality indicators Many doctors in Hospital Affiliations YourTown Hospital our directory offer discounts CDHA Plan Discounts Some information on to CDHA Plan costs for different Service Est. Discounted Cost Typical Cost providers and consumers. New Office Visit $95.00 $10.00 treatment options Look here to see Return Office Visit $60.00 $80.00 how much you Specialties Dermatology can save on Financial information Background Board Certification: often general and typical health Information Dermatology services. does not include Years in Practice: 12 out-of-pocket costs Additionally, find Age: 42 background Sanctions: None information on Residency: each doctor. YourTown Hospital Languages: Spanish Figure 7 HRAs and HSAs: What‟s the Difference? • HRAs have been in existence longer than HSAs, but HSAs growing in prevalence • HRAs only offered in employer market; HSAs available to people who get coverage from their employer or buy it on their own • Structure, legal requirements and patient incentives can vary significantly between HRAs and HSAs • HRAs and HSAs are intended to work with health plans, but they are separate accounts; HSAs often administered by financial institution, not health plan Figure 8 Health Reimbursement Accounts • Employer-established accounts that provide non-taxed funds that employees can use for medical expenses • Funded exclusively by the employer • Nominal accounts – employers do not add funds to account until liabilities are incurred • Employer may restrict the types of services for which HRA funds can be used • Unused balances may be rolled over for use in future • Not portable if employee leaves job – Unused balances often revert to employer – Employer plan can stipulate that funds can be used for health care expenses (but not as cash) incurred after retirement or termination Figure 9 Health Reimbursement Accounts (cont‟d) • Can be used to pay for premiums for medical plan, including COBRA coverage • Generally no limit on employer contribution to HRA (nondiscrimination rules apply) • HRAs often offered with a HDHP, but not required – Can be offered without a health plan at all („Defined contribution”) – May be limited to retiree benefits or other uses Figure 10 Health Savings Accounts • Tax-exempt accounts established by an eligible individual • Eligibility criteria: – Covered under a HDHP that meets federal requirements – Not covered by other plan that is not HDHP (some exceptions) – Not entitled to benefits under Medicare – May not be claimed as dependent • Individual, employer, others can make contributions to HSA • Funds can be used for qualified expenses of individual/ dependents • HSAs belong to individual and are portable if change in job – Contributions can continue only as long as eligibility – Individual is beneficiary of investment income • HSA funds generally cannot be used to pay for health insurance premiums, except COBRA, LTC, when individual is unemployed, or coverage for people over age 65 other than Medigap Figure 11 Requirements for HDHPs Offered with HSAs, 2006 • Deductible of at least $1,050 for single coverage and at least $2,100 for family coverage • Annual limit on out-of-pocket expenses (for in-network services) of $5,250 for single and $10,500 for family coverage • Cannot cover services before deductible has been satisfied (other than preventive care) – IRS has been liberal in permitting services (including some maintenance prescription drugs) to be considered preventive • Can be provided by an employer or purchased directly from an insurer (non-group health insurance) Figure 12 Contribution Rules Differ for HRAs and HSAs • HSAs have strict limits on contributions • Maximum contribution to HSA is 100% of annual deductible, up to $2,700 for self-only coverage and $5,450 for family coverage • Individuals 55 to 64 can make additional ‘catch up’ contributions Figure 13 Tax Treatment of CDHC Accounts Contributions • Employer contributions not taxable to employees • Individuals can deduct amount of contribution to HSA or HRA from taxable income when computing income taxes Payments • Funds from HRAs or HSAs used for medical expenses of beneficiary or dependents not taxable income • HSA payments used for non-medical expenses are includable income - subject to additional 10% penalty. – No penalty if beneficiary dies, becomes disabled, or reaches age 65 • Interest earned on HSA balances not taxed Figure 14 Mary‟s Consumer-Directed Health Plan $1,200 • PPO High Deductible Plan with an HSA $400 Mary‟s • $2,000 Deductible Contribution • 100% of preventive care $800 covered before deductible Employer‟s Contribution • 80% cost sharing for in- network – after deductible • Out of pocket maximum: $4,000 Mary's Health Savings Account Year 1 Figure 15 Mary‟s Health Care Expenses – Year 1 Health Event Expenses Mammogram - network provider No cost (100% covered) Children’s sinus infection $125 Broken Leg $700 Total $825 Figure 16 Over the year … $1,200 Mary (Tax $400 deductible) Health Employer - Expenses $825 = $385 $10 Interest $800 Residual $375 Total Contributed to Draw Down from End of Year Balance Mary's HSA HSA Figure 17 Mary‟s HSA Contributions - Year 2 $1,585 Year 2 $800 Employer contribution Year 2 $400 Mary‟s contribution $385 Year 1 Rollover Total in Mary's Health Savings Account - Year 2 Figure 18 Mary‟s CHDP – Year 2 Expenses Health Event Expenses Heart Surgery Facility charges (in network) $9,000 Surgeon (in network) $3,000 Anesthesiologist (out of network) $1,000 (plan only recognizes $700) Cardiologist (in network) $1,000 Other miscellaneous charges $ 500 Unrelated MD charges $ 200 Total Expenses $14,700 Figure 19 So How Much Does Mary Spend… It‟s complicated! Total Year 2 Expenses = $14,700 Recognized expenses (paid from HSA) $1,585 Plan coverage Mary‟s Total $10,400 Recognized OOP expenses Expenses = $2,415 ( not from HSA) $4,300 Unrecognized $300 expenses (not from HSA) Figure 20 By the end of the year… • Mary spent $4,300 on health care – $1485 from her HSA – $2815 directly out-of-pocket • Mary has no money left in her HSA • Mary can deduct her $400 HSA contribution from her taxable income when calculating her income taxes Figure 21 Points to Consider • Employers and individuals often contribute monthly to HSAs, entire amount contributed for a year may not be available for expenses incurred earlier in the year – Individuals can pay the amounts out-of- pocket and be reimbursed by their HSA after making contributions – Individuals can increase contributions – larger tax deduction • Only services covered by plan are counted towards deductible – Plan only counts what is considered “reasonable amount” Figure 22 Out-of-Pocket (OOP) Spending • Important to consider total OOP spending limit, not just deductible amount – HSA plans - out-of-pocket maximum limit applies to all services covered by providers in the network – HRA and traditional plans – limits may not apply to all cost- sharing; often exclude mental health and Rx OOP costs • OOP limits may not apply to services from out of network providers, or a higher limit may apply • Specific services may have separate benefit limits – Plan may only pay for certain number of visits or up to maximum dollar level; consumers pay any additional costs – These costs can be paid from an HSA, but this spending will not count towards deductible or plan‟s out-of-pocket limit Figure 23 Large Employers Most Likely to Offer HDHPs Share of Firms Offering HDHP, By Firm Size, 2005 33% 20% 20% 20% 20% Small (3-199 Midsize (200- Large (1,000- Jumbo All Firms Workers) 999 Workers) 4,999 (5,000+ Workers) Workers) HDHP has annual deductible ≥$1,000/ individual and $2,000/family. Prevalence shown is for all HDHPs, regardless of offer with HRA, HSA qualified, or neither. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005. Figure 24 Features of HDHPs, 2005 HDHP with HRA HDHP with HSA Average Enrollment 25% 15% (among firms offering plan) Annual Averages for Single Coverage: Premium $3,503 $2,700 Worker Contribution to $423 $431 Premium Deductible $1,870 $1,901 Out of Pocket Maximum ‡ $2,859 $2,551 Employer Contribution $792 $553 ‡ Employers reported no maximum OOP limits for 3% of workers enrolled in HDHP/HRAs, who are excluded from calculation. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005. Figure 25 Average Annual Costs of CDHPs Compared to All Plans 2005 HSA Qualified For Single Coverage: HDHP/HRA HDHP All Plans‡ Total Premium $3,503* 2,700* $4,024 --Worker Contribution $423 $431 $610 --Firm Contribution $3,080 $2,270* $3,413 Total Firm Contribution (Firm Share of Premium Plus $3,872* $2,850 $3,413 Firm Contribution to Acct.) Total Spending (Premium Plus Firm $4,295 $3,280* $4,024 Contribution to HRA or HSA) Estimate is statistically different from All Plans at p<.05. ‡ All Plans refers to all conventional, HMO, PPO, and POS plans in the survey, not just HDHP/HRAs or HSA qualified HDHPs. The average firm contributions to HRAs and HSAs cannot be calculated from this chart. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005. Figure 26 HDHPs Likely to Grow in Employer- Sponsored Insurance Market Among firms not offering an HSA-qualified Somewhat HDHP, share saying they are likely to offer one Likely in 2006: Very Likely 32% 25% 23% 25% 25% 2% 2% 8% 10% 6% Small (3-199 Midsize (200- Large (1,000- Jumbo (5,000 All Firms Workers) 999 Workers) 4,999 or More Workers)* Workers) *Estimate is statistically different from All Firms at p<.05. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005. Figure 27 CDHPs Growing in the Non-Group Market 1000 Enrollment in Non-Group Qualified HDHPs (in thousands) 750 855 500 556 250 346 0 2004 Sept. 2005 March 2006 Jan. Source: Survey of insurers by America’s Health Insurance Plans http://ahip.org/content/default.aspx?docid=15302 Figure 28 Policy Considerations • Financial incentives and health information – Try to provide consumers more control over their health care and incentives to stay healthy and choose efficient treatment options – Departure from more top-down rules used by managed care organizations • Possibility for adverse selection – If CDHPs attract healthier people, prices for more traditional insurance will rise because they will be left with disproportionate share of sicker enrollees • Higher cost-sharing in CDHPs – May result in lower premiums for CDHPs – Can deter beneficial (preventive, diagnostic, treatment) as well as unnecessary services – Impact on health outcomes unclear Figure 29 Impact on Health Care Costs? Concentration of U.S. Health Spending, 2003 • CDHPs could lower spending, but magnitude unclear 97% 80% • Most health care spending is on relatively few people who 64% are very ill • Spending for ill often exceeds deductible levels in CDHPs 24% • Traditional insurance already has significant cost sharing - incremental difference with CDHPs may be modest Top 1% Top 10% Top 20% Top 50% Population Percentile Ranked • Overall impact on health by Health Care Spending spending yet to be determined Note: Population includes those without any health care spending. Health spending defined as total payments, or the sum of spending by all payer sources. Source: KFF calculations using data from Agency for Healthcare Research and Quality, MEPS, 2003.