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					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
                                                 • Intended to make consumers
                           $3,383                  more cost-conscious and
                                                   use less health care

                  $2,424                            – Lower future increases in
 $2,000                                             – Higher deductibles
                                                    – Lower premiums mean
                                                      lower short-term costs for
                                                    – Potential high out-of-
                                                      pocket spending for
      $0                                              consumers
                   2000     2003      2005
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
                    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
  – Employer contributions typically much less than the
  – Individuals can also contribute to accounts - tax
  – Unspent funds in the account can be rolled over for
    future health care needs
  – Provides consumers with incentives to spend account
                                         Figure 6

                     Providing the consumer with
                     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
                      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
                     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
     – Can be offered without a health plan at all
       („Defined contribution”)
     – May be limited to retiree benefits or other
                           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/
• 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
• 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
• Employer contributions not taxable to employees
• Individuals can deduct amount of contribution to
  HSA or HRA from taxable income when computing
  income taxes
• Funds from HRAs or HSAs used for medical
  expenses of beneficiary or dependents not taxable
• HSA payments used for non-medical expenses are
  includable income - subject to additional 10%
   – 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
          Mary‟s                • $2,000 Deductible

                                • 100% of preventive care
            $800                  covered before deductible
         Contribution           • 80% cost sharing for in-
                                  network – after deductible

                                • Out of pocket maximum:
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 …

        Mary     (Tax
       $400         deductible)

                     -        Expenses
                               $825       =     $385

Total Contributed to     Draw Down from   End of Year Balance
       Mary's HSA                 HSA
                  Figure 17

     Mary‟s HSA Contributions -
              Year 2


                               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

                             (paid from HSA)
Plan coverage                                  Mary‟s Total
 $10,400                     Recognized        OOP
                             expenses          Expenses =
                  $2,415     ( not from HSA)   $4,300

                         $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

      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
       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,
                                    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%
       25%                                                        25%
               2%                        8%              10%

  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

                    2004 Sept. 2005 March 2006 Jan.
Source: Survey of insurers by America’s Health Insurance Plans
                          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
  – Departure from more top-down rules used by managed care
• 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
                               80%                    • Most health care spending is
                                                        on relatively few people who
                 64%                                    are very ill
                                                      • Spending for ill often exceeds
                                                        deductible levels in CDHPs
                                                      • 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.