Consumer directed health care is a broad term given to a new model of health care benefits that employs economic principles behind consumerism. The idea is that consumers are made aware of the cost of care and asked to help manage a health care budget, reimbursed through dedicated savings accounts. These accounts can be subsidized by an employer and/or their own savings and featured significant tax advantages.
The “health care account” is the primary mechanism of consumer directed health care and may take several forms:
Health Savings Accounts (HSAs) offer employees maximum control over their health care spending. These plans typically provide for virtually no “gatekeeping” (restrictions imposed by other types of health plans.) Consumers are free to make medical decisions and expenditures as they see fit. HSAs are owned outright by the individual, including employer contributions from the time of deposit. All contributions to an HSA are tax-free, as is the interest earned on HSA balances.
Health Reimbursement Arrangements (HRAs) Paired with the right health plan, an HRA can cover expenses people face most often (e.g. dental, vision, dependent coverage, etc.) Contributions are made exclusively by the employer, and funds deposited into the account are not subject to income, FICA or worker’s compensation tax.
Flexible Spending Accounts (FSAs) provide a higher degree of discretion over health care budgets. Qualified expenses may go beyond services like copays, health insurance premiums, prescription and OTC medications to include expenses such as childcare or eldercare. Individuals choose how much to contribute to an FSA. All FSA contributions are tax-exempt.
Employers may also contribute to these plans and reclaim unused funds at year’s end.
FSAs are typically used in conjunction with other health plans.
See ConnectYourCare’s Employer Benefits Modeler Tool for a full picture of potential trended cost savings.
For employers in the market for group insurance, an insurance company simply has less financial risk selling higher deductible health plan; unnecessary utilization is not encouraged because employees do not have “first dollar coverage” but rather have to pay their deductible before the health plan offers coverage. Therefore, the premium cost is typically lower.
For HSAs, you must have High Deductible Health Plans (HDHP) that specifically complies with HSA regulations. For example, one might have a deductible that meets the HSA regulations, but also offer a prescription plan that would disqualify it. With an HDHP and CDH Account (HRA/HSA), insurance becomes more like car insurance for the employee – it is only accessed when the employee has a major medical challenge. For maintenance, most expenses come out of the employee’s health care account. For an HSA, if the employee maintains good health – he or she can save dollars for retirement. For expenses, the employee would use his ConnectYourCare Health Payment card. The employee would present his card at the doctor for copays, at the pharmacy for prescriptions and pay for medical or dental expenses out of his or her account. HRAs require substantiation just like FSAs, however, HSAs require no substantiation. ConnectYourCare’s payment card technology is the most advanced on the market and auto-substantiates purchases based on merchant code intelligence, plan data, and relationships with PBMs.
A Health Savings Account is sometimes referred to as the “401(k) of Health care”. It’s true – the money goes in the account pre-tax and if the funds are spent on health care, there are no taxes on the funds withdrawn from the account. At the age of 65, an account holder (often referred to as an HSA Saver) can withdraw the funds for any expense – health care or non-health care – with no penalty, taxed at his current rate.
One critical differentiator between IRAs/401(k)s and HSAs is that an HSA participant can redeem money from his HSA for his expenses at any time in the future with no tax or penalty implications. The HSA participant can seek reimbursement immediately after an expense is incurred or he/she can save the medical receipts, while putting money away in the HSA, tax free, earning interest tax free, and access the account for reimbursement at a later time.
In 2014, maximum contributions to an HSA per year are $3,300 and $6,550 for individuals and families respectively. In 2015, maximum contributions to an HSA per year are $3,350 and $6,650 for individuals and families respectively.
HSAs are commonly implemented as a “slice” plan or an option compared to a PPO or other traditional plan. HSAs are better for you and your employees in the long run; however, it is a big jumping off point for many employees to incur a risk of paying for first dollar medical expenses, while building an account. Seeding the HSA provides an incentive to make the HSA and underlying HDHP in parity with a traditional plan. Use the HSA Savings – 360° Analysis calculator to see your savings. Your seed funding of an HSA will pay for itself in two years or less.
All employers, regardless of the number of employees, are eligible to set up a CDH plan. Any employee can enroll in a CDH plan. HSA holders are required to also have a High Deductible Health Plans (HDHP).
The nature of CDH plans encourage people to maintain and increase their health by rewarding them financially. HSAs are portable and employees can build wealth by saving pre-tax dollars in their HSAs and staying healthy. CYC provides extensive health education with every plan to help employees achieve better health.
With an increase in the health of employee population, health care usage will be driven down. Early data already shows a significant decrease in emergency room visits by those with CDH plans.
Though it varies by plan, state and even region due to differing levels of competition with the CDH plans; most CDH plans offer premium savings up to 15 – 25% compared with traditional plans. You can be assured actuarially that the rate of increase in premiums is significantly lower than traditional plans’ double digit growth.
Some regions have high penetration of CDH plans and thus very competitive prices while others are just introducing these plans to the market. Over time, the competition will spread as carriers begin to aggressively price CDH to take over business.
The real carrot in CDH is the ability for employees to build wealth in their HSAs. For most individuals, if they have the opportunity and education on how to do this, it becomes a no-brainer. Coupled with education tools and a sound employer-sponsored Wellness initiative, CDH is a terrific benefit package for employees.
Among dozens of benefits, employees will have more control over how their health care dollars are spent, a better understanding regarding how much health care costs, have access to reliable health education tools that will enable them to make better health care decisions, and can potentially save thousands of dollars – tax free – for retirement.
Since HSA plans are coupled with High Deductible Health Plans (HDHP), they will not have first dollar coverage as they would on a traditional plan. Some employees will see an increase in their deductible and some employees will have to pay more out-of-pocket for items like prescriptions and copays. However, they can typically use their health care account to cover these costs.
Why would an employee want to switch to a CDH plan if it appears to cost more out-of-pocket?
Though employees may now have to pay for coverage under their deductible out of pocket, they can use their tax advantaged health care account to do so. Long term savings pay off as their accounts accumulate savings and interest in the case of an HSA. Employees can determine specific savings through our employee savings calculators.
Earnings through investments on money in HSA grow tax free. Additionally, once a person turns age 65, they can continue to use the account tax-free for out-of-pocket health expenses. It is a great resource to save money for health care expenses one may incur during retirement. It can be used to pay Medicare premiums, deductibles, copays, and coinsurance under any part of Medicare. It can also be used to pay for a person’s share of retiree health insurance premiums under a former employer.
The HSA can also be used to pay for things other than medical expenses. If used for other expenses, the amount withdrawn will be taxable as income but will not be subject to any other penalties.
Employees can determine specific savings through our HSA Growth Estimator.
Employees can include family members on their CDH accounts and use tax-free contributions to pay for their health care costs.
CDH Plans can include measures for preventive care, where regular checkups and certain screening tests are not subject to the deductible; your employees typically pay a nominal copayment or have no charge at all. With respect to pharmaceuticals, it’s becoming common knowledge as a CDH participant, that “if you see it on TV, you want to get the generic drug”. CYC provides a prescription drug comparison tool at the dosage level so an employee can search for their prescription and see all approved alternatives including costs for pill splitting. Your employees can even look up drugs prescribed for common conditions before going to see the doctor.
At the end of the day, your account-based plan design and contributions must be consistent with your desired outcomes. CYC can assist you and your consultant with creative ideas based on our experience in these areas.
A best practice suggests a portion of the money saved on premium should be diverted into employee health care accounts. Otherwise, employees clearly notice their benefits are being depleted. To alleviate this notion, we recommend that you seed accounts to make them competitive with traditional offerings and offer wellness programs that educate, and frankly, nudge employees into healthier lifestyles, precluding health care spending. Additionally, communications are critical to successful transitions. We offer a suite of standard and custom communication options to help you build an educated employee population.
If your company already has a CDH account administrator, but your administrator cannot offer a multi-purse payment card, mobile and online tools, health education tools, employee communications and access to experienced customer service representatives, we can help you quickly and easily upgrade your CDH program. For onboarding, we will provide an implementation guide complete with timelines, checklists and appropriate set-up and enrollment instructions and forms. We will also provide employee communications designed to drive understanding of CDH and increase enrollment. Our experience in onboarding clients and communicating to employees make the entire process a snap for your busy HR department.
To ensure enough time to select the right plan for your employee population, distribute employee communications and answer employees’ questions, CYC recommends you begin planning for CDH 12-18 months before your plan year start date.
Some employers implement a plan that does not suit their employee population, and some do not adequately communicate plan benefits to employees. These pitfalls can lead to low employee enrollment.
ConnectYourCare’s plan design experts help you select the plan that best suits your needs and the needs of your employees. We offer pre-enrollment education materials and enrollment tools such as a plan cost modeler that help communicate the benefits and potential savings of CDH plans to your employees.
Change is usually met with resistance. Employers must position the change as an increase in choice and control in their health care spending, rather than as a shift in costs. To do this, they should develop a communication strategy that helps employees understand the myriad benefits of CDH plans, including significant tax advantages. To this end, we provide communications that clearly spell out the financial, convenience and educational benefits, as well as custom communication options to meet your unique needs.
We automate the enrollment process to eliminate unnecessary extra work from HR staff. Employees may be enrolled in a matter of hours.
Employees access their account balance and investment option through our mobile app or easy online portal. These tools also give them access to claim information, communications, and health education tools.
Employees are issued a payment card with which they can pay for any medical cost. If an employee has multiple accounts (HSA and HRA for example), the card automatically pulls money from the appropriate account. Or, employees may choose to enter a claim online or using the mobile app.
Most purchases are auto-adjudicated at point of sale, but some require employees to submit receipts through a simple process.
The claims process is quick and easy. Employees snap a picture of their receipts with their mobile phone or upload documentation online, and receive approval in minutes.