What Are Consumer Driven Health Plans and How do They Work for You?

Consumer Driven Health Plans have become popular as a way to contain health care costs.

But what are consumer driven health plans and how do they work for you?

While a consumer driven health plan can substantially lower health costs to an employer, they can also result in substantial savings — and other benefits — to employees.

The plans center on health savings accounts (HSAs) and health reimbursement accounts (HRAs), and pay for up front health care costs not generally covered by regular health insurance plans.

They are typically (but not always) used in conjunction with high deductible health insurance plans that protect the beneficiary only from very large medical expenses.

The difference is then covered through either the HSA or HRA account.  This enables the employee to pay lower health insurance premiums but to budget for the higher out of pocket costs through regular contributions to HAS/HRA accounts by either the employee or employer.

The combination is named “consumer driven health care” because up-front health care costs are paid using a consumer-controlled account versus a single payer, giving the beneficiary greater control over his own health coverage.

“Catastrophic” health plans

The very term “catastrophic” used in connection with health insurance conjures up visions of something exotic.

In fact, it’s nothing of the sort.

Catastrophic health insurance is merely a term that describes a health plan with a high deductible, and even that can be the subject of some misunderstanding.

To one person, a high deductible may mean $5,000; to another it may mean $10,000, or even more.  The critical takeaway however is using a high deductible to lower the basic cost of health insurance premiums.

These savings are the basic foundation of consumer driven health plans, and they’re significant.

Raising the deductible from, say $1,000, to $5,000 can quite literally lower your monthly premiums by hundreds of dollars.  You’ll pay more for routine health costs, such as tests and many other first dollar expenses, but the insurance will be there to cover the majority of very large health events that can easily run into six figures — the true medical catastrophes.

As attractive as this arrangement is, it’s not without drawbacks.

You can pay a lot of medical expenses on the way to $5,000 or $10,000; if you’re in good health, that’s a chance you may be willing to take.

If you’re in less than good health, it could prove to be the road to financial ruin.

The key is to consider and evaluate the likelihood of the level of healthcare you’ll need.

When raising your deductible, it’s important to work out a plan for how you’ll cover the high deductible in the event of a claim that falls short of a catastrophic event.  That’s where HSAs and HRAs come into the picture.

Health Savings Accounts (HSA)

HSAs were created to provide individuals with tax deductible funding for out-of-pocket health expenses.

The plans are set up like an individual retirement accounts (IRAs) — money is put into the account and accumulates tax-free until it’s withdrawn to pay for qualified medical expenses.  And funds remaining in the account at year end can be rolled over to the next year, or held until age 65 when it can be withdrawn tax free.

The plans can be set up by individuals or by employers, but must be adminstered by an IRS approved trustee.

When set up by employers they’re typically established under a “cafeteria plan”, along with employee childcare and other plans.  The plans often come with a debit card enabling you to access the account.  You can use the funds to cover co-payments and deductibles for doctor visits, prescription drugs and other up front health costs.

Since Health Savings Accounts are funded with pre-tax income, you will receive the medical deduction even though you aren’t able to itemize deductions on your income tax returns.

For 2011, an individual can contribute up to $3,050 ($3,100 for 2012), while a family can contribute up to $6,150 ($6,250 for 2012). Also, if you’re 55 or older, you can increase your contribution by $1,000.

HSAs are established specifically to be used in conjunction with high deductible health insurance plans.

You must have a minimum health insurance plan deductible of $1,200 for an individual ($2,400 for a family) in order to qualify for the plan.

Health Reimbursement Accounts (HRA)

While HSA accounts are funded by the employee, HRA accounts are funded entirely by the employer, who can also decide whether or not the funds will be rolled over from one year to the next.

The type of medical expenses that an employee can be reimbursed for are determined by the employer in advance.  Employers are not required to fund the plans in advance and can instead reimburse employees as expenses arise.

For these reasons, HRAs are more typically held by a small businesses, though the self-employed are not eligible.

Contributions to an HRA are tax deductible to the employer, but are not taxable to the employee either.  A significant difference from HSAs is that HRAs don’t require a high deductible health insurance plan — or any plan at all.

An increasing number of employers are offering HSAs or HRAs in an attempt to lower health insurance costs.

Because of the tax advantages alone they’re worth checking out if your employer has them available.

Do you have an HSA or HRA through your employer?  If so, how has your experience been with the plans?  Do you prefer them to more traditional, low deductible plans?