What Is a CDHP Medical Plan and How Does It Work?
Understand Consumer-Driven Health Plans (CDHPs): learn how this modern health insurance structure works to give you control over your medical spending.
A Consumer-Driven Health Plan (CDHP) represents a distinct approach to health insurance, empowering individuals with greater influence over their healthcare expenditures. It operates by combining a specific type of health coverage with a dedicated savings vehicle. This structure encourages a more engaged role in managing medical costs and making informed decisions about healthcare services.
Understanding the Core Components of a CDHP
A CDHP integrates two primary elements: a High-Deductible Health Plan (HDHP) and a tax-advantaged savings account. The HDHP is the insurance component, characterized by higher deductible requirements before the plan covers most medical services. For 2025, an HDHP must have a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. HDHPs generally cover preventive care services, such as screenings and immunizations, without requiring the deductible to be met first.
A deductible is the amount an individual pays for covered healthcare services before the insurance plan contributes. After the deductible, an individual’s financial responsibility is limited by an out-of-pocket maximum, the most a policyholder pays for covered services in a plan year. For 2025, the out-of-pocket maximum for an HDHP cannot exceed $8,300 for self-only coverage or $16,600 for family coverage. Once this maximum is reached, the plan covers 100% of eligible costs for the remainder of the plan year.
Alongside the HDHP, a CDHP includes a tax-advantaged savings account, primarily a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA). An HSA is an individually owned account allowing employee and employer contributions. HSA funds are portable, remaining with the individual if they change employers or health plans, and roll over year to year. An HRA is an employer-funded account, owned by the employer, used to reimburse employees for qualified medical expenses. HRAs are not portable, and employers set rules for their use, including whether unused funds can be carried over.
How a CDHP Works in Practice
When enrolled in a CDHP, individuals pay for most medical services out-of-pocket, typically using funds from their associated HSA or HRA, until their HDHP deductible is satisfied. For example, if an individual has a $2,000 deductible, they pay the first $2,000 of covered expenses. This direct payment mechanism encourages individuals to consider the cost of services.
After the deductible is met, coinsurance usually applies. Coinsurance is a percentage of covered healthcare service costs the individual pays, while the plan pays the remaining percentage. For example, with an 80/20 coinsurance arrangement, the plan covers 80% of eligible costs, and the individual pays the remaining 20%. Copayments, fixed dollar amounts paid at service, are less common with HDHPs but might apply to certain services before the deductible.
All payments towards the deductible, coinsurance, and copayments contribute to the annual out-of-pocket maximum. Once this limit is reached, the HDHP covers 100% of all eligible medical expenses for the rest of the plan year. The integrated savings account helps cover these initial expenses, fostering cost awareness and active participation in healthcare decisions.
Key Financial Aspects of CDHPs
A financial advantage of CDHPs, particularly those with an HSA, is the “triple tax advantage.” Contributions to an HSA are tax-deductible, reducing taxable income. Funds within an HSA grow tax-free through interest or investments, and withdrawals for qualified medical expenses are also tax-free.
Unlike HRAs, which are employer-owned and do not allow for investment, HSA funds can be invested once a certain balance is achieved, offering potential for long-term growth. This allows HSA balances to accumulate over time, providing a resource for healthcare expenses, including those in retirement. Employers often contribute to both HSAs and HRAs, which can reduce the employee’s out-of-pocket burden.
The IRS sets annual contribution limits for HSAs. For 2025, the maximum contribution is $4,300 for self-only HDHP coverage and $8,550 for family HDHP coverage. Individuals aged 55 and older can contribute an extra $1,000 annually as a “catch-up” contribution. These limits apply to total contributions from all sources.
CDHPs Versus Traditional Health Plans
CDHPs differ from traditional health plans, such as Preferred Provider Organizations (PPOs) or Health Maintenance Organizations (HMOs), primarily in their cost-sharing mechanisms. CDHPs feature lower monthly premiums in exchange for higher deductibles that must be met before insurance coverage begins for most services. Traditional plans often have higher premiums but provide coverage with lower deductibles, or sometimes with fixed copayments from the outset.
CDHPs emphasize the high deductible and integrated savings account, requiring individuals to pay for initial medical expenses directly. Traditional plans, in contrast, rely on predictable copayments for doctor visits and prescriptions, with a lower deductible that, once met, leads to the plan covering a larger share of costs. This means CDHPs place more financial responsibility on the individual at the beginning of the plan year.
CDHPs encourage consumers to be more engaged with healthcare costs. Since individuals often use their own savings account funds to cover initial expenses, there is an incentive to compare prices for services and medications. Traditional plans, with fixed copayments and lower deductibles, may not provide the same direct financial incentive for cost-consciousness.