What Is a Consumer-Driven (CDHP) Health Insurance Plan?
Understand Consumer-Driven Health Plans (CDHPs) and how they empower you to manage healthcare costs with associated savings accounts.
A Consumer-Driven Health Plan (CDHP) is a contemporary health insurance approach designed to empower individuals with more influence over their healthcare expenditures. These plans foster cost-conscious decision-making by emphasizing consumer involvement, providing a framework to manage healthcare resources effectively while maintaining comprehensive coverage.
Understanding the Core Components
A CDHP integrates two main elements: a High Deductible Health Plan (HDHP) and an associated savings account. This combination distinguishes CDHPs from traditional insurance models.
A High Deductible Health Plan (HDHP) has a higher annual deductible than conventional plans, requiring individuals to pay a larger initial amount of medical expenses before insurance coverage begins. HDHPs often feature lower monthly premiums, which can be an advantage for those who anticipate fewer medical needs. They are required to cover certain preventive care services, such as annual physicals and various screenings, without requiring the deductible to be met first. The IRS sets specific minimum deductible and maximum out-of-pocket limits for HDHPs, and these amounts are subject to annual adjustments.
The associated savings accounts linked with HDHPs are primarily Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs). An HSA is a tax-advantaged savings account where funds can be used for a wide array of qualified medical expenses. HSAs offer triple tax benefits: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. HSAs are owned by the individual and are portable, meaning the account holder retains the funds even if they change employers or health plans.
In contrast, a Health Reimbursement Arrangement (HRA) is an employer-funded account designed to reimburse employees for approved medical expenses. HRAs are employer-owned, and their rules for eligible expenses and fund rollovers are determined by the employer. Unlike HSAs, HRAs are generally not portable, and employees typically lose access to the funds if they leave the company.
How CDHPs Manage Healthcare Costs
CDHPs involve individuals in their initial healthcare costs. When medical services are needed, excluding preventive care, individuals typically pay for these services out-of-pocket until their HDHP deductible is satisfied. This direct payment often comes from an associated savings account, such as an HSA or HRA, allowing for the use of pre-tax funds.
Once the deductible has been fully met, the health plan begins to share the cost of covered services. This shared cost arrangement is known as coinsurance, where the plan pays a percentage of the costs, and the individual pays the remaining percentage. For instance, a plan might cover 80% of the cost, leaving the individual responsible for 20%.
The out-of-pocket maximum serves as a protective cap on an individual’s annual spending for covered medical services. Once this maximum limit is reached through a combination of deductibles, copayments, and coinsurance, the health plan then covers 100% of the costs for all further eligible medical services for the remainder of the plan year. Funds from HSAs and HRAs can be utilized for a broad range of qualified medical expenses, which include doctor visits, prescription medications, dental care, and vision services.
Eligibility and Contributions for Associated Accounts
Eligibility to contribute to a Health Savings Account (HSA) requires meeting specific IRS criteria. An individual must be covered by a High Deductible Health Plan (HDHP) on the first day of the month. Additionally, they cannot have other disqualifying health coverage, be enrolled in Medicare, or be claimed as a dependent on someone else’s tax return.
Contributions to an HSA can be made by the eligible individual, their employer, or both. Contributions made by an individual are tax-deductible, even if they do not itemize deductions. Employer contributions are generally not included in the individual’s taxable income. The IRS sets annual limits on the total amount that can be contributed to an HSA, and these limits are subject to change each year due to inflation. For individuals aged 55 and older, an additional catch-up contribution is permitted annually.
For Health Reimbursement Arrangements (HRAs), the eligibility criteria and rules for contributions are determined solely by the employer. Employers fund HRAs, and the specific design of the plan, including which medical expenses are covered and whether unused funds can be carried over, is at the employer’s discretion. This employer-specific design means that HRA rules can vary considerably between different companies.