What Is a Consumer-Driven Health Plan?
Employers often opt for consumer-driven health plans to combat the rising cost of health care. In turn, consumer-driven health plans may be the insurance plan of choice for employees because they offer lower premiums.
Before choosing this insurance plan, it’s essential to understand what it is and weigh the advantages and disadvantages. While the saving on premiums may appear advantageous, this plan is only ideal for specific individuals. To help you make the right choice, we’ll look at what a consumer-driven health plan is, its pros and cons and how it works.
What Is a Consumer-Driven Health Plan?
A consumer-driven health plan (CDHP) is a health insurance plan that allows employers, employees or both parties to put aside pre-tax money to pay for qualified medical expenses not covered by the employee’s health plan. A CDHP links to tax advantage savings account such as a health savings account (HSA), flexible savings account (FSA) or health reimbursement account (HRA). This account helps participants to save money to cover medical expenses such as co-pays.
The premiums for a CDHP typically cost less — however, you pay more out of pocket than traditional health care plans. To help with out-of-pocket expenses, participants can use the funds in their savings accounts. Typically, you’ll pay out-of-pocket before the coverage begins. The plan is, therefore, ideal for people who are healthier, more cost-conscious and know how to manage their health care plan and the tax benefits that come from the savings account linked to it.
Is a CDHP a PPO or HMO?
A CDHP is a preferred provider organizations (PPO) health insurance plan. It offers a network of health care providers for medical care at a specific rate. Unlike a health maintenance organization (HMO) insurance plan, a PPO allows you to receive care from any provider in or outside your network.
If you enroll in a CDHP, confirming that your doctor is on the list of in-network providers is wise, as you will pay a discounted rate. Non-network providers bill you directly for any amount not covered by your health care plan.
How Do Consumer-Driven Health Plans Work?
A CDHP is a sound choice for people who don’t visit the doctor much but wish to have coverage for when they become ill. For an employer to set up a CDHP, they must offer a high-deductible health plan (HDHP). An HDHP means higher coverages only kick in once an employee pays a large deductible. A qualifying HDHP allows employees to save part of their income in a tax-advantaged savings account. There are three types of savings accounts:
- Health savings account: An HSA saving account is employee-owned. It specifically works with an HDHP to allow tax-free payments of current and future qualified medical costs. The employer, employees or both parties may contribute to this account according to the limits set by the IRS.
- Flexible spending account: An FSA is an employee account for saving pre-tax income for qualifying health care expenditures like prescriptions or co-pays. At the end of the year, employers can give employees a two-and-a-half-month grace period to use the balance or allow up $500 to roll over to the following year. After this, the employee loses any unused credit.
- Health reimbursement arrangement (HRA): This account is employer-owned and works with employer-provided health care plans. The employer is the only contributor to this account. Employees receive tax-free reimbursements for eligible medical expenses up to a limit set by their employer.
Once you meet your annual deductible, the CDHP will pay for covered services based on the coinsurance percentage in your insurance plan. If you are considering a consumer-driven health plan, ask yourself the following questions to determine if it is the right choice for you:
- How much is the deductible compared to traditional health plans?
- What is the out-of-pocket maximum compared to conventional health plans?
- How much are the premiums to traditional health plans?
- How often do you need health care procedures or doctor visits?
Pros and Cons of Consumer-Driven Health Plans
CDHPs are an excellent way for employers to give employees access to cost-effective medical care. Now that we know how a CDHP works, let’s look at some of the pros and cons of these insurance plans.
Advantages of Consumer-Driven Health Plans
CDHPs have several benefits for both employers and employees, such as:
- Pre-tax contributions: Because the contribution to the savings accounts occurs before taxes, the employee’s gross income is lower, resulting in tax savings for both the employee and the employer.
- Lower premiums: The premiums on CDHPs are generally lower than traditional insurance plans. People who are healthier and don’t need regular medical care can save on monthly premiums.
- Unused contributions can carry over: Rather than lose out on saved funds, HSA savings carry over the following year to pay for future medical costs. Employers choose the amount to carry over for HRAs.
- Distributions are tax-free for qualified medical expenses: Money taken out of an HSA, FSA or HRA for health care is tax-free as long as it meets the definition of qualified medical expenses set by the IRS.
- Interest from accounts is tax-free: Unused contributions in an HSA earn interest as long as they remain in the account. When you use the interest for eligible medical expenses, it is also tax-free. Money grows in an HSA — you can even invest it in mutual funds.
- Certain CDHPs may become more valuable: Employers can transfer certain accounts. Moving accounts makes the ability to roll over funds more valuable. Employees are often reluctant to contribute significantly to an HSA when unsure of their career progression within an organization. It makes it a more worthwhile investment if they can keep their savings when they switch jobs.
Disadvantages of Consumer-Driven Health Plans
There are many benefits to a consumer-driven health plan, but it’s crucial also to understand the drawbacks of this type of insurance plan:
- May increase patient risks: Sicker people may have difficulty setting aside savings, so the savings account loses its value to them. If you have an unpredicted illness, the funds in your savings account can deplete quickly. To keep funds from finishing or use the account correctly, participants may decide to hold off on preventative care or delay addressing their health needs.
- Higher out-of-pocket costs: CDHPs have lower premiums and higher deductibles. Participants may pay more for health care if they need frequent or costly medical care.
- Uncertainty of costs: It can be challenging to estimate how much you will pay for your medical expenses, especially if you need unexpected care and don’t have money saved to cover the costs.
- Limited coverage: While CDHPs cover preventative care and major medical expenses, they generally exclude dental, vision and mental health care. If you don’t have additional cover, you’ll need to pay out of pocket for these medical services.
Get Covered With Health for California
A consumer-driven health plan is an excellent option if you are healthy. You can save on premiums and accumulate funds for future medical expenses in your savings account. Before enrolling in a CDHP, evaluating how often you need medical care is essential, as there may be other cost-effective choices to meet your health needs.
At Health for California, we are passionate about helping you find coverage that matches your medical needs. We have a vast range of insurance plans, so you can choose the one that gives you the perfect coverage. Get started with affordable health insurance — contact us for a quote today!
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