Consumer-Directed Health Plans

1. Consumer-Directed Health Plans Gary ClaxtonVice President and Director, Health Care Marketplace ProjectKaiser Family Foundation June 2006 Hello. My name is Gary�Hello. My name is Gary�

2. What is a consumer-directed health plan (CDHP)? Core concept is to increase consumer awareness about health care costs and provide incentives for consumers to consider costs when making health care decisions Health plan with a high deductible accompanied by a consumer-controlled savings account for health care High deductible health plan (HDHP) typically has deductible of at least $1000 for single coverage, but can be much higher  Two primary types of health care savings accounts Health Savings Accounts (HSAs) Health Reimbursement Arrangements (HRAs) :17 We�re talking today about CDHP. Insert additional 2 seconds pause at end of this slide.:17 We�re talking today about CDHP. Insert additional 2 seconds pause at end of this slide.

3. Why consumer-directed health plans? Continuing rise in health care costs Intended to make consumers more cost-conscious and use less health care Lower future increases in premiums Higher deductibles Lower premiums mean lower short-term costs for employers Potential high out-of-pocket spending for consumers 1:09 So, why are we seeing these plans come into the market? Insert additional 2 seconds pause at end of this slide. 1:09 So, why are we seeing these plans come into the market? Insert additional 2 seconds pause at end of this slide.

4. Principles of CDHPs Departure from previous health care financing principles Consumers have greater responsibility for cost containment Emphasize individual responsibility and ownership 1:45 Consumer-directed approaches represent a distinct departure from� 1:45 Consumer-directed approaches represent a distinct departure from�

5. High Deductible Health Plans Consumer responsible for costs up to specified deductible level � can pay out of pocket or with funds from savings account Plan begins to pay for services after consumer has reached deductible Many plans require cost sharing after deductible is met, up to out-of-pocket max Plans may pay for �preventive� benefits (i.e. annual physical, mammogram, pap test) before deductible is met So, how do these arrangements work? Insert 2 seconds.So, how do these arrangements work? Insert 2 seconds.

6. Consumer-Directed Savings Accounts Account to pay for expenses subject to the deductible or not covered by the plan Employers and/or individuals can contribute to the account Employer contributions typically much less than the deductible Individuals can also contribute to accounts - tax preferred Unspent funds in the account can be rolled over for future health care needs Provides consumers with incentives to spend account wisely So, how do these arrangements work? Insert 2 seconds.So, how do these arrangements work? Insert 2 seconds.

7. Providing the consumer with information 3:59 Health plans that offer these �and does not tell consumers how much they can expect to pay a doctor or hospital for a particular service. Reduce the long gap after this slide. 3 seconds is enough.3:59 Health plans that offer these �and does not tell consumers how much they can expect to pay a doctor or hospital for a particular service. Reduce the long gap after this slide. 3 seconds is enough.

8. HRAs and HSAs:What�s the Difference? HRAs have been in existence longer than HSAs, but HSAs growing in prevalence HRAs only offered in employer market; HSAs available to people who get coverage from their employer or buy it on their own Structure, legal requirements and patient incentives can vary significantly between HRAs and HSAs HRAs and HSAs are intended to work with health plans, but they are separate accounts; HSAs often administered by financial institution, not health plan 4:55 The two primary savings accounts� �which are often administered by a bank or financial insitution and not by the health plan. Reduce the long gap after this slide. 3 seconds is enough.4:55 The two primary savings accounts� �which are often administered by a bank or financial insitution and not by the health plan. Reduce the long gap after this slide. 3 seconds is enough.

9. Health Reimbursement Accounts Employer-established accounts that provide non-taxed funds that employees can use for medical expenses Funded exclusively by the employer Nominal accounts � employers do not add funds to account until liabilities are incurred Employer may restrict the types of services for which HRA funds can be used Unused balances may be rolled over for use in future Not portable if employee leaves job Unused balances often revert to employer Employer plan can stipulate that funds can be used for health care expenses (but not as cash) incurred after retirement or termination 6:31 Let�s look first at HRAs. Reduce the long gap after this slide. 4 seconds is enough. 6:31 Let�s look first at HRAs. Reduce the long gap after this slide. 4 seconds is enough.

10. Health Reimbursement Accounts (cont�d) Can be used to pay for premiums for medical plan, including COBRA coverage Generally no limit on employer contribution to HRA (nondiscrimination rules apply) HRAs often offered with a HDHP, but not required Can be offered without a health plan at all (�Defined contribution�) May be limited to retiree benefits or other uses 8:20 In addition to paying for direct medical expenses� Reduce the long gap after this slide and delete the cough. 4 seconds is enough. 8:20 In addition to paying for direct medical expenses� Reduce the long gap after this slide and delete the cough. 4 seconds is enough.

11. Health Savings Accounts Tax-exempt accounts established by an eligible individual Eligibility criteria: Covered under a HDHP that meets federal requirements Not covered by other plan that is not HDHP (some exceptions) Not entitled to benefits under Medicare May not be claimed as dependent Individual, employer, others can make contributions to HSA Funds can be used for qualified expenses of individual/ dependents HSAs belong to individual and are portable if change in job Contributions can continue only as long as eligibility Individual is beneficiary of investment income HSA funds generally cannot be used to pay for health insurance premiums, except COBRA, LTC, when individual is unemployed, or coverage for people over age 65 other than Medigap 9:05 Now, let�s look at HSAs.9:05 Now, let�s look at HSAs.

12. Requirements for HDHPs Offered with HSAs, 2006 Deductible of at least $1,050 for single coverage and at least $2,100 for family coverage Annual limit on out-of-pocket expenses (for in-network services) of $5,250 for single and $10,500 for family coverage Cannot cover services before deductible has been satisfied (other than preventive care) IRS has been liberal in permitting services (including some maintenance prescription drugs) to be considered preventive Can be provided by an employer or purchased directly from an insurer (non-group health insurance)  10:31 An individual can establish or contribute to an HSA only if he or she is covered by a high-deductible health plan� Add 2 seconds after this slide.10:31 An individual can establish or contribute to an HSA only if he or she is covered by a high-deductible health plan� Add 2 seconds after this slide.

13. Contribution Rules Differ for HRAs and HSAs HSAs have strict limits on contributions Maximum contribution to HSA is 100% of annual deductible, up to $2,700 for self-only coverage and $5,450 for family coverage Individuals 55 to 64 can make additional �catch up� contributions 11:20 Unlike HRAs, annual contributions to HSAs are subject to strict limits. Reduce pause after this slide. 3 seconds is enough.11:20 Unlike HRAs, annual contributions to HSAs are subject to strict limits. Reduce pause after this slide. 3 seconds is enough.

14. Tax Treatment of CDHC Accounts Contributions Employer contributions not taxable to employees Individuals can deduct amount of contribution to HSA or HRA from taxable income when computing income taxes Payments Funds from HRAs or HSAs used for medical expenses of beneficiary or dependents not taxable income HSA payments used for non-medical expenses are includable income - subject to additional 10% penalty. No penalty if beneficiary dies, becomes disabled, or reaches age 65 Interest earned on HSA balances not taxed 11:56 Now, let�s look at how the tax law works with these plans. Reduce pause after this slide. 3 seconds is enough.11:56 Now, let�s look at how the tax law works with these plans. Reduce pause after this slide. 3 seconds is enough.

15. Mary�s Consumer-Directed Health Plan PPO High Deductible Plan with an HSA $2,000 Deductible 100% of preventive care covered before deductible 80% cost sharing for in-network � after deductible Out of pocket maximum: $4,000 13:04 Let�s briefly look at an example of one of these plans. Reduce pause after this slide. 3 seconds is enough. 13:04 Let�s briefly look at an example of one of these plans. Reduce pause after this slide. 3 seconds is enough.

16. Mary�s Health Care Expenses � Year 1 13:47 Looking at Mary�s expenses in the first year� Reduce pause after this slide. 3 seconds is enough. 13:47 Looking at Mary�s expenses in the first year� Reduce pause after this slide. 3 seconds is enough.

17. Over the year � 14:31 The next figure shows the results for Mary� Reduce pause after this slide. 4 seconds is enough. 14:31 The next figure shows the results for Mary� Reduce pause after this slide. 4 seconds is enough.

18. Mary�s HSA Contributions - Year 2 15:15 Continuing the example to Year 2� Reduce pause after this slide. 4 seconds is enough.15:15 Continuing the example to Year 2� Reduce pause after this slide. 4 seconds is enough.

19. Mary�s CHDP � Year 2 Expenses  15:46 In Year 2, Mary had a significant health event� Insert 4 seconds pause after and delete stumble �The next figure recaps�15:46 In Year 2, Mary had a significant health event� Insert 4 seconds pause after and delete stumble �The next figure recaps�

20. So How Much Does Mary Spend�It�s complicated! 16:26 The next figure recaps what the health plan paid and what Mary paid�16:26 The next figure recaps what the health plan paid and what Mary paid�

21. By the end of the year� Mary spent $4,300 on health care $1485 from her HSA $2815 directly out-of-pocket Mary has no money left in her HSA Mary can deduct her $400 HSA contribution from her taxable income when calculating her income taxes 17:44 The next figure recaps Mary�s expenses for the year.17:44 The next figure recaps Mary�s expenses for the year.

22. Points to Consider Employers and individuals often contribute monthly to HSAs, entire amount contributed for a year may not be available for expenses incurred earlier in the year Individuals can pay the amounts out-of-pocket and be reimbursed by their HSA after making contributions Individuals can increase contributions � larger tax deduction Only services covered by plan are counted towards deductible Plan only counts what is considered �reasonable amount� 18:10 There are several important points to consider� 19:43 � The sentence cuts off. Is there more? If not, drop the sentence that is cut off. 18:10 There are several important points to consider� 19:43 � The sentence cuts off. Is there more? If not, drop the sentence that is cut off.

23. Out-of-Pocket (OOP) Spending Important to consider total OOP spending limit, not just deductible amount HSA plans - out-of-pocket maximum limit applies to all services covered by providers in the network HRA and traditional plans � limits may not apply to all cost-sharing; often exclude mental health and Rx OOP costs OOP limits may not apply to services from out of network providers, or a higher limit may apply Specific services may have separate benefit limits Plan may only pay for certain number of visits or up to maximum dollar level; consumers pay any additional costs These costs can be paid from an HSA, but this spending will not count towards deductible or plan�s out-of-pocket limit 19:44 People trying to understand the cost-sharing liability in consumer-directed health plans�19:44 People trying to understand the cost-sharing liability in consumer-directed health plans�

24. Large Employers Most Likely to Offer HDHPs 21:19 The next figure shows the percentage of employer firms that are offering�21:19 The next figure shows the percentage of employer firms that are offering�

25. Features of HDHPs, 2005 21:48 The next figure provides basic information about the premiums� Hillary - Drop the text highlighted in red below. The important numbers to focus on are the deductible amounts, which for a single coverage are $1,870 for high deductible plans with HRAs, and $2,551 for HSA-Qualified health plans. You can see that the employer contributions to the HRA or HAS are considerably lower� 21:48 The next figure provides basic information about the premiums� Hillary - Drop the text highlighted in red below. The important numbers to focus on are the deductible amounts, which for a single coverage are $1,870 for high deductible plans with HRAs, and $2,551 for HSA-Qualified health plans. You can see that the employer contributions to the HRA or HAS are considerably lower�

26. Average Annual Costs of CDHPs Compared to All Plans 2005 22:40 The next figure shows the average annual premiums and contributions to spending accounts�22:40 The next figure shows the average annual premiums and contributions to spending accounts�

28. CDHPs Growing in the Non-Group Market 24:22 The next figure shows that HSA-qualified plans are growing rapidly� Add 3 seconds pause. 24:22 The next figure shows that HSA-qualified plans are growing rapidly� Add 3 seconds pause.

29. Policy Considerations Financial incentives and health information Try to provide consumers more control over their health care and incentives to stay healthy and choose efficient treatment options Departure from more top-down rules used by managed care organizations Possibility for adverse selection If CDHPs attract healthier people, prices for more traditional insurance will rise because they will be left with disproportionate share of sicker enrollees Higher cost-sharing in CDHPs May result in lower premiums for CDHPs Can deter beneficial (preventive, diagnostic, treatment) as well as unnecessary services Impact on health outcomes unclear 24:38 Consumer-directed approaches rely on financial� 24:38 Consumer-directed approaches rely on financial�

30. Impact on Health Care Costs? CDHPs could lower spending, but magnitude unclear Most health care spending is on relatively few people who are very ill Spending for ill often exceeds deductible levels in CDHPs Traditional insurance already has significant cost sharing - incremental difference with CDHPs may be modest Overall impact on health spending yet to be determined 25:38 Although the higher cost-sharing in consumer-directed plans is likely to� Several years will be needed to determine the level of savings that can be achieved by consumer-direc. Audio cuts off. Please add in the last words.25:38 Although the higher cost-sharing in consumer-directed plans is likely to� Several years will be needed to determine the level of savings that can be achieved by consumer-direc. Audio cuts off. Please add in the last words.