Consumer-Driven Health Plans

Question 1

What core design attributes characterize CDHPs?

Answer 1

Although there is no precise definition of a CDHP, many of the plans that are given this label share common core design attributes. The basic structure of the CDHP entails a high deductible health insurance plan, an individually controlled health account, and information and decision-making tools regarding health care cost and quality.

Question 2

Need to Know - Review Answer

Answer 2

Consumer-driven health care proponents conclude that until individuals pay for health care costs more directly, there is little pressure either for individuals to be actively involved in cost decisions or for the health care industry to control costs.

Consumer-driven health care must engage and inform the individual on the issues of health care costs by providing information on health care costs, quality and outcomes, so that individuals can escape the notion that more expensive health care is better care.

Question 3

What must an employer do to achieve success when implementing a CDHP?

Answer 3

An employer must take such steps as the following:

A. Educate employees as to the true cost of medical services and their role in managing healthcare spending.
B. Increase the employee’s responsibility for medical purchase decisions through innovative plan designs with built-in incentives.
C. Provide clinical and financial information to enable employees to be true healthcare consumers.
D. Provide proactive clinical management and coaching to optimize provider efficiencies and courses of treatment.

Question 4

Describe the basic plan design structure of the CDHP.

Answer 4

CDHPs typically combine a high deductible health plan with one of two types of individually controlled accounts (HRA’s and HSA’s) which can be used to pay deductibles and other costs not covered by the high deductible plan. The basic plan structure provides first-dollar coverage through either an HRA or HSA fund. The employee then bears full responsibility for the difference between the fund amount and the deductible. Once the deductible is met, the plan coinsurance and copayment features apply. Fund contributions, deductibles, coinsurance and copayments usually differ for single vs. family coverage and for in-network vs. out-of-network services.

Question 5

To what extent does federal law mandate specific features within CDHPs?

Answer 5

There are no specific or legally required features mandated, per se, for a CDHP at the federal level. Neither the employee retirement income security act (ERISA) nor federal tax laws, impose additional requirements on CDHPs beyond those normally applicable to health plans generally. However, federal law does precisely defined how the tax-favored individual health accounts (both HSAs and HRAs) common to CDHPs must be structured. Federal law also establishes some basic requirements for the high-deductible plans that must accompany HSA’s if the accounts are to receive certain tax benefits.

Question 6

Are there any restrictions with respect to funding mechanisms or underlying plan types that may be used with CDHPs?

Answer 6

There are no specific restrictions on funding mechanisms for a CDHP; it may be fully insured or self-insured. Likewise, there is flexibility in the underlying plan type that may be used with a CDHP. For example, it could be a preferred provider organization (PPO), point of service (POS) or even a health maintenance organization (HMO) plan.

Question 7

What are the three legally recognized types of individually controlled accounts for health costs that could be used with a CDHP to take full advantage of favorable tax treatment?

Answer 7

FSAs, HRAs and HSAs.

Question 8

What are the rules governing the use of multiple accounts?

Answer 8

Ask defined earlier, a CDHP involves a high-deductible health plan (HDHP) coupled with either an HRA or HSA. However, an employee maybe eligible for, and enrolled in, more than one type of account. The rules provide:

A. An employee covered by an HDHP and either a health FSA or an HRA generally cannot make contributions, or have employer contributions made on his or her behalf, to an HSA. However, an employee can make contributions to an HSA while covered under an HDHP and a “limited purpose” FSA. Limited purpose FSA’s cover expenses not otherwise covered by the plan, such as dental or vision care.

B. An HRA participant may also have a general purpose FSA. The employer establishes the priority, which is outlined in the plan document.

Question 9

Describe the characteristics of cafeteria plan health FSAs.

Answer 9

Health FSA’s are funded on a pretax basis by the employer for the employee. The amount being contributed to the FSA must be determined prior to the start of the plan year. Amounts contributed to an FSA are not subject to either federal income tax or to federal insurance contributions act (FICA-Social Security and Medicare) taxes. Avoidance of FICA taxes adds another level of savings for both the employer and the employee. The major drawback of an FSA is the use-it-or-lose-it provision of the law.

Essentially, unused balances at the end of the plan year may not be carried over to a future year. However, plans may permit a grace period of up to 2 1/2 months after the end of the plan year for remaining balances to be used. The forfeiture requirements for FSA’s has been criticized as encouraging employees to unnecessarily spend remaining health care balances at the end of a plan year.

NOTE: in late 2013, the IRS revised they use-it-or-lose-it rule for health flexible spending accounts (FSA’s). It will now permit the carryover of up to $500 in unused health FSA funds from one plan year to another. The employer is not required to offer this option, but if it does, it cannot offer the grace period option at the same time. Under the grace. Option, the plan is allowed to reimburse any expenses incurred by a plan participant within 2 1/2 months beyond the close of the plan year.

The carryover amount up to $500 can be used to reimburse qualifying medical expenses at any time during the next plan year. The amount does not count against the total amount that a plan allows a participant to contribute, currently capped by lot at $2500.

Question 10

Discuss the origin and tax treatment of HRA’s.

Answer 10

By early 2002, the IRS and it’s parent agency, the US Department of treasury, or besieged with insurance companies seeking guidance on the tax treatment of a high-deductible health insurance product that would be coupled with an annually funded health care account in which the unused balances would be carried over from year-to-year. IRS and Treasury Department reviewed these accounts favorably in part because health care inflation had again started to dramatically escalate after a few years of relatively modest growth. IRS ruled that HRA’s funded solely by the employer and permitting unused amounts to be carried over from year-to-year, would qualify as health benefits exempt from federal income tax; but IRS specifically prohibited the use of employee contributions, including arrangements that ineffective would be financed with employee money.

Question 11

Discuss why HRA’s are not considered an ideal account structure.

Answer 11

HRA’s, although utilized in CDHPs, are not considered an ideal account structure because they limit contributions to those expressly provided by the employer. Employees who need more tax favored money to pay out-of-pocket expenses are unable to supplement the employer account with pretax dollars.

Question 12

Briefly discuss the tax treatment of HSA’s.

Answer 12

First available in 2004, HSA’s maybe funded by an employer, an employee or both on a tax-free basis. HSAs provide triple tax savings:

1) pretax contributions
2) tax-free interest on investment earnings
3) tax-free distributions for qualified medical expenses

Question 13

Highlight the key features of HSAs.

Answer 13

When compared to HRAs or traditional health care FSA’s offered under cafeteria plans, HSA’s offer more flexibility in funding and encourage participant savings for future medical expenses. Some key features of HSA’s include:

A. HSA’s are fully owned by the employee.
B. The employee has unfettered access to HSA funds, even for nonmedical purposes. However, distributions for reasons other than qualified medical expenses are subject to income tax as well as an additional 20% tax penalty.
C. HSA’s have the advantage of portability. Employees may take the funds with them upon changing employers or leaving the workforce.
D. Unlike HRAs and health FSA’s, which by law can either be coupled with any type of health plan or standalone as the only employer health benefit, and HSA can only be utilized when it is coupled with an HDHP that meets specific criteria.

Question 14

Describe the deductible and out-of-pocket limits for an HDHP which accompanies an HSA.

Answer 14

An HSA can be used only if paired with an HDHP which meets deductible and out-of-pocket limits required by law. There are separate minimum deductible requirements for single coverage and family coverage (in 2011, $1200 and $2400, respectively) and also maximum out-of-pocket requirements for single and family coverage (in 2011, $5950 and $11900, respectively). The amounts are adjusted annually for inflation.

Question 15

Describe the contribution limits for HSA’s, HRAs and health care FSA’s.

Answer 15

There are annual contribution limits for HSA’s for single coverage and for family coverage, adjusted annually for inflation (in 2011, $3050 and $6150, respectively.). These contribution limits are increased by $1000 for individuals who are aged 55 or older and not enrolled in Medicare. There are no legislated contribution limits for HRAs. However, employers often set limits on their HRA contributions. As for FSA’s, contribution limits were introduced for these accounts by the patient protection and affordable care act (PPACA). A $2500 contribution limit is scheduled to take effect in calendar year 2013.

Question 16

Describe the difference in funding provisions, other than contribution limits, among HSA’s, HRA’s and health care FSA’s.

Answer 16

There are substantial differences and other funding provisions among the various types of individual savings accounts. Whereas both employers and employees may contribute to HSA’s an FSA’s, only employers may contribute to an HRA.

The provisions regarding carryover of unused balances from year-to-year and transfer of accounts also differ. There are no annual or lifetime limits on the amount that can be carried over or accumulated in an HSA. Although HRAs allow for the carryover of unused balances from year-to-year, an employer may impose annual or lifetime carryover limits. In late 2013, the IRS also allowed FSA’s to carry over $500 of unused balances.

Only the HSA is portable, meaning and please keep their HSA’s when they leave or change jobs. HRA’s and FSA’s do not have this portability feature.

Question 17

What restrictions apply to permissible reimbursements from HSA’s, HRAs and FSA’s?

Answer 17

Generally, the reimbursement requirements applicable to HSA’s, HRA’s and FSAs are the same. All three types of accounts can pay for Section 213 (d) qualified medical expenses incurred by the account holder, his or her spouse and dependents. However there are some differences in connection with certain types of medical expenses. Specifically, differences apply when health insurance premiums, long-term care insurance premiums or payment for long-term care services are involved. Where he as an HRA can pay for health insurance premiums, and FSA cannot. An HSA May only pay for health insurance premiums under the following circumstances: while receiving federal or state unemployment benefits, for COBRA continuation coverage, and for Medicare (excludes Medicare supplemental plans) premiums and for employer-sponsored retiree health insurance premiums.

Both HSA’s and HRAs can pay long-term care insurance premiums; an FSA cannot. An HSA can pay for long-term care services, but neither HRAs nor FSA’s can make such payments.

Question 18

What differences exist among HSA’s, HRAs and FSAs regarding their tax treatment?

Answer 18

Subject to funding limits, HSA and FSA contributions are excludable from gross income and not subject to FICA. HRA contributions receive the same tax treatment, but are not subject to any statutory contribution limits. Earnings on balances within an HSA generally are not taxable. This generally is not an issue for HRA’s and FSA’s since employers usually maintain balances as notional accounts so there are no earnings. If distributions are made from an HSA, HRA or FSA to reimburse medical expenditures there are generally no income tax issues. HRAs and FSA’s may only make distributions to reimburse qualified medical expenses. An HSA, however, can make other distributions. There would be no income tax on timely distributions of excess contributions.

For all other distributions from an HSA (not used to reimburse qualified medical expenses), federal income tax plus a 20% penalty would apply. The penalty tax is waived after the account beneficiary becomes Medicare eligible, is disabled or dies.

Question 19

What employer compliance issues apply to HSA’s, HRA’s and FSA’s?

Answer 19

A. ERISA - eateries an FSA sponsored by employers subject to ERISA generally are ERISA plans. This would subject these plans to the normal responsibilities and posed by ERISA, such as reporting and disclosure requirements. HSA’s, on the other hand, generally would not be considered ERISA plans, even if funded by the employer, provided employer involvement with the HSA is limited.

B. Nondiscrimination Rules - different types of nondiscrimination rules apply to HSA’s, HRAs and FSA’s. HSA’s (if receiving employer contributions) must provide comparable employer contributions to all employees participating in an HSA for each coverage period. If the HSA contributions are made through a cafeteria plan, these contributions would be subject to cafeteria plan nondiscrimination rules, rather than the general HSA comparability rules. HRA’s are subject to the general nondiscrimination requirements for self-insured medical expense reimbursement plans (and for certain insured plans as a result of the health care reform of 2010). Health FSA’s are subject to both the general nondiscrimination requirements for self-insured medical expense reimbursement plans, and also are subject to the cafeteria plan nondiscrimination rules.

C. COBRA Continuation - COBRA continuation coverage rules apply to both HRAs and FSA’s, but do not apply to HSA’s.

D. Trust Requirements - HSA assets must be held in a trust for custodial account, where as no such trust or custodial account is needed for an HRA or an FSA.

Question 20

Discuss additional plan design decisions and employer must make once the basic features of a CDHP (such as levels of cost sharing and type of individual account are established).

Answer 20

A. Preventive Care - preventative care is a critical component of consumer driven health care given the premise that staying healthy is cheaper than treating illness. In cases of chronic illness or potential health issues, individuals may be assigned a health coach to assist in making healthcare decisions.

B. Full Replacement vs. Option - The CdHP may be offered as an option alongside other plans, or on a standalone basis. Large employers are more likely to introduce a CDHP as an option. Full-replacement CDHPs are more common among smaller employers, although they are becoming more popular with larger employers as well. Standalone plans have the advantages of minimizing adverse selection and maximizing potential cost savings.

C. Employer Contribution Strategy - properly set employer funding and premium contribution levels affect employee acceptance, participation and behavior. Generally, employer account contributions fund only a portion of the deductible to encourage greater consumerism.

D. HRA Carryovers - whereas HSA funds are fully owned by the employee and not subject to any use-it-or-lose-it provisions, HRA accounts are employer dollars and the employer has the discretion whether to permit carryover of unused dollars.

Question 21

Discuss the importance of price and quality transparency to participants in a CDHP.

Answer 21

Since an underlying premise of CD HPs is that plan participants are well-informed, it is essential that they are given relevant health information germane to their decision making. This necessitates detailed and understandable information about provider quality, health costs, available treatments and best medical practices. The tools provided must be easy to access and use. Employees can often access this information from their company’s website.

Question 22

Explain the underlying premise on which consumer-driven health plans (CDHPs) are designed.

Answer 22

CDHPs operate on the underlying premise that when an individual is more directly aware of the full costs of health care, he or she will weigh with greater scrutiny whether the recommended care is needed and shop for that care as a cost-conscious consumer.

Question 23

Why are employee communication and education programs especially critical for consumer driven plans?

Answer 23

With the number of working pieces involved in consumer driven health careand the potential for confusion, a key component of a successful CDHP is an effective employee communication and education program. A successful CDHP requires that the employee not only understands the mechanics of the plan, but also is empowered to make informed and cost-effective personal health care decisions. Consequently, most plans offer some form of a health coach to help employees navigate the medical care system. The most effective communication and education campaigns reach out to employees early and often. While the initial media campaign is critical to employee acceptance and understanding,ongoing communications are important to achieving and sustaining the behavioral changes needed to make CDHP cost saving objectives possible.

Question 24

Briefly describe the key findings of the American Academy of actuaries and Government accountability office (GAO) studies regarding impact of CDHPs on health plan cost and trend.

Answer 24

Both the American Academy of actuaries and the GAO studies reported favorable cost results for CD HPs. The actuaries’ study showed significant savings in first-year costs and subsequent year trend rates as compared to traditional PPO plans. Similarly, GAO reported spending and utilization increased by a smaller amount or decreased for HRA enrollees compared with those in PPO plans. However, note that these favorable results may not be generalized. Individual employer experience may differ because of such factors as plan design, large claims impact, group demographics and employer contribution strategy.

Question 25

Discuss the impact of CDHPs on consumer behavior and quality of care.

Answer 25

While critics of CDHPs often contend that plan savings result from participants foregoing necessary care, A study conducted by the American Academy of actuaries reported otherwise. Among the findings of the study were the following:

(A) CDHP participants received the same or higher levels of care as those in traditional plans.

(B) CDHP participants showed significantly higher use of preventive services

(C) CDHP participants received the same or higher levels of care for chronic conditions such as diabetes and hypertension.

Question 26

Earnings on assets and health savings account (HSA’s) generally are:

A. Taxable and potentially subject to unrelated business income tax rules.

B. Not taxable and not subject to unrelated business income tax rules.

C. Taxable but not subject to unrelated business income tax rules.

D. Not taxable but potentially subject to unrelated business income tax rules.

E. Taxable until disbursed to reimburse healthcare expenses.

Answer 26

D. Not taxable but potentially subject to unrelated business income tax rules.

Question 27

Which of the following types of expenses may be reimbursed by a cafeteria plan health flexible spending account (FSA)?

I. Health insurance premiums
II. Long-term care insurance premiums
III. Payment for long-term care services

Answer 27

A. None. Cafeteria plan health flexible spending accounts (FSA’s) specifically prohibit reimbursement of certain medical related expenses. Among these types of prohibited expenses our health insurance premiums, long-term care (LTC) insurance premiums and the payment of LTC services.

Question 28

All of the following statements regarding consumer driven health plans CDHPs are correct EXCEPT:

A. Federal law specifies minimum deductibles for high deductible health plans (HDHP’s) used in CDHPs.

B. An employer may only offer an HDHP if it also offers a health savings account (HSA).

C. A health maintenance organization plan can be used as the underlying plan in a CDHP.

D. It is very uncommon for employers to offer health plans whose premium contributions are not deductible from federal income tax for the employer.

Answer 28

B. An employer may only offer an HDHP if it also offers a health savings account (HSA).

Although an employer may only offer a health savings account in connection with the high deductible health plan, the reverse is not true. And HDHP maybe offered as a health plan choice without the employer offering an HSA.

Question 29

Explain how plan sponsors and CDHP designers seek to provide the necessary tools for allowing plan participants to fully realize the potential of these plans.

Answer 29

The following features that comprise a CDHP assist as described:

A. A high-deductible health insurance plan - this type of health insurance plan provides protection for catastrophic losses but leaves the burden of minor losses on the individual; this burden should provide an incentive to select the best and lowest class providers one health care is needed.

B. A health reimbursement arrangement (HRA) or a health savings account (HSA) - either one of these accounts provides funds to cover minor health expenses and/or expenses not covered by the health insurance. Since the accounts balance can be carried over from year-to-year, participants are encouraged to accumulate funds for future use. This is in contrast to use it or lose it aspect of flexible spending accounts (FSA’s).

C. Information sources and tools to educate on health issues and to locate the highest quality and most cost effective healthcare providers. Without easily accessible information on health care alternatives, it is difficult for plan participants to make informed choices.

D. Hey conveniently accessible health coach or consultant. Even if information is made available, there are times when individual participants require the counsel of an expert to assist in understanding health issues. The purpose of the health coach or consultant is to help plan participants obtain and use existing health information, answer questions about the individuals health issues, and provide guidance on use, choice and interaction with healthcare providers.

E. A proactive medical professional empowered to actively assist in cases of serious chronic conditions or illnesses. In contrast to less extreme health cases, a serious chronic condition or illness requires greater input from a medical professional. Such a person may contact the patient on a regular basis and act as a liaison or coordinator between the patient and his or her medical providers.