Consumer-Directed Health Plans (CDHPs)
Introduction
Consumer-directed health care is
the latest approach to managing the spiraling cost of health care by engaging
consumers to take a more active role in their health care decisions.
Consumer-directed health plans (CDHPs) are typically a combination of a
high-deductible medical insurance plan coupled with a health care savings plan
that consumers access to pay for eligible medical care expenses. Account assets
roll-over each year and compound over time, allowing consumers to save for
future medical care expenses.
Two significant legislative
actions allow for these new CDHP program structures:
-
Health Reimbursement
Arrangements (HRAs), created by IRS guidance in June of 2002
-
Health Savings Accounts
(HSAs), which were created as part of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003.
Click to view Public Sector Employee HRA and HSA comparison (PDF). These legislative actions were
designed to encourage market growth by allowing tax relief for employers and
employees who participate in these programs.
How do CDHPs work?
The health plan is
generally a high-deductible medical plan that provides 100 percent preventive care coverage, for services such as annual physicals, mammograms,
immunizations, and well-child care. These plans are typically less costly than
current co-payment type medical plans. In addition to other funding mechanisms,
the premium savings generated by moving to a high-deductible plan can be used to
fund the health care savings plan for the participant. Contributions to the plan
are made pre-tax while account balances accumulate and compound tax-free.
Depending upon the type of plan, this can be employer-funded, employee-funded1
or funded by both the employer and the employee1.
Unused account balances roll-over from year-to-year providing consumers with
financial incentives to make wiser choices in seeking medical care services.
Consumers access their
accounts to pay for any qualified pre-retirement and/or post-retirement medical,
dental, or vision out-of-pocket expenses allowed by the IRS (deductibles,
co-payments, co-insurance, uninsured expenses, etc.), plus
post-retirement insurance premiums for medical, dental, vision, qualified
long-term care premiums, Medicare Part B premiums, Medicare Part D premiums, and
Medicare supplement insurance plan premiums2.
Reimbursement of expenses during active employment as well as after retirement
are tax-free to the consumer. Health care savings plans are the only vehicles
that allow tax-free reimbursement of post-retirement insurance premiums and
expenses.
Is there a consumer's need for
CDHPs?
One of the greatest threats to retirement security
is retiree health care premiums and expenses. According to Fidelity Investments,
it is estimated that a couple retiring today at age 65, without access to an
employer sponsored plan, will need about $200,000 in savings to cover lifetime
post-retirement medical expenses. This amount is needed to cover Medicare Part B
premium, Medicare Part D premium, expenses associated with Medicare
cost-sharing provisions, and the cost of services not covered by Medicare. For
those choosing to retire early, the post-retirement medical obligation will be
noticeably larger.
Click to view full Fidelity press release
(PDF).
Assuming a
post-retirement tax rate of 25%, the tax savings alone generated from tax-free
reimbursement of health care expenses through a fully-funded health care savings
plan would be $50,000, as compared to a taxable withdrawal for payment of these
same expenses from an IRA or employer sponsored retirement plan (e.g., 401(k),
403(b), 401(a), 457).
What about
Government subsidies in the future?
According
the U.S. Government Accountability Office (GAO), by 2020, the number of
individuals in the 55 to 65 age group is projected to increase by 75% and, by
2030, those over age 65 are expected to double, creating the largest percentage
of the U.S. population in retirement in America’s history3.
The
Office of the Actuary in the Centers for Medicare & Medicaid Services (CMS)
reports that Medicare is fiscally unsustainable as currently constructed. The
Hospital Insurance Trust Fund, which provides funding for Medicare Part A, is
expected to experience a growing annual cash deficit in 2018, just one year
after Social Security outlays are expected to exceed tax revenues in 20174.
The prospect of
additional Government subsidization in the years ahead seems unlikely given the
current financial state of Medicare and Social Security.
What can be
done?
With Medicare
available at age 65, there is some comfort in knowing that a subsidized, or
pre-funded, form of insurance coverage exists. However, there are large
financial “gaps” in Medicare coverage. These gaps include significant
cost-sharing provisions (deductibles and coinsurance). Another gap is Medicare
Parts B and D premiums, which are the responsibility of the participant.
Currently, this collective financial gap accounts for 45% of total health care
costs, or approximately $12,885 per year per couple, according to the GAO.
Given the present outlook, pre-retirees may want to
begin planning for the health care expenses of their retirement years. Accruing
a tax-free health care savings plan account as part of a CDHP program through
America's VEBA Solution is one element of successful retirement planning that
should not be overlooked.
Contact us for more details
1Only HSAs allow employee
contributions
2Medicare supplement insurance
plan premiums are only reimbursable through an HRA
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3GAO Medicare Report to the U.S.
House of Representatives - 3/2000
4Board of Trustees of the Federal
Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds -
5/2006
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