A few years ago, consumer-directed health plans were somewhat of a novelty, an intriguing but untested alternative to the HMOs and PPOs we’d all grown to trust. But these innovative plans now are going mainstream.
Consumer-directed health plans (CDHPs) typically include a health fund (such as a health reimbursement arrangement or a health savings account), a deductible and a traditional health plan, supported by a wealth of consumer tools and information. These plans give employees greater control over how they spend their health care dollars and increase their financial stake in decisions. The result is an increased employee focus on cost that tends to improve an employer’s overall claim experience.
Market interest and enrollment in CDHPs is growing rapidly. This spring, 73 percent of nearly 1,000 employers surveyed by Mercer said they were either very likely or somewhat likely to offer a CDHP-style plan by 2006.
How the plans work
CDHPs encourage employees to infuse their health care decisions with the same informed consumerism they demonstrate when buying a car or a major appliance. To help them make informed decisions, these plans generally offer sophisticated planning tools, as well as information about health care costs and treatments.
Consumers are able to choose — in consultation with their doctors — treatment options, medications and other medical services to best meet their individual needs.
HRAs, HSAs and RRAs
Two of the most popular models are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). Recently, Retiree Reimbursement Accounts (RRAs) have also begun to attract attention from employers who want to explore alternate or additional methods of funding employee benefits during retirement.
An HRA blends a deductible-based benefits plan with an employer-established fund, which is owned by the employer, not the employee. With an HRA, unused year-end balances roll into the following year’s account, as long as the member remains in the plan. This gives the member a chance to save for future expenses. Underlying medical coverage will often include first dollar coverage for preventive care benefits.
HSA: A different animal
Health Savings Accounts are tax-advantaged accounts for both the employer and employee. Unlike an HRA, the funds in an HSA are owned by the individual and held by a trustee (a bank, insurer or other entity).
HSA funds can be invested, and earnings grow tax-free. Distributions for qualified medical expenses are also tax-free. Accumulated HSA funds automatically roll over from year to year and are portable.
Contributions you as an employer make to an HSA are excluded from the income of employees. Your employees’ contributions to the HSA can be made on a pre-tax basis as part of a cafeteria plan offering, or, if they choose to use after-tax dollars, they can claim the amount as a tax deduction.
RRAs — an alternative for retirees
In a Retiree Reimbursement Account, a type of HRA, funding is entirely employer-funded. Contributions are made to the employee’s account to reimburse qualified health care expenses in retirement.
Employers offering RRAs have significant control over how the plan is structured, flexibility regarding contributions and are not required to maintain an underlying medical plan.
Only scratching the surface
Clearly, there is a lot more to these plans than we can cover here. You should consult with your insurance broker or consultant and your company’s financial advisers to assess the various consumer-directed plans and their associated funds in light of your overall benefits strategy.
You may find that these trend-setting plans are just what you need to maintain high-quality, affordable health benefits for your employees. Mark Hanrahan is vice president of sales and service for Aetna’s north central west region. Reach him at (312) 928-3104 or [email protected].
