Consumer–Driven Health Plan (CDHP): What does it really mean? There are certainly a number of interpretations or definitions of a Consumer-Driven Health Plan. The reality is that it isn’t any one thing, but a movement to give employees and individuals a more active role in paying for their medical expenses.
The most common interpretation of a Consumer-Driven Health Plan is a “high deductible health plan” combined with a pre-tax account which employees can use to pay for eligible medical expenses.
High deductible health plan
A high deductible health plan (HDHP) is a generic term used to describe a health plan with a high deductible that must be paid before insurance begins to pay expenses. The definition of what qualifies as an HDHP is fairly flexible. One person may interpret $500 as a “high” deductible, while others may interpret $5,000 as “high”. It often depends on your frame of reference and previous plans you had. Typically, HDHPs have lower premiums than “traditional” insurance plans. This allows employees to set funds aside on a pre-tax basis to pay for any out-of-pocket expenses that may be incurred.
By contrast, the definition of a Qualified High Deductible Health Plan (Qualified HDHP) is firm. Each year, the IRS releases limits which specifically state the minimum deductible and maximum out-of-pocket amount. A health plan must be a Qualified HDHP in order to be combined with a health savings account. In addition to the limits of a Qualified HDHP, there are also certain restrictions on what can be paid prior to the deductible. The health plan is permitted to pay for “preventive care”. IRS Notice 2004-23 establishes what services qualify as preventive care and what can be paid before the deductible.
What makes a plan unqualified?
There is a common misconception that if a plan meets the deductible and maximum out-of-pocket limits that it is a Qualified HDHP. While it may not be obvious, there can be subtle plan characteristics that would make it unqualified. A few examples include:
- A prescription co-pay plan is offered prior to the deductible. Under a Qualified HDHP, only preventive care can be provided prior to the deductible (including prescription drugs.) On the plus side, any prescription drug payments are counted towards the maximum out-of-pocket amount.
- An embedded individual deductible doesn’t meet the minimum family limit. While embedded deductibles are permitted, the insurance cannot pay any benefits until the minimum statutory family deductible is met.
- Preventive care services do not follow the IRS definition. There are some states or plans that may try to cover additional preventive care services prior to the deductible. This generally disqualifies a plan as a Qualified HDHP. Earlier this year, at least four states passed laws indicating plans must cover males sterilization and male contraceptives with no cost sharing. The IRS came out with Notice 2018-12 indicating that male sterilization and male contraceptives would not qualify as preventive care and would not be eligible with an HSA. Transition relief was provided through 2019. However, if action is not taken either by the states or nationally, certain states would no longer be able to provide Qualified HDHPs and HSAs.
As you can see, it gets a little complicated. The best thing you can do to determine if you have a Qualified HDHP is to look for a designation indicating it is HSA-eligible. If you are not sure, you can also ask the insurance carrier.
Pre-tax Benefit Accounts
The second component of a Consumer-Driven Health Plan is the Pre-tax Benefit Account. There are generally three types of Pre-tax Benefit Accounts. We will give you the high-level comparison below, but for a more detailed comparison, check out this blog.
Medical Flexible Spending Accounts
- Account owned by employer and funded by employee (and sometimes employer)
- No specific insurance required, but employer must offer insurance to employees
- Elections are made once per year, unless there is a qualifying event
- Full election is available on the first day of the plan year
- Unused funds are generally forfeited at the end of the plan year (options for an extended grace period or up to $500 rollover)
Health Savings Accounts
- Account owned by employee and funded by employee and/or employer
- Must be combined with a Qualified HDHP
- Elections can change at any time
- Funds become available as they are deposited into the HSA
- Unused funds automatically rollover year-to-year and belong to the employee, even if employment changes or ends
Health Reimbursement Accounts
- Account owned by employer and funded by employer
- A comprehensive group health plan is required, most commonly in the form of an HDHP
- Elections or enrollments are made once per year, unless there is a qualifying event
- Employers determine when funds are made available
- Employers determine what happens to funds at the end of the plan year
The next step for Consumer-Driven Health Plans
For many, this is where Consumer-Driven Health Plans stop. You have the insurance and a pre-tax benefit account to help pay for out-of-pocket medical expenses.
However, there are opportunities to turn employees into true consumers of health care. Check out 4 Steps to Be a Smart Health Care Consumer.