Consumer Directed Health Plans

Increasing cost transparency is always a good thing

By David Fear, Sr.

About 25 years ago – mid 1990s – a new “thing” came out on the market called “Consumer Directed Health Plans” (CDHP). This was a time of great change in the group benefit market as HMOs were beginning to become more accepted by employers and employees, and PPOs were seeing double digit rate increases. Traditional benefit plan designs were being overhauled as the cost of coverage for traditional plans was increasing by double digits.

Here in California, with the passage of AB-1672, we had guaranteed issue coverage for small employers with 2-50 employees. Coupled with this was a change in rating and underwriting for small employers, which meant that benefit plans were becoming more standardized. As PPOs lost market share to HMOs employers began to look for another path to preserve the fee-for-service model. This gave rise to CDHPs.

The passage of HIPAA in 1996 also brought a new product to the market – Medical Savings Accounts (MSAs) which, at the time, would be coupled with higher deductible health plans and allow some tax savings of both contributions and benefit payments. This changed in 2004 when the Medicare Modernization Act was passed and replaced MSAs with the new Health Savings Accounts (HSA). Either way, the legalization of these types of “savings accounts” gave new life to PPO plans, but with “high deductibles” that could be wrapped with a pre-tax MSA/HSA. They were referred to as CDHPs and have grown in popularity since then.

The theory behind a CDHP is that if the purchaser of health care services has skin in the game – i.e. deductible, coinsurance, copayment – they would become better “consumers” and choose less-expensive health care. They would ask questions of their physicians such as alternative treatments, generic Rx equivalents or services provided in an outpatient setting. In theory, this is a good idea. In reality, it doesn’t always work that way.

HMOs will tell you that they manage a patient’s care better than the patient themselves can manage that care. And that might be true. PPOs will tell you that HMOs don’t work for everyone and that patients should be able to have choices in where they get care and in the quality of the care they receive. In other words, decisions should be made by the patient. And, of course, that might also be true.

The problem is that not everyone is sophisticated about health care. Some people take advantage of information available on the internet and make provider and treatment decisions based on that information. However, we all know that there are many inaccuracies on the internet too. In the end, the best decision about one’s health care is to consult with licensed and experienced physicians who can provide viable options for patients. That is what Consumer Directed Health Care is about – the consumer working with their health care provider to make informed decisions.

Over time, HMOs caught on to this and have brought out their own version of CDHPs – which today are high deductible plans that can be used for a variety of applications. The enactment of the Affordable Care Act pretty much guaranteed that CDHPs would continue to be around as we have high deductible health plans at nearly every level of benefit available (Platinum, Gold, Silver and Bronze). Some of these HDHPs are qualified to be used with an HSA and that is a good thing. However, over the past 15 to 20 years, CDHPs became popular with another program – Health Reimbursement Arrangements (HRAs).

What an HRA does is shift some of the risk for claims liability back to the employer who effectively ‘partially self-funds’ their benefit by reimbursing a portion of the deductible or out of pocket expense that the participant incurs during the year. HRAs really gained momentum in 2006 when the IRS ruled that such arrangements were tax-deductible as long as they followed the rules laid out in sections 105 and 106 of the IRS code.

Following passage of the ACA, new regulations were adopted pertaining to how an HRA can be used by employers.  At the very end of the Obama administration, Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) were adopted for employers with fewer than 50 employees. Most recently the Trump administration published final regulations which overturned regulations from the Obama administration having to do with HRAs and individual health insurance coverage.

So as of July 2019, the future continues to look bright for the continued adoption of CDHPs in both the group and individual markets. CDHPs offer catastrophic protection at a lower cost than traditional coverage and give the member the option of wrapping that coverage with a tax-favored program such as a Health Savings Account (HSA) or Health Reimbursement Arrangement (HRA). Having these choices available is good for both workers and employers. Even greater though is that such programs help make the cost of health care a bit more transparent to consumers who have been long out of touch with what the actual cost of health care really is.

And having transparency in the cost of health care is good for America. CDHPs are helping to make that a reality.

 David Fear

Cal Broker editorial advisory board member David L. Fear, Sr., RHU, is managing partner of Shepler & Fear General Agency and a 40-year veteran of the employee benefits industry. He is a past-President of CAHU and NAHU and 2015 recipient of the NAHU Harold R. Gordon Memorial Award as ‘Health Insurance Person of the Year’.