An employer’s health insurance benefits are a major consideration for job seekers. But offering traditional group insurance can be expensive and tricky. As group plan rates continue to rise to unsustainable levels for many businesses, more employers are expressing interest in other long-term health plan options.
One solution is a consumer-driven health plan (CDHP). A CDHP gives your employees more control over their healthcare and network doctors while giving you more control over your budget.This article will delve into consumer-driven health plans, including common types and the advantages of these popular benefits.
What is a consumer-driven health plan?
A consumer-driven health plan, or consumer-directed health plan, is a quality care health plan where portions of your employees’ healthcare services are paid for directly with pre-tax dollars.
A CDHP is typically made up of two components: a high-deductible health plan (HDHP) and a pre-tax health fund that is used to pay for medical services that the HDHP doesn't cover.
Although they were initially created1 to reduce the amount of money employers paid for health coverage, CDHPs are now highly regarded for empowering employees to make their own decisions about their healthcare.
CDHPs come in two general forms. The first type includes an employer-sponsored group plan and a health spending account or arrangement that allows employees to use pre-tax money to help pay for qualified out-of-pocket costs, such as co-pays and deductibles.
The second type of CDHP is commonly referred to as a “pure defined contribution” health plan. This is where you offer health benefits through a monthly pre-tax allowance to reimburse individual health plan premiums and over 200 other eligible expenses. You don't offer a group health plan with this type of health insurance plan.
What are the benefits of a consumer-driven health plan?
Employee benefits are important because they significantly affect recruiting and retention efforts. But according to Kaiser Family Foundation (KFF)2, the average annual premiums for employer-sponsored health insurance in 2021 are $7,739 for single coverage and $22,221 for family coverage.
Large organizations are at an advantage because they can typically afford to provide better health benefits despite high premium costs. But the high costs for employers that run a small business may create a financial burden. Luckily, these employers have other options.
CDHPs are an excellent way for you to offer health benefits to employees at an affordable cost.
They have become a popular option for many businesses since they are easier to budget for and encourage employees to make their own informed healthcare decisions which, in turn, can boost retention.
Other benefits of offering consumer-driven healthcare include:
- Saving on premium costs: The monthly premium cost tends to be lower for CDHPs than other types of healthcare plans, such as preferred provider organization (PPO) plans.
- Reducing medical care costs: Overall healthcare spending is lower than traditional plans because participants take on more out-of-pocket medical costs.
- Increasing employee morale: Employee satisfaction improves because employees have more choices in how their healthcare is handled.
- Tax benefits: As long as the contributions are considered a qualified medical expense, the money taken from a CDHP account is free of income tax.
- Potential for annual rollover: Certain CDHP plan funds can roll over annually at the employer’s discretion. Other accounts stay with the employee for future use, even if they leave the company.
Traditional health benefits are one-size-fits-all, which means you choose one or two employer plans you can afford that you think your employees will like. However, consumerized employee benefits, like CDHPs, give the decision-making power to your employees, ultimately providing more flexibility and personalization.
What are the common types of consumer-driven health plans?
CDHPs come in wide variations but typically include a pre-tax health fund. The main difference between the different types of health funds is whether the employer or employee funds them.
However, they all focus on encouraging employees to take a more active role in choosing their healthcare and network providers, which is especially important for sicker patients with a chronic illness.
The three main types of pre-tax health funds associated with consumer-driven plans include:
- Health savings account (HSA): An HSA is an employee-owned, tax-advantaged account set up to pay for healthcare expenses with a qualifying high-deductible health plan (HDHP).
- Health reimbursement arrangement (HRA): Often confused as a health reimbursement account, an HRA is a tax-advantaged health benefit that allows you to reimburse your employees for their medical costs. Employee contributions aren’t permitted with HRAs.
- Certain HRAs can be integrated with a group health plan, while others are stand-alone.
- Flexible spending account (FSA): An FSA is an employer-owned tax-advantaged account that provides your employees with a set amount of funds to use during the year and can be paired with any type of health insurance plan.
The most customizable of these three options is the HRA. HRAs level the employee benefits playing field for small employers by allowing them to control healthcare spending.
In the following sections, we’ll discuss the three types of HRAs offered by PeopleKeep and how these consumer-driven healthcare options can work for you.
Qualified small employer HRA (QSEHRA)
A qualified small employer HRA (QSEHRA) is for employers with less than 50 active employees that don’t offer group health insurance, making it a pure-defined contribution health plan.
With a QSEHRA, you set an allowance up to the annual contribution limits and provide tax-free reimbursement for your employees’ qualified medical expenses, such as individual health insurance premiums, preventive care, prescription drugs, and more.
Reimbursements are free of income taxes for employees—as long as their insurance policy meets minimum essential coverage (MEC). Employers' contributions are fully tax-deductible and not subject to payroll taxes, making a QSEHRA a great cost-saving solution.
Individual coverage HRA (ICHRA)
An individual coverage HRA (ICHRA) is another pure-defined contribution health plan. It’s for employers of all sizes and functions, much like the QSEHRA, though with greater flexibility regarding plan design.
With an ICHRA, you offer your employees a monthly allowance, they choose and pay for individual health insurance coverage and other qualified expenses, and you reimburse them up to their allowance amount.
The significant difference between an ICHRA and a QSEHRA is that the ICHRA comes with 11 employee classes employers can use to structure benefit eligibility and allowance amounts.
These classes add greater control and flexibility to your organization’s health benefit while your employees save money on their monthly premium—a perk that can increase employee satisfaction.
CDHPs can also contain an integrated HRA—also known as a group coverage HRA (GCHRA). A GCHRA is a health benefit for employers that want to supplement their group health insurance plan.
Using a GCHRA, employers can set their own reimbursement allowance for employees to use each month toward out-of-pocket expenses that aren’t fully paid for by the group health plan. And similar to the ICHRA, the GCHRA has eight employee class options you can use to customize your benefit even further.
For example, suppose you’re switching to an HDHP for the premium savings. In that case, a GCHRA can cover the additional out-of-pocket costs for your employees, and you can offer different allowance amounts to your employees for greater flexibility.
Your business will save money with a high-deductible plan, and your employees will still have comprehensive coverage and access to a range of providers.
Unlike traditional benefits that attempt to provide a universal solution for the group of employees, a consumer-directed health plan enables small businesses to offer a true benefit and control healthcare spending while meeting the unique needs of each employee.
Finding a way to make your health benefit affordable is critical for a small business—and consumerization is a great place to start. Whether you’re looking for an integrated or stand-alone HRA, PeopleKeep has a solution for you. Contact us and we’ll get you and your employees set up with the right health benefit for your organization.
This article was originally published on February 2, 2021. It was last updated on August 8, 2022.