A consumer directed health plan (CDHP) is a type of health benefit that empowers employees to make their own decisions about their health care and the types of coverage they need.
For employers, a CDHP offers absolute control over their tax-free health benefits budget.
CDHPs come in various forms, but most commonly a CDHP means offering a health reimbursement arrangement (HRA). An HRA is an IRS-approved, employer-funded health benefit used to reimburse employees for out-of-pocket medical expenses and health insurance premiums. The two most popular HRAs are a qualified small employer HRA (QSEHRA) and an individual coverage HRA (ICHRA).
A QSEHRA is available to employers with fewer than 50 employees that do not offer a group health insurance policy. An ICHRA is available to employers of all sizes and functions much like the QSEHRA, though with greater flexibility.
Additional rules apply to each HRA. Learn more about how they differ using our comparison chart.
A brief history of CDHPs
In the early 2000s, employers began utilizing CDHPs as a cost-savings and cost-containment strategy. Since then, CDHPs have been on the rise. In 2013, 23% of employers with 10–499 workers and 39% of employers with 500+ workers offered either an HRA- or HSA-eligible health plan.
CDHPs for employers already offering group health insurance
CDHPs can also look like a high-deductible health plan paired with a spending account for out-of-pocket costs such as a health savings account (HSA) or integrated (HRA)—also known as a group coverage HRA (GCHRA). CDHPs encourage employees to make informed decisions and spend wisely—which can lead to lower costs for the organization.
A hypothetical example
For example, XYZ company switches from a lower-deductible plan to a high-deductible plan for the premium savings. To keep the coverage level and employee exposure the same, they offer a GCHRA to cover the additional out-of-pocket deductible costs. XYZ company achieves savings because the premium savings from switching to the HDHP is larger than the increase in employee deductibles, and they’ll save even more if employees don’t max out their allowance.
Interested in offering an HRA? Check out our product demos to see how the PeopleKeep software works.
Growth of CDHPs
CDHPs, HRAs, and HSAs have become a popular option for many individuals and businesses since they are easier to budget for and as group health insurance costs continue to rise.
According to Mercer, “over two-thirds of these employers offer a consumer-directed health plan (a plan with either a health savings account or health reimbursement arrangement), and fully 37% of enrolled employees have chosen a CDHP. More HSA-plan sponsors than ever—82% —are now contributing to the underlying HSA, with that amount rising over 6% to nearly $700 for an individual employee. CDHPs are here to stay.”
A third type of CDHP is a "pure" defined contribution health plan, where the employer offers a plan that reimburses for individual health insurance premiums. With this type of CDHP, the employer does not offer a group health plan. Rather, the defined contribution health plan (i.e. the reimbursement of individual health insurance premiums) is the primary health benefit offered.
With rising healthcare costs, small organizations are looking for alternative ways to lower their spending while providing their employees with a valued health benefit. CDHPs have become an increasingly popular way for employers to fulfill both of these needs.
Want to learn more about how an HRA works for employers? Watch our on-demand webinar.