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Consumer Directed Health Plans and Cost Savings Posted: November 13th, 2009

By Sanford Ellowitz

Sanford Ellowitz is a New York State licensed insurance agent. He is also a Certified Financial Planner and a Certified Employee Benefit Specialist. He has over 25 years experience in the insurance and financial services industries.

Consumer directed health plans are intended to save money by putting consumers in charge of their healthcare expenditures. Companies looking for cheap health insurance might find that this is the right way to go.

Consumer Directed Health Plans Put the Consumer in Charge

With the average employer sponsored health insurance plan for a family of four costing close to $13,400 per year, it's no wonder that employers are trying to find cheaper health insurance.

Many companies are offering their employees consumer directed health plans (CDHPs) instead of traditional health insurance. These plans, which are designed to achieve cost savings by putting the consumer in charge of their expenditures, are a small but growing alternative to traditional plans.

The Difference Between Traditional Insurance and CDHPs

Most employer paid health insurance plans have low deductibles. Once met, the plans then pay most of the balance of the employees' medical expenses. Since most costs are covered by their insurance, there is little incentive on the employee's part to curtail their healthcare spending.

With CDHPs, in contrast, the employee has a high deductible plan, which provides catastrophic claims coverage and is often the cheapest health insurance option for companies. This leaves the employee to pay quite a bit more before their insurance takes over. The intention is that employees will be more careful with their medical spending, as they will have to pick up a large portion of it.

Health Savings Accounts, HSAs, and Health Reimbursement Arrangements, HRAs

To ease the burden of the high upfront costs, employees can have Health Savings Accounts or Health Reimbursement Arrangements. These accounts are funded by the employer or employees. They are tax deductible and their earnings grow tax deferred.

Tax-free withdrawals can be made from these accounts if used to pay to pay for qualified medical spending, including insurance deductibles. The accounts belong to the employee and are portable, so employees can take them with them whenever they change jobs or stop working.

The Results of Using CDHPs

Several studies, including one conducted by the Department of Health and Human Services, which examined the results when several large companies switched from offering their employees low to high deductible plans, have mixed results.
Health insurance costs dropped substantially. However, employees, trying to save their own money due to the high deductible, were found to cut back on preventive care measures and taking medications.

If healthcare costs continue their upswing, companies are likely to seek out the cheapest health insurance plans available. In short, look out for changes like these coming down the pike a bit more often.

Sanford Ellowitz