The concept of a CDHP is to return control of health care dollars to the person who uses them, the consumer. The consumer is given a financial incentive to control costs and as a result tend to become more directly involved in the selection and usage of health care services. CDHP’s consist of three parts:

• A health plan with a relatively high deductible level that provides financial security for more severe illnesses. Preventive care services are typically covered with only a small copayment.

• A health fund that the consumer controls. Employers can make contributions into the health fund of their employees. Funds in the account can be used to pay for expenses before the deductible is met. Any unused funds typically roll over from year to year and can accumulate into a significant balance.
• Information tools are provided to the consumer to help them make better health care decisions. These may include health and wellness information and information on providers and the cost of services.

The health fund is money that is set aside at the start of the year and is used towards medical expenses that the consumer is responsible for up to the deductible. For example, if a consumer has an annual deductible of $1,500 and a $750 health fund, the first $750 of medical expense can be paid out of the health fund. The consumer is then responsible for the next $750 up to the $1,500 deductible. Note that preventive care services, including physicals, immunizations, mammography’s etc. are generally covered at 100% or with only a small copay. Health funds (CDHP’s) come in two general varieties: Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs).

A health savings account is a physical account established at a bank or insurance company. In order to establish an HSA, the consumer must be covered by a federally qualified High Deductible Health Plan (HDHP). The structure of the HDHP is set by the U.S. Treasury with minimum deductibles and maximum out-of-pocket maximums. Every covered health service, even prescription drugs, is subject to the deductible and coinsurance with the exception of preventive care.

Employees and/or employers can contribute to the HSA account, subject to an annual maximum. The accounts are portable and remain with the employee even if they change jobs. Withdrawals from the HSA can be made for any IRS qualified medical expense, the list of which is very broad including dental and vision care. The consumer does not need to submit claims or receipts to make a withdrawal; it is an honor system where the consumer needs to keep receipts should they be audited by the IRS.

A health reimbursement arrangement starts out as a financial commitment from the employer to the employee; IE the employer will pay the first $750 of medical expense for the employee each year. If the employee incurs no claims, the employer does not make any payment. However, his obligation generally carries over to the next year and is added to another $750 commitment for year two. HRAs are generally paired with a higher deductible

health plan whose structure is very flexible; it can have co-payments for office visits, prescription drugs etc. HRAs are not portable; any balances are forfeited if an employee leaves the organization. Although HRAs can be used to cover the very broad list of IRS qualified medical expenses, most employers limit their use to only services covered by the higher deductible health plan, IE subject to the deductible. Claims need to be submitted and substantiated to get paid from the HRA.