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Do CDH plans really work?

CDH-plans-workThe cost of healthcare continues to steadily rise year over year. In an environment of escalating premiums, many employers are in search of alternatives to the status quo. Whether the solution is a lower cost plan or increased premium share with employees, decision makers are doing the best they can to retain employees and remain profitable.

Consumer directed health plans (CDHPs), paired with a health savings account (HSA) are trending higher among many employers with growth of 11.2% from 2017 to 2018. These plans with lower premium costs are coupled with a new philosophy which brings comparison shopping and savvy consumerism into the healthcare space. If healthcare consumers have “more skin in the game,” i.e. paying more of their out-of-pocket costs, they will shop around for the best deal on doctor visits, prescription medicines and more. It sounds good in theory, but does it really work? Some actuaries say yes.

 

 

Benefits for Employees

Actuaries at the Centers for Medicare and Medicaid Services have found that by increasing out-of-pocket costs for consumers, they have indeed become better healthcare shoppers.

Analysts reported the use of CDHPs contributed to a 0.9% drop in hospital care spending growth. Physician and clinic services spending growth also decreased in 2017. To put that into context, the United States spent $3.5 trillion dollars on healthcare in 2017 so that 0.9% drop equates to $31.5 billion dollars.

A recent study by The Employee Benefit Research Institute (EBRI), found that CDHP enrollees were more engaged, more likely to seek cost and quality information and exhibit more cost-conscious behavior in their healthcare than traditional plan enrollees.

 

Employers save money

According to Kaiser Family Foundation’s 2018 Employer Health Benefits Survey, employers who elect a CDHP can save an average of $1,722 in plan arbitrage over a traditional plan.

Employers who incentivize employees by matching HSA contributions through pre-tax payroll deductions can save on FICA tax (7.65%).

A recent Devenir study found that, on average, employees contribute $1,086 to their HSAs. Which means:

  • An employee’s contribution can save the employer, $83.08 in FICA taxes.
  • For a mid-sized organization of 500 employees, according to these numbers is an average employer annual savings of $41,540.

FICA savings

Additionally, if employers embrace a health and wealth strategy by matching and contributing to both an HSA and 401(k), both employers and employees benefit. It’s a win-win.

Employee 401(k) contributions made through payroll deductions lower taxable income while saving for retirement. In 2018, the average 401(k) contribution was $6,850.

Employers matching contributions to employees 401(k) are tax deductible to the business.

By adding these 401(k) tax benefits to the tax benefits previously discussed in HSAs2, it makes for a powerful and effective healthcare and retirement one, two punch.

When you contribute funds to your HSA for 2018 taxes, there are certain rules and regulations you need to follow. Not being compliant with these rules can end up costing you, so keep the following in mind:  


Conclusion

According to the CDC, between 2007 and 2018, CDHP participation has grown from 17% to 46%. When weighing different health plan options for your organization, consider a CDHP coupled with an HSA. With the cost savings from plan arbitrage and the tax benefits to both employer and employees, it is abundantly clear why so many companies are turning to this plan strategy as a solution. As you implement a CDHP into your organization, you will begin to realize the long-term benefits of a health and wealth strategy to both you and your employees.

 

 HealthEquity does not provide legal, tax, financial, or medical advice.

1The examples used are for illustrative purposes only, individual results may vary.

2HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state’s specific rules.

 

 

Topics: HSA, tax savings, 401(k), HSA contributions

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