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Consumer-Directed Health Plans

Consumer-Directed Health Plans

The future of health care is here and it’s called “consumerism,” the same principle that drives your choice of supermarket each week. As food prices soar, you think more carefully about how much money you have to spend and which stores offer the best deals on the highest quality food. Consumerism in health care is no different. If you were given $1,000 to buy your groceries for a year, you would study the weekly supermarket flyers, clip coupons, and forgo the extras. This is exactly the same kind of consumer-driven behavior that health policy experts are hoping will curb runaway health care costs.

This is a fundamental shift away from the strict managed care plans that shielded us from the true costs and consequences of our health care decisions. Not long ago, we could get a brand name cholesterol-lowering prescription drug for a $10 co-pay rather than ask our doctors to prescribe the lower-cost generic. Today, under a consumer-directed health plan, our portion of the cost of that drug is likely to be closer to $100, an incentive for us to seek out lower-cost alternatives.

Health Accounts

Most consumer-directed health plans feature health accounts that allow you to control a portion of your own health care dollars and pay directly for routine medical needs such as doctor visits and prescription drugs. They are intended to be used to help pay for out-of-pocket medical expenses or when working in tandem with a high-deductible health plan (HDHP), to pay for smaller medical expenses until your deductible is met. Once your deductible is met, your insurance begins paying for covered benefits.

Both health reimbursement arrangements (HRAs) and health savings accounts (HSAs) are tax preferred alternatives to traditional health insurance products that create incentives for you to weigh your health care spending options. Both are similar to flexible spending accounts (FSAs), except there is no “use it or lose it” rule. Balances roll over from one year to the next. However, there is one fundamental difference between the two. An employer owns your HRA; you own your HSA. However, if you are self-employed, you are the company – so you own the HRA, too. 
 

Health Reimbursement Arrangements (HRAs)

If you are a micro-business or self-employed, Health Reimbursement Arrangements (HRAs) can be helpful in managing your medical costs. HRAs allow a micro-business to reimburse employees for all out-of-pocket medical costs, including health insurance. If you are a self-employed business owner whose spouse works
part-time or full-time in your business, an HRA allows you the opportunity to fully deduct your medical expenses such as premium costs, dental expenses, vision expenses, co-pays, prescription drugs, and much more. This is particularly beneficial for sole proprietors who are unable to deduct health insurance costs as a business expense and must pay self-employment tax on their premiums.

Unlike HSAs, a qualifying high deductible plan is not required when you have an HRA.  Contributions to an HRA are 100 percent tax deductible and are not subject to federal, state or Social Security taxes.  In addition, many micro-business owners and self-employed individuals favor HRAs because there is no "pre-funding" requirement.  This means that the reimbursement of medic...