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4. What is consumer-directed coverage?

Consumer-directed health plans allow individuals and families to have greater control over their health care, including when and how they access care, what types of care they receive, and how much they spend on health care services. The major types of consumer-directed coverage are:

  • Health savings accounts, usually coupled with high-deductible health plans.
  • Health reimbursement arrangements.
  • Flexible spending arrangements.
  • Archer Medical Savings Accounts.

Health Savings Accounts

A health savings account is a type of medical savings account that allows you to save money to pay for current and future medical expenses on a tax-free basis. In order to be eligible for a health savings account, you must be covered by a high-deductible plan, not have any other health insurance (including Medicare), and not be claimed as a dependent on someone else's tax return.

You can use this account to pay for your qualified health expenses, including expenses that the plan ordinarily doesn't cover, such as eyeglasses and hearing aids. Expenses paid out of the HSA that are eligible expenses under your high-deductible health plan will count toward the plan's deductible.

During the year, you can make voluntary contributions to your health savings account using before-tax dollars. In some cases, employers may set up and help fund health savings accounts for their employees. A health savings account earns interest. If you have a balance in your health savings account at the end of the year, it will "roll over," allowing you to build up a cushion against future health expenses. A health savings account allows you to accumulate funds and retain them when you change plans or retire.

High-deductible Health Plans

High-deductible health plans that can be used with health savings accounts are now being offered by many insurers. As of 2007, individuals contributing to a health savings account must be covered by a health plan with an annual deductible of not less than $1,100 for self-only coverage and $2,200 for family coverage. The deductible generally applies to all expenses, including prescriptions and doctor office visits, but in some cases, preventive care does not count toward meeting the deductible. However, most plans will cover preventive services, such as routine office visits, before you have met your deductible.

Under a high-deductible plan, out-of-pocket expenses in 2007 cannot exceed $5,500 for self-only coverage and $11,000 for family coverage. These dollar amounts are adjusted annually to account for inflation, and they include deductibles, copays, and other amounts, but not premiums.

After the deductible has been met, some plans will have a coinsurance of 10 to 15 percent of expenses but only up to the out-of-pocket limit in the plan. After you meet the out-of-pocket limit, the plan will pay 100 percent of expenses. Other plans will pay 100 percent after the deductible has been met.

Some insurers have negotiated discounted prices with participating physicians and hospitals, resulting in substantial savings to consumers who purchase high-deductible health plans. If you are considering this type of coverage, be sure to inquire about discounted prices.

Health Reimbursement Arrangements

Health reimbursement arrangements may be established by employers to pay employees' medical expenses. A health reimbursement arrangement must be set up by an employer on behalf of its employees, and only the employer can contribute to it. The employer decides how much money to put in a health reimbursement arrangement, and the employee can withdraw funds from the account to cover allowed expenses. Health reimbursement arrangements often are established in conjunction with a high-deductible health plan, but they can be paired with any type of health plan or used as a stand-alone account.

Federal law allows employers to determine whether employees can carry over all or a portion of unspent funds from year to year. Also, employers can decide whether account balances will be forfeited if an employee leaves the job or changes health plans.

Flexible Spending Arrangements

Flexible spending arrangements are set up by employers to allow employees to set aside pre-tax money to pay for qualified medical expenses during the year. Only employers may set up an account, and employers may or may not contribute to the account. Also, there may be a limit on the amount that employers and employees can contribute to a health flexible spending arrangement.

Health flexible spending arrangements can be offered in conjunction with any type of health insurance plan, or they can be offered on a stand-alone basis. In the past, health flexible spending arrangements were subject to a use-it-or-lose-it rule. Now, employers may give employees a 2-½ month grace period at the end of the plan year to use up funds in the account. After that time, remaining funds from the previous plan year are forfeited. If you have a flexible health spending arrangement, you should try to anticipate your health care expenses for the coming year to avoid losing any money that you contribute and don't spend.

Archer Medical Savings Accounts

Archer Medical Savings Accounts are individual accounts that may be set up by self-employed individuals and those who work for small businesses (less than 50 employees). To set up an Archer medical savings account, you must be covered by a high-deductible health plan. Either the employee or the employer may contribute to an Archer account, but both cannot contribute to the account in the same year. Individuals control the use of funds in Archer medical savings accounts and can withdraw funds for qualified medical expenses. You can roll over funds from year to year, and balances in Archer medical savings accounts are portable. This means you can take them with you when you change jobs or retire.

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