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“Page Down” to Advance Last Revised: 4/21/2008 1 Consumer Directed Health Care Health Savings Accounts James G. Knight MD CEO, Consumer Directed Health.

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Presentation on theme: "“Page Down” to Advance Last Revised: 4/21/2008 1 Consumer Directed Health Care Health Savings Accounts James G. Knight MD CEO, Consumer Directed Health."— Presentation transcript:

1 “Page Down” to Advance Last Revised: 4/21/ Consumer Directed Health Care Health Savings Accounts James G. Knight MD CEO, Consumer Directed Health Care, Inc. Chairman, 1 st Pacific Bank of California Past President, San Diego County Medical Society

2 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance HCFA: Census Bureau Why? Inflation Adjusted Per Capita Expenditures A Reduced Share of Cost/ Less Personal Spending! The Problem

3 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Rationale Behind HSAs Consumer Directed Health Care (CDHC)

4 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Spending Curve Sickest 10% of the Population Spends Seventy-six Percent of Health Care Dollars Annual Health & Dental Care Expenditures For Persons Under Age 65 Healthiest 90% spend on average about $500 per year on health and dental care X3 Based On the Rand Health Insurance Experiment; Health & Human Services; R Graph Reproduced with permission: Consumer Directed Health Care, Inc.

5 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Random Distribution Rand Corporation: R-3476-HHS Distribution of Annual Health & Dental Care Spending (under 65) VERY few actually “live” in the high utilization part of the curve! They get pregnant, have a kidney stone, appendicitis or a significant injury, but then recover and lead generally healthy lives for years thereafter.

6 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance The Rand Health Insurance Experiment (1974 – 1982) Spent as much as 67% more, with… No significant health advantage! People with Free Care versus a $1,000 Deductible: 67% Outpatient – 30% Inpatient

7 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance More Red Means Higher Premium$! Rand Corporation: R-3476-HHS A lower share of cost significantly increases utilization … High Deductible Insurance Covered Above Average Expenses Increases total spending by 184% or more! More Covered Services Forty-five years of progressively reducing deductibles & share-of-cost… An arithmetic arithmetic increase in Insured Spending plus A behavioral increase in total spending

8 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Consumer Directed Health Care

9 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Reversing the Incentives Rand Corporation: R-3476-HHS A Behavioral reduction in Total Spending Both an Arithmetic reduction in Insured Spending & Reduce Both Insured & Total Spending Increased Deductibles Significantly…

10 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance 2006 Cost of 1 st Dollar Coverage (HMO or other coverage that pays for day-to-day care as well as major illnesses and injury) Average employee health benefit ~$8,222* *Calculated based on historic national estimates and the ** Kaiser Foundation 2006 Employer Health Benefits Report ( $4,242 individuals - $11,480 families**)

11 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance ~$4,522 HSA Premium Convert to high deductible HSA ~$3,190 HSA Premium No Behavioral Reduction 30% Behavioral Reduction $8,222 Annual Premium $8,222 Annual Premium * *Calculated based on 2005 Estimate from Hewitt Associates & 2006 Kaiser Family Foundation Employer Health Benefit Report Consumer Directed Health Care ~$3,700 Savings + ~$5,032 Savings +

12 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Consumer Directed Health Care ~$3,700 Premium Savings Health Reimbursement Arrangement Rolls Over Tax FreeRolls Over Tax Free Employer OwnedEmployer Owned Accrues Income???Accrues Income??? Employer Must:Employer Must: MaintainMaintain ReportReport SubstantiateSubstantiate Doesn’t Roll OverDoesn’t Roll Over Use it or Loose itUse it or Loose it No Income?No Income? Employer Must:Employer Must: MaintainMaintain ReportReport SubstantiateSubstantiate Flexible Spending Account Rolls Over Tax FreeRolls Over Tax Free Employee ownedEmployee owned Accrues TF IncomeAccrues TF Income Employee:Employee: MaintainsMaintains ReportsReports SubstantiatesSubstantiates For Any Use After 65For Any Use After 65 Health Savings Account Becomes an Employer’s Tax Free Contribution to An Employee’s…

13 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Employer contribution should exceed annual employee expenditures ~90% of the time Catastrophic Insurance Pays the Really Big Bills! Day to day care is now completely FREE on a tax-free basis up to the amount the employer contributes The vast majority will have money left over each year that rolls over tax-free (along with interest income) for future health or retirement needs! Premium Savings Now Become Tax-Free HSA Contributions

14 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance $5,800 annual HSA contribution$5,800 annual HSA contribution 5% Average annual rate of return5% Average annual rate of return $1,200 Annual & Dental Health Care Spending$1,200 Annual & Dental Health Care Spending Health Savings Account Scenario 2008 Healthy Family (Healthiest 90% with 2.6 persons on average per family) HSA Value Projector HSA Value Projector Not Financial Advice!

15 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance 2003 Medicare Modernization Act Created Health Savings Accounts  First: A special Qualifying High Deductible Health Insurance Plan (HDHP)A special Qualifying High Deductible Health Insurance Plan (HDHP)  Second: A Tax-preferred Health Savings AccountA Tax-preferred Health Savings Account Actually Two Related Components:

16 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance HSA Eligible Individual  You have a qualifying high deductible health plan (HDHP) on the first day of the month.  You have no other health coverage except what is permitted under Other health coverage (see IRS Pub. 969).  You are not enrolled in Medicare.  You cannot be claimed as a dependent on someone else’s 2008 tax return.

17 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Medicare enrollees can use their HSA for:  Medicare premiums and out-of-pocket expenses: –Including deductibles, co-pays, and coinsurance for: Part A (hospital and inpatient services)Part A (hospital and inpatient services) Part B (physician and outpatient services)Part B (physician and outpatient services) Part C (Medicare HMO and PPO plans)Part C (Medicare HMO and PPO plans) Part D (prescription drugs)Part D (prescription drugs)

18 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Preventive Care Safe Harbors  Drugs taken by a person who has developed risk factors for a disease that has not yet manifested itself or to prevent reoccurrence of a disease –Example: Cholesterol-lowering medication for those with high cholesterol  Periodic health evaluations (e.g., annual physicals)  Screening services (e.g., mammograms)  Routine pre-natal and well-child care  Child and adult immunizations  Tobacco cessation programs  Obesity weight loss programs

19 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Health Savings Accounts: Contributions (2008)  Individuals and Families may contribute on a tax-free basis up to : –Individuals: $2,900 –Families: $5,800 –Limits undergo annual COLA adjustments

20 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Health Savings Accounts: Contributions  Both employers and employees may contribute (up to the legal limits).  Special “Catch Up” provision for ages 55 to up to Medicare enrollment, each spouse may contribute to their own HSA account an additional: $800 per year in 2007$800 per year in 2007 $900 per year in 2008$900 per year in 2008 $1,000 per year after 2008$1,000 per year after 2008

21 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Health Savings Accounts: Contributions  Like IRAs: Investment income compounds on a tax-free basis.Investment income compounds on a tax-free basis. Funds carry over tax-free from year to year.Funds carry over tax-free from year to year.  Unlike IRAs Contributions are not phased out with increasing Adjusted Gross IncomeContributions are not phased out with increasing Adjusted Gross Income Can be made in addition to 401k and IRA contributions etc.Can be made in addition to 401k and IRA contributions etc.

22 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Health Savings Accounts Distributions:  Qualified medical expenses ( IRS Publication 502 ) generally also include: –Long term care coverage –Health care coverage while receiving unemployment benefits or, –Healthcare continuation coverage under Federal law.  If used to pay for Qualified Medical Expenses –Always tax and penalty free. –May be withdraw at any time for these purposes (even years later)!

23 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Health Savings Accounts: Distributions Not Used To Reimburse Qualified Health Care Expenses  If 65 or older: Taxed as incomeTaxed as income But No penalty.But No penalty.  Under age 65 are: Taxed as incomeTaxed as income Plus a ten percent (10%) penalty.Plus a ten percent (10%) penalty.

24 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance States Still Without Federal Tax Conformity for HSAs (as of November 2006*) 1. Alabama - R 2. California - D 3. New Jersey - D 4. Wisconsin - D * According to HSAFinder.comHSAFinder.com

25 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Insurance Savings if Used as Employer Contribution: Potential Employer Family Contribution: $3,700

26 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance HSAs Increase Employee Purchasing Power:  The whole pre-tax health care dollar is now available for tax-free purchase of health care; including services not covered by insurance! (No middleman, insurance profit/ overhead)  Virtually all insurance plans offer access to the insurer’s discounted rates (PPOs); except savings now accrue to the employee, not the insurance company.  Cash discounts range from 5% to 55%*. *Consumer Directed Health Care, Inc.

27 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance With CDHC employees can now: Choose to control health spending versus decide to go uninsured.Choose to control health spending versus decide to go uninsured. Save for future health or dental needs in a fully portable self-owned account.Save for future health or dental needs in a fully portable self-owned account. Personally benefit ($) from healthy lifestyles (reduced moral hazard?).Personally benefit ($) from healthy lifestyles (reduced moral hazard?). Choose services and doctors they want, including services not typically covered by health or dental insurance.Choose services and doctors they want, including services not typically covered by health or dental insurance. Convert excess health insurance coverage into tangible retirement benefits.Convert excess health insurance coverage into tangible retirement benefits.

28 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Value of Tax Deduction Versus Individual Spending Not Including any State or Local Tax Savings! Tax Benefit for the Maximum Contribution in an “Average” Tax Bracket

29 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Value of Tax Deduction Versus Family Spending Census Bureau Not Including any State or Local Tax Savings!

30 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance CDHC Employer Benefits  CDHC/ HSAs and Defined Contributions can reduce the total cost of health benefits by: –Promoting more efficient use of services, less insured spending and more favorable underwriting classifications/ premium versus claims analysis? –Slower growing or even decreasing premiums. –Converting a large portion of the total health benefit into a discretionary, tax free contribution which the employer controls.

31 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Consumer Directed Health Care Recommendations for Employers  Reduce 1 st dollar insurance coverage (increase deductibles, reduce premiums).  Convert premium dollars saved into tax free employee owned health and retirement benefits (Health Savings Accounts).  Migrate to Defined Contributions away from Defined Health Benefits and… –Provide employees a wide range of insurance choices.

32 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance $5,800 annual HSA contribution$5,800 annual HSA contribution 5% Average annual rate of return5% Average annual rate of return $1,200 Annual & Dental Health Care Spending$1,200 Annual & Dental Health Care Spending Maximum expenditure every 10 th yearMaximum expenditure every 10 th year Health Savings Account Scenario 2008 Healthy Family (Healthiest 90% with 2.6 persons on average per family) Not Financial Advice! Link to Online Calculator Link to Online Calculator

33 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Defined Contribution Health Plans

34 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Defined Contributions:  Employers predefine the amount they will contribute towards an employee’s health benefit.  Employers provide a wide range of health coverage options for employees to choose from.  Employees decide what type of coverage they want.  Employees that select coverage that cost more than what the employer has agreed to pay, must pay the difference.

35 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Employers: Policy and Pain Employers: Policy and Pain  Make controlling the cost of health benefits part of the strategic business plan!  Make the painful changes now; it will only be more costly and painful later!  Reconnect people to the cost of day-to-day care and give them “Ownership” of these dollars!

36 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance HSAs Insured Spending Reductions? Rand Corporation: R-3476-HHS Should Reduced Insured Spending (Lower Premiums & Commissions) By At Least 64%! 2005 Significantly Raising Deductibles Broker/Agents and Health Plans Not Thrilled!

37 Consumer Directed Health Care, Inc. James G. Knight MD Revised 4/21/2008 All Rights Reserved – CDHC, Inc. “Page Down” to Advance Thank You! James G. Knight MD CEO, Consumer Directed Health Care, Inc. Chairman, 1st Pacific Bank of CaliforniaChairman, 1st Pacific Bank of California Past President, San Diego County Medical SocietyPast President, San Diego County Medical Society


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