United States Government Accountability Office

GAO Report to the Chairman, Committee on 

the Budget, House of Representatives 

CONSUMERDIRECTED HEALTH 

PLANS 

Small but Growing 

Enrollment Fueled by 

Rising Cost of Health 

Care Coverage 

April 2006 

 

GAO-06-514 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2006

CONSUMER-DIRECTED HEALTH PLANS

Small but Growing Enrollment Fueled by 

Highlights of GAO-06-514, a report to the Rising Cost of Health Care Coverage 

Chairman, Committee on the Budget, 

House of Representatives

Insurance carriers, employers, and 

individuals are showing increasing 

interest in consumer-directed 

health plans (CDHP). CDHPs 

typically combine a high-deductible 

health plan with a health 

reimbursement arrangement (HRA) 

or health savings account (HSA).

HRAs and HSAs are tax-advantaged

accounts used to pay enrollees’ 

health care expenses, and unused 

balances may accrue for future use,

potentially giving enrollees an

incentive to purchase health care

more prudently. The plans also 

provide decision-support tools to 

help enrollees become more

actively involved in making health 

care purchasing decisions. Because 

CDHPs are relatively new, there is 

interest in the extent of enrollment 

and in other aspects of the plans.

GAO was asked to review the 

prevalence of CDHPs, how the 

associated accounts are funded and

used, and the factors that may

contribute to the growth or limit

the appeal of these plans. GAO 

examined survey data on CDHP

enrollment and interviewed or 

obtained data from employers,

insurance carriers, individuals, 

financial institutions, and other 

CDHP experts. 

Enrollment in CDHPs accounts for a small but growing share of the 177 

million Americans with private health insurance coverage. From January 

2005 to January 2006, the number of enrollees and dependents covered by a

CDHP—either an HRA-based plan or an HSA-eligible plan—increased from 

about 3 million to between about 5 and 6 million. An increasing number of 

health insurance carriers and employers began offering CDHPs during 2005. 

Most employers made a contribution to their employees’ health accounts, 

and the share of account funds spent by enrollees varied. Employers 

commonly contributed to their employees’ HRAs from $500 to $750 for 

individual coverage and $1,500 to $2,000 for family coverage in 2004. Most 

HRA-based plan enrollees spent some or all of these HRA funds in that year. 

For HSAs, industry representatives noted that not all HSA-eligible plan 

enrollees opened and contributed to an HSA, and survey data indicate that 

two-thirds of employers offering these plans contributed to their employees’ 

HSAs. Industry representatives indicated that while most HSA account 

holders withdrew a portion of their account funds in 2005, some account 

holders used other, out-of-pocket funds, rather than their HSAs, to pay for 

medical care. 

According to industry officials and experts, the primary factor responsible 

for the growth of CDHPs is the rising cost of health care coverage. 

Prompting the growth of enrollment among individuals is the desire to lower

premiums and accumulate tax-advantaged savings, according to the officials.

Experts noted that employers would be more likely to offer a CDHP if the 

plans demonstrate the ability to restrain rising costs, and employees would 

be more likely to enroll in a CDHP if employers offered more comprehensive 

CDHP benefits coupled with education about the plans. 

Experts and industry officials cited several factors that may limit the appeal 

of CDHPs. Certain federal requirements for HSAs and HSA-eligible plans

may preclude changes desired by some, such as higher annual contribution 

limits for HSAs. Certain state insurance requirements or income tax laws in 

eight states do not reflect federal statutory provisions for HSAs and HSAeligible plans. Insurers are generally unable to determine the amount to be 

deducted from the patient’s CDHP account at the time of service or offer 

decision-support tools that provide enrollees with sufficiently detailed data 

on the cost and quality of health care. 

GAO received technical comments from organizations that provided data for 

this report, and incorporated the comments as appropriate. 

www.gao.gov/cgi-bin/getrpt?GAO-06-514.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact John E. Dicken 

at (202) 512-7119 or dickenj@gao.gov. 
Contents 

Letter 1

Results in Brief 4 

Background 6

CDHPs Constitute a Small but Growing Share of the Private Health 

Insurance Market 11 

Most Employers Contributed to Health Accounts, and the Share of 

Account Funds Spent by Enrollees Varied Widely 15 

Desire to Restrain Rising Cost of Health Care Coverage Is Primary 

Factor Driving Growth of CDHPs 18 

Federal and State Requirements, Inadequate Consumer Tools, and 

Other Factors Could Limit the Appeal of CDHPs 21 

Concluding Observations 29 

External Comments 30 

Appendix I Summary of Information Included in 

Decision-Support Tools Offered by CDHP Health 

Insurance Carriers 31 

Related GAO Products 33 

Tables 

Table 1: Comparison of HRA-Based and HSA-Eligible Plans and 

Account Features for 2006 10 

Table 2: Factors Driving Employers to Offer CDHPs 20 

Table 3: Challenges Faced by Employers Implementing a CDHP 28 

Table 4: Information Included in the Decision-Support Tools of 

Five Multistate CDHP Insurance Carriers 31 

Figure 

Figure 1: Average Share of HRA Funds Spent by Enrollees, 2004 16 

Page i GAO-06-514 Consumer-Directed Health Plans
Abbreviations 

AHIP America’s Health Insurance Plans 

CDHP consumer-directed health plan 

HDHP high-deductible health plan 

HRA health reimbursement arrangement 

HSA health savings account 

HMO health maintenance organization 

IRS Internal Revenue Service 

MSA medical savings account

PPO preferred provider organization 

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Page ii GAO-06-514 Consumer-Directed Health Plans
United States Government Accountability Office

Washington, DC 20548 

April 28, 2006

The Honorable Jim Nussle 

Chairman 

Committee on the Budget 

House of Representatives 

Dear Mr. Chairman: 

Since 2000, premiums in the group health insurance market, which covers 

the majority of Americans, have risen nearly five times faster than the 

overall rate of inflation and the rate of increase in workers’ wages, leading 

to debate about ways to reduce the growing cost of health care coverage.

Employers and insurance carriers are showing increasing interest in 

consumer-directed health plans (CDHP), which combine a high-deductible 

health plan (HDHP) with a tax-advantaged health reimbursement 

arrangement (HRA) or health savings account (HSA) that enrollees can

use to pay for a portion of their health expenses.1

 HRA accounts are 

owned by the employer, and only the employer may contribute to them. 

HSAs are owned by the enrollee; may be contributed to by both employer 

and enrollee; and unlike HRAs, may be taken by the enrollee to a new 

employer. 

Proponents of CDHPs contend that CDHPs can help restrain the growth in 

health care costs. They maintain that because CDHP enrollees may use 

account funds rolled over from one year to pay for health care in 

subsequent years, enrollees have an incentive to seek lower-cost health 

care services and to limit their discretionary spending on health care by 

 1

Throughout this report we refer to two types of CDHPs—HRA-based plans and HSAeligible plans—used in conjunction with their associated health accounts. The Internal 

Revenue Service affirmed that employer contributions to employee HRAs are to be 

excluded from gross income for income tax purposes. Rev. Rul. 02-41, 2002-2 C.B. 75;

Notice 02-45, 2002-2 C.B. 93. Tax advantages for HSAs associated with HSA-eligible HDHPs 

were established under the Medicare Prescription Drug, Improvement, and Modernization 

Act of 2003, Pub. L. No. 108-173, §1201, 117 stat. 2066, 2469. HSAs are usually administered 

separately by a financial institution. Medical savings accounts (MSA) are another type of 

tax-advantaged CDHP that must be used in conjunction with an HDHP. MSAs were 

authorized by the Health Insurance Portability and Accountability Act of 1996, Pub. L. 

No. 104-191, § 301, 110 stat. 1936, 2037; however, the number of MSAs opened is relatively 

small and no new accounts could be opened after December 31, 2005. 

Page 1 GAO-06-514 Consumer-Directed Health Plans
obtaining care only when necessary. The higher deductibles associated 

with the HRA-based and HSA-eligible plans2

 typically result in lower health

insurance premiums because the enrollee bears a greater share of the 

initial cost of care.3

 Although not required to do so, insurance carriers 

typically provide CDHP enrollees with decision-support tools, such as 

Web-based information on costs of services and quality of providers, to 

help them become more actively involved in making health care 

purchasing decisions. 

Critics, however, question whether CDHPs will help restrain the growth in 

health care coverage costs, and whether they will do so by changing 

consumer behavior or merely by attracting healthier individuals who use 

fewer health care services. If CDHPs do attract a larger share of healthier 

individuals, premiums for traditional plans could rise faster than they 

otherwise would because of a disproportionate share of less-healthy 

enrollees with higher health care expenses remaining in those plans. 

Critics also worry that employers will use CDHPs to shift the cost of 

health coverage to employees, either by failing to reduce employee 

premium contributions or by insufficiently funding their employees’ 

accounts. 

Because the CDHP is a relatively new concept in the design of health care 

plans, there is interest in determining the extent to which insurance 

carriers and employers are offering such plans, how the accounts are 

funded and used, and the factors that may contribute to the growth or 

limit the appeal of these plans.4

 You requested that we explore these and 

other issues related to CDHPs. We examined the following questions: 

1. How prevalent are CDHPs? 

2. How are the associated health accounts funded and used? 

 2

HDHPs that are designed to be associated with an HSA are called HSA-eligible plans. The 

enrollee is not obligated to open or contribute to an HSA. 

3

Many health plans require enrollees to pay out of pocket for a portion of their health care 

costs up to a specified limit, known as the deductible. Once the deductible has been met,

the plan pays most of the remaining costs. 

4

We recently reported on the early experiences with CDHPs offered to federal employees. 

See GAO, Federal Employees Health Benefits Program: First-Year Experience with HighDeductible Health Plans and Health Savings Accounts, GAO-06-271 (Washington, D.C.: 

Jan. 31, 2006), and Federal Employees Health Benefits Program: Early Experience with a

Consumer-Directed Health Plan, GAO-06-143 (Washington, D.C.: Nov. 21, 2005). 

Page 2 GAO-06-514 Consumer-Directed Health Plans
3. What factors may contribute to the growth of CDHP enrollment? 

4. What factors may limit the appeal of CDHPs? 

To determine the prevalence of CDHPs, we summarized existing literature 

and industry surveys regarding the extent to which employers offer and 

individuals enroll in CDHPs, and the extent to which insurance carriers 

and financial institutions offer the plans and their associated accounts. 

To determine how the associated accounts are funded and used, we 

interviewed representatives of five of the largest CDHP insurers, six of the 

largest financial institutions that administer HSAs, CDHP experts, and 

industry officials. We obtained HRA funding and use data from three of the 

insurers we contacted, obtained HSA account funding and use data from 

one of the financial institutions we contacted, and obtained tax data on 

HSA contributions and deductions from the Internal Revenue Service 

(IRS).5

 IRS data may not be nationally representative of HSA account 

holders because the data do not capture individuals who opened HSAs and 

made no individual contributions, even if their employers contributed, or 

those who did not claim an HSA deduction. We did not independently 

verify the account data we received from insurers and financial 

institutions; however, we performed certain quality checks, such as 

determining consistency between data elements provided and discussing 

data reliability and limitations with the private entities providing the data, 

and determined that the data were sufficiently reliable for our purposes. 

We also discussed the use of HSAs during eight focus groups with 75 HSAeligible plan and traditional plan enrollees at three large employers in the

public, energy utility, and insurance sectors. 

To determine the factors that may contribute to the growth or limit the 

appeal of CDHPs, we conducted interviews with

• officials at the Department of the Treasury and IRS; 

• industry officials representing health insurance carriers, America’s Health 

Insurance Plans (AHIP), Blue Cross Blue Shield Association, HSA Insider, 

and a nationwide health insurance broker; 

• representatives of employers offering CDHPs; 

• representatives of financial institutions administering HSAs; 

 5

Two other financial institutions we contacted were able to provide limited HSA account 

funding and use data, but we determined that the data they provided were not sufficiently

reliable for our purposes. 

Page 3 GAO-06-514 Consumer-Directed Health Plans
• provider association officials, such as the American Hospital Association 

and the American Medical Association; and 

• CDHP experts, including the American Academy of Actuaries, benefit 

consultants, and health policy analysts. 

We also obtained information from five large employers in the retail, 

health care, financial services, technology, and beverage industries that 

offer HRA-based plans and obtained information from the focus groups of 

HSA-eligible plan enrollees. We evaluated the decision-support tools on 

provider quality and prices for medical services that five large multistate 

CDHP insurers made available to their enrollees. We reviewed federal

statutory requirements and guidance related to CDHPs. To validate 

information provided by a health insurance trade association on the 

effects of state requirements on the appeal of HSA-eligible plans, we 

reviewed selected state insurance and tax laws related to CDHPs. We 

summarized existing literature and surveys by benefit consultants on 

factors influencing the growth of CDHPs and factors that could limit their 

appeal. We conducted our work from November 2004 through April 2006 

in accordance with generally accepted government auditing standards. 

CDHPs constitute a small but growing share of the private health 

insurance market. Publicly available survey data indicate that the number 

of enrollees and dependents with CDHP coverage increased from about 

3 million in January 2005 to between about 5 million and 6 million in 

January 2006—still a small share of the 177 million enrollees and 

dependents with private health insurance coverage. Many health insurance 

carriers offer CDHPs to employers and individuals, and the number of 

employers offering them to their employees increased from about 

1 percent in 2004 to 4 percent in 2005. Large employers were more likely 

than smaller employers to offer a CDHP, and large employers were more 

likely to offer HRA-based plans, whereas small employers were more 

likely to offer HSA-eligible plans. When employers offered a CDHP as one 

of two or more health plan options, the percentage of employees enrolled 

in the CDHP was generally lower than the percentage enrolled in the 

traditional plan. Most individuals enrolled in an HSA-eligible plan in 2004 

and 2005 purchased the plan directly from a health insurance carrier 

rather than obtaining it through their employers. 

Most employers made a contribution to their employees’ health accounts,

and the share of account funds spent by enrollees varied. Employers are 

required to contribute to the HRA accounts associated with HRA-based 

plans, and data from three multistate insurance carriers indicate that the

Results in Brief 

Page 4 GAO-06-514 Consumer-Directed Health Plans
most common employer HRA contribution in 2004 ranged from about $500 

to $750 for single coverage and $1,500 to $2,000 for two or more persons, 

or family coverage. Insurance carrier data we obtained also indicate that 

almost three-quarters of HRA-based enrollees with single coverage and 

more than 95 percent with family coverage spent some or all of their HRA 

funds in 2004. For HSAs offered by employers, a national survey of 

employer benefits reported that about two-thirds of employers made a 

contribution to their employees’ accounts, and the average employer HSA 

contribution in 2005 was $553 for single coverage and $1,185 for family 

coverage. Industry officials noted that not all HSA-eligible plan enrollees 

opened and contributed to an HSA, estimating that up to half did not. Data

from IRS indicate that among tax filers who claimed a deduction for an 

HSA in 2004, the average amount was $2,100 and increased with income. 

While data from one large financial institution indicate that most HSA 

account holders withdrew a portion of their account funds in 2005, 

representatives from three of the six financial institutions we contacted

indicated that some account holders chose to use other, out-of-pocket 

sources to pay for medical care, rather than withdraw the funds from their 

HSAs. 

The rising cost of health care coverage is the primary factor contributing

to the growth in employers offering and individuals enrolling in CDHPs. 

According to CDHP experts, industry officials, and employers we 

interviewed, other factors that lead employers to offer CDHPs include a 

desire to promote cost-consciousness among employees, expand 

employees’ choice and control of health coverage options, and provide a

tax benefit for employees. Experts reported that employers would be more 

likely to offer a CDHP if the cost of health care coverage continues rising 

significantly or if CDHPs demonstrate the ability to reduce these costs. 

With regard to factors that lead individuals to enroll in CDHPs, experts 

and enrollees in HSA-eligible plans cited enrollees’ desire to lower their 

health insurance premiums, accumulate tax-advantaged savings, and gain 

greater control over their health care decisions. Experts also reported that

individuals were more likely to enroll in a CDHP offered by an employer if

the employer offered a generous CDHP package and effectively 

communicated with and educated its employees about the plan. 

Experts and industry officials identified a number of factors that could 

limit the appeal of CDHPs. Representatives from a health insurance trade 

association and a policy research organization that promotes HSAs 

suggested that certain federal requirements for HSAs and HSA-eligible 

plans—such as those precluding coverage for most prescription drugs 

before the deductible is met and establishing maximum HSA contribution 

Page 5 GAO-06-514 Consumer-Directed Health Plans
limits—could limit the appeal of CDHPs to certain segments of the 

population. A health insurance trade association also cited insurance or 

income tax requirements in eight states that do not reflect federal 

statutory provisions for HSAs in that they limit the extent to which HDHPs 

may be coupled with HSAs or because they do not allow state income tax 

deductions for HSA contributions. The association noted that states have 

recently revised their insurance requirements and tax laws to be more 

consistent with federal requirements. Experts and provider association 

officials cited additional factors, including the inability of the patient or 

provider to know at the time service is delivered the amount to be 

deducted from the patient’s CDHP account, and decision-support tools 

that do not provide enrollees with sufficiently detailed information about 

the quality of health care providers and the cost of health care services. 

Experts and industry officials also cited the fact that CDHP products were 

priced too high by insurance carriers, a “wait and see” attitude by some 

employers, and questions about the suitability of these plans for certain 

segments of the population—such as the aged or the sick—as being among 

other factors that may limit the wider appeal of these plans. 

We provided excerpts of a draft of this report to IRS and other 

organizations that provided us data, and we incorporated technical 

comments as appropriate. 

The majority of Americans receive their health coverage through the 

private health insurance market. Over the past several years, insurance 

carriers selling coverage in this market have added CDHPs to their 

portfolio of insurance products. The most common types of CDHPs are 

HRA-based and HSA-eligible plans used in conjunction with the associated 

health account. 

Private health insurance plans are offered in two primary markets—the 

individual and the group markets. The individual market includes health 

plans sold by insurance carriers to individuals who do not receive 

coverage through an employer or other group. About 17 million individuals 

and their dependents received health coverage through the individual 

market in 2004.6

 The group market includes health plans offered by 

Background 

The Private Health 

Insurance Market 

 6

Employee Benefit Research Institute, “Sources of Health Insurance and Characteristics of 

the Uninsured: Analysis of the March 2005 Current Population Survey,” Issue Brief No. 287 

(Washington D.C.: November 2005). 

Page 6 GAO-06-514 Consumer-Directed Health Plans
employers to employees, either by purchasing the coverage from an 

insurance carrier or by funding their own health plans, and health plans 

offered by other groups, such as professional associations. About 

159 million individuals and their dependents received health coverage 

through the group market in 2004.7

 Most employers subsidize a share of 

the cost of their employees’ health coverage purchased in the group 

market, whereas individuals purchasing coverage in the individual market 

typically must pay the full cost. 

Private health plans are subject to various state and federal requirements, 

depending on the market in which they are offered and the manner in 

which they are funded. Health plans purchased from health insurance 

carriers, either by an individual in the individual market or by an employer 

in the group market, are subject to state insurance requirements. In 

contrast, health plans that are self-funded by employers in the group 

market are generally not subject to state insurance requirements, but 

rather to federal requirements that apply to employer-sponsored benefits.8

Larger employers are more likely to self-fund their health plans, whereas 

small employers are more likely to purchase coverage from insurance 

carriers.9

Although insurance carriers and employers offer several variants of 

CDHPs in the private health insurance market, these plans generally 

include three basic components—a health plan with a high deductible; an 

associated tax-advantaged account to pay for medical expenses under the 

deductible; and decision-support tools to help enrollees evaluate health 

care treatment options, providers, and costs.10 In addition to including 

Consumer-Directed Health 

Plans 

 7

Employee Benefit Research Institute, “Sources of Health Insurance and Characteristics of 

the Uninsured: Analysis of the March 2005 Current Population Survey.” 

8

Federal law establishes several requirements for private health plans that apply to both 

fully insured and self-funded coverage, such as certain fiduciary and reporting 

requirements, as well as standards for continuation and portability of coverage and

coverage of certain conditions and procedures. 

9

States typically define small employers as those with fewer than 50 employees for 

purposes of establishing regulations that apply to health plans offered in the small-group 

market. 

10Average CDHP deductibles are about $1,900 for single coverage and about $3,900 for 

family coverage, compared to an average of about $320 and $680, respectively, for the most

common type of traditional plan. See Henry J. Kaiser Family Foundation and Health

Research and Educational Trust (HRET), Employer Health Benefits 2005: Summary of

Findings (Menlo Park, Calif.: 2005). 

Page 7 GAO-06-514 Consumer-Directed Health Plans
these three basic components, the health care billing process is different 

for CDHPs than for traditional health plans. The two most prominent 

CDHP models are HRA-based plans and HSA-eligible plans, used in 

conjunction with their associated savings accounts.11

An HRA is an employer-established arrangement designed to reimburse 

employees for qualified medical expenses that occur prior to meeting the

deductible.12 When enrollees in an HRA-based plan receive medical care, 

the costs are paid from a tax-advantaged HRA account. Once the HRA 

funds are exhausted, enrollees are typically responsible for paying for a 

certain amount—known as a bridge amount—out of pocket before 

reaching their deductible. Although employers are not required to couple 

an HRA with a high-deductible health plan, in practice the two are 

typically combined. HRA-based plans are only offered by employers to 

employees in the group market, and only employers may contribute to the 

HRA accounts. Account balances can accrue from year to year, and the 

accounts are typically not portable—that is, employees do not own the 

accounts and cannot retain unspent funds when they change jobs.13 HRAs 

are administered by the employer or an insurance carrier. IRS affirmed in 

2002 that employer contributions to HRAs are to be excluded from gross 

income for tax purposes.14

HRAs and HRA-Based Plans

 11MSAs, another type of tax-advantaged CDHP, must be used in conjunction with an HDHP; 

however, the minimum deductible levels are higher and the allowable contribution 

amounts lower than for HSAs, and eligibility is restricted to individuals working for 

employers with 50 or fewer employees and self-employed individuals. 

12Qualified medical expenses include expenses intended to prevent or alleviate a mental or 

physical condition, including vision and dental services. Qualified medical expenses may 

also include certain insurance premium costs, long-term care insurance, and the costs of

transportation to obtain medical care. 

13HRAs are generally set up as notational arrangements—employers do not actually deposit

funds into the accounts for their employees. Instead, employers reimburse employees for

their medical expenses as they occur. Unused HRA contribution amounts allotted during 

the year are made available to the employee for use in future years. Both HRA-based plans

and HRA account balances are subject to continuation of coverage provisions under the

Consolidated Omnibus Budget Reconciliation Act of 1985, which requires employers to 

continue to offer coverage to individuals, with certain exceptions, who otherwise would 

have lost employer-based health coverage, for a specified length of time. See Pub. L. No. 99-

272, Title X, 100 Stat. 82, 222 (1986). 

14IRS Rev. Rul. 02-41, 2002-2 C.B. 75; IRS Notice 02-45, 2002-2 C.B. 93. 

Page 8 GAO-06-514 Consumer-Directed Health Plans
An HSA is also a tax-advantaged account established for paying qualified

medical expenses, but it is the employee rather than the employer who 

owns the account. Individuals are eligible to open and fund an HSA when 

they have a high-deductible HSA-eligible plan and no other health 

coverage, with limited exceptions.15 In order to be considered an HSAeligible plan, a health plan must meet certain criteria, including a minimum 

deductible amount—$1,050 for single coverage and $2,100 for family 

coverage in 2006—and a maximum limit on out-of-pocket spending—

$5,250 for single coverage and $10,500 for family coverage in 2006. 

Preventive care services may be exempted from the deductible 

requirement; however, coverage of most other services, including 

prescription drugs, is subject to the deductible.16 Health insurance carriers 

offer HSA-eligible plans to employers in the group market and to 

individuals in the individual market. HSA-eligible plan enrollees are not 

required to open or contribute to an associated HSA. A financial 

institution, such as a bank or insurance company, typically administers the 

HSA. An employer may partner with a financial institution to offer an HSA 

alongside the HSA-eligible plan offered to employees, or it may defer to 

employees to open the account. Both employers and individuals may 

contribute to HSAs, and individuals may claim a deduction on their federal 

income taxes for the HSA contribution regardless of whether they itemize

deductions or claim the standard deduction. Account balances can accrue

without limit, and the accounts are fully portable. Contributions, 

withdrawals, and interest earned on the accounts are not federally taxed if

used for health care; however, enrollees may use accrued balances for 

purposes other than medical care subject to a tax penalty and, for 

retirement income, subject to income tax. Tax advantages for HSAs were 

authorized in December 2003 by the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003. Table 1 compares key 

features of the two CDHP plan types. 

HSAs and HSA-Eligible Plans 

 15Limited coverage (including specific injury or accident, disability, dental care, or vision 

care) in addition to the HSA-eligible plan is permissible.

16The IRS definition of preventive care includes periodic health evaluations, tests and 

diagnostic procedures ordered in connection with routine examinations, routine prenatal 

and well-child care, immunizations, tobacco cessation programs, obesity weight-loss 

programs, and various screening services. 

Page 9 GAO-06-514 Consumer-Directed Health Plans
Table 1: Comparison of HRA-Based and HSA-Eligible Plans and Account Features for 2006 

HRA-based plans HSA-eligible plans 

High-deductible plan features 

Deductible requirements No requirements, but most employers 

pair HRAs with high-deductible plans 

Minimum of $1,050 for single and $2,100 for family 

coverage; to be adjusted for inflation in future

years 

Maximum out-of-pocket limitsaIRS does not specify a maximum outof-pocket limit Maximum of $5,250 for single and $10,500 for 

family coverage; to be adjusted for inflation in

future years 

Account features 

Portability No requirements, but most employers 

do not make accounts portable 

Accounts are fully portable, so individuals retain 

the accounts if they leave their employers 

Ownership Employer owned Individual owned

Who may contribute Employers only Employers, individuals, and family members 

Annual contribution limits No requirements; employers typically 

determine contribution amounts 

Contributions allowed up to 100 percent of 

deductible, but not more than $2,700 for single or 

$5,450 for family coverage; to be adjusted for

inflation in future years 

Unspent funds May roll over from year to year; some 

employers limit the maximum amount 

that may accumulate 

May roll over from year to year without limit 

Definition of qualified medical expenses As specified by IRSbAs specified by IRS;b however, payment for health 

insurance premiums is restricted to long-term care 

coverage, certain continuation coverage, coverage

while receiving unemployment benefits, and 

coverage after age 65 (except Medigap)c

Tax treatment Withdrawals for qualified medical 

expenses are exempt from federal 

income taxes; employer contributions 

to account are excluded from gross 

income by employers and are not 

treated as taxable income to 

employees 

Withdrawals for qualified medical expenses and 

earned interest are exempt from federal income 

taxes; employer contributions are excluded from 

gross income and employee contributions are 

deductible from federal income taxes 

Nonmedical withdrawals Not allowed—all withdrawals must be 

for documented medical expenses 

Subject to income tax; additional 10 percent 

penalty assessed for nonmedical withdrawals

before age 65

Source: GAO analysis of The Medicare Prescription Drug, Improvement, and Modernization Act of 2003; IRS Rev. Rul. 2002-41; IRS 

Notice 2002-45; and additional IRS guidance on HSAs. 

a

Premiums and services not covered by the insurance plan do not count toward the out-of-pocket 

maximum. 

b

Qualified medical expenses include expenses intended to prevent or alleviate a mental or physical 

condition, including vision and dental services. Qualified medical expenses may also include certain 

insurance premium costs, long-term care insurance, and the costs of transportation to obtain medical 

care. 

c

Medigap is private supplemental insurance available to Medicare enrollees. It helps to pay for some 

of Medicare’s deductibles, copayments, and coinsurance amounts, as well as some benefits 

Medicare does not cover. 

Page 10 GAO-06-514 Consumer-Directed Health Plans
Decision-support tools, including information on the price and quality of 

health care services and providers, can help CDHP enrollees become more 

actively involved in making health care purchasing decisions. These tools 

may be provided by health insurance carriers to all health insurance plan

enrollees, but are likely to be more important to CDHP enrollees, who 

have a greater financial incentive to make informed trade-offs between the 

quality and costs of health care providers and services. Experts suggest 

that in order to make informed provider choices, enrollees need data to

assess the quality of different providers. These data may include the 

volume of procedures performed, the outcomes of those procedures, and 

indicators demonstrating whether providers followed certain 

recommended treatment guidelines. In order to assess the price 

competitiveness of different providers, experts also suggest that enrollees

need reliable and specific information about the cost of services. CDHP 

insurance carriers may also provide online access to health accounts for 

enrollees to manage their health care spending. 

Decision-Support Tools 

CDHP insurance carriers process and reimburse health care claims 

differently than traditional insurance carriers. Unlike enrollees in 

traditional health plans, enrollees in CDHPs are typically not required to 

make a copayment or pay a coinsurance amount to providers at the time 

they receive care. Instead, providers send the complete claims to the 

insurance carriers, which process the claims and inform the providers of 

the correct amounts to charge the enrollees. The providers then bill the 

enrollees, who pay from their HRA account or HSA by check, by debit

card, or by authorizing the insurance carriers to allow the providers to 

directly debit their account funds. If enrollees have exhausted all of the 

HRA or HSA funds in their accounts, but have not yet met the deductible,

the enrollees must pay the full amounts owed the providers using out-ofpocket funds. Once the deductible has been met, however, the insurance 

carriers cover all or most of the costs of covered services. 

Health Care Claims Processing 

According to publicly available survey data, the number of enrollees and 

dependents covered by HRA-based or HSA-eligible plans is small but 

growing. In January 2006, total CDHP enrollment was almost evenly split 

between HRA-based and HSA-eligible plans. An increasing number of 

health insurance carriers are offering CDHPs, and a small but growing 

share of employers are offering them to their employees. Large employers 

were more likely to offer HRA-based plans, whereas small employers 

tended to offer HSA-eligible plans. 

CDHPs Constitute a 

Small but Growing 

Share of the Private 

Health Insurance 

Market 

Page 11 GAO-06-514 Consumer-Directed Health Plans
Although no national database of CDHP enrollment exists, we estimate 

that the number of enrollees and dependents covered by these plans 

increased from about 3 million in January 2005 to between about 5 and 

6 million in January 2006, based on publicly available survey data.17 About 

3 million of the 5 to 6 million enrollees and dependents were covered by 

HRA-based plans, and from 2 to 3 million by HSA-eligible plans. These 

estimates represent a small share of the approximately 177 million 

enrollees and dependents with private health insurance coverage. 

Available Surveys Suggest 

That a Small but Growing 

Share of Privately Insured 

Enrollees and Dependents 

Were Covered by a CDHP 

The number of enrollees and dependents appears to be growing faster for 

HSA-eligible than for HRA-based plans. According to a series of surveys 

conducted by a health care information company, the number of enrollees

and dependents in HRA-based plans grew from about 2.5 million in 

January 2005 to 2.9 million in January 2006, and the number of enrollees 

and dependents in HSA-eligible plans during this period increased from 

about 600,000 to about 2 million.18 A second series of insurance carrier 

surveys provide a higher estimate for HSA-eligible plans.19 These surveys—

conducted by a health insurance trade association—estimate that the 

number of enrollees and dependents covered by an HSA-eligible plan 

increased from about 438,000 in September 2004 to about 1 million in 

March 2005 and to about 3 million in January 2006. In 2004 and 2005, more 

than half of these enrollees and dependents were covered by an HSAeligible plan purchased in the individual insurance market, rather than 

obtained from an employer.20 None of these surveys indicate whether HSAeligible plan enrollees opened HSAs. 

 17See Inside Consumer-Directed Care, CDH Enrollment Increases to 4.9 Million; HSAQualified HDHPs Gain on HRA Plans (Washington, D.C.: 2006). See also America’s Health 

Insurance Plans, HSAs Triple in Ten Months: Over 3 Million Enrolled in HighDeductible/HSA Plans (Washington, D.C.: 2006), and Summary: Number of HSA Plans 

Exceeded One Million in March 2005 (Washington, D.C.: 2005). 

18Inside Consumer-Directed Care, CDH Enrollment Increases to 4.9 Million.

19America’s Health Insurance Plans, HSAs Triple in Ten Months, and Summary: Number

of HSA Plans Exceeded One Million in March 2005. 

20Preliminary data for 2006 suggest that the number of HSA-eligible plan enrollees in the 

group market is growing faster than in the individual market. 

Page 12 GAO-06-514 Consumer-Directed Health Plans
The number of health insurance carriers offering CDHPs in the individual 

and group insurance markets is increasing. A survey of health insurance 

trade association members reported that 99 offered HSA-eligible plans in 

March 2005, up from 29 in September 2004.21 In addition, the plans are 

being offered widely in the United States. Another health insurance trade 

association survey reported that members offered HSA-eligible plans in 

the individual market in 40 states, in the small-group market in 44 states, 

and in the large-group market in 46 states in 2005.22 Further, a survey of 

group health insurance carriers in 2005 reported that 93 percent of survey 

respondents expected to offer an HRA-based or HSA-eligible plan within 

the next year.23

An Increasing Number of 

Health Insurance Carriers 

Are Offering CDHPs 

A Small but Growing Share 

of Employers Offer 

CDHPs, and the Type 

Offered Varies by 

Employer Size 

Although many insurance carriers have made CDHPs widely available to 

employers, only a small percentage of employers offer CDHPs to their 

employees. This percentage is growing, however. According to national 

employer benefit surveys, about 1 percent of all employers that offered 

health benefits offered a CDHP in 2004, and about 4 percent offered one in 

2005.

24 Large employers were more likely than smaller employers to offer a

CDHP. According to a 2005 benefit survey, 22 percent of employers with 

20,000 or more employees offered a CDHP, compared to 2 percent of 

employers with less than 500 employees.25 One recent employer benefit 

survey indicated that the number of employers offering CDHPs would 

likely increase in 2006. It found that 22 to 25 percent of employers said 

they were somewhat likely, and 2 to 4 percent said they were very likely, 

to begin offering a CDHP in 2006.26

 21America’s Health Insurance Plans, Summary: Number of HSA Plans Exceeded One 

Million in March 2005. 

22BlueCross BlueShield Association, States Where BCBS Plans Offer HSA Health Plans

(Chicago: 2005). 

23Milliman, 2005 Group Health Insurance Survey (Seattle: 2005). 

24See Kaiser Family Foundation and Health Research and Educational Trust, Employer 

Health Benefits 2005 Annual Survey (Menlo Park, Calif.: 2005), and Mercer Human 

Resource Consulting, National Survey of Employer-Sponsored Health Plans: 2004 Survey

Tables (New York: 2005).

25Mercer Human Resource Consulting, National Survey of Employer-Sponsored Health

Plans: 2005 Survey Tables (New York: 2006). 

26Kaiser Family Foundation and Health Research and Educational Trust, Employer Health

Benefits 2005 Annual Survey. 

Page 13 GAO-06-514 Consumer-Directed Health Plans
Almost all employers that offer CDHPs also offer one or more traditional 

health plans. According to a national employer benefit survey, only 

1 percent of employers offering a CDHP in 2005 did not also offer one or 

more traditional plans.27 However, benefit consultants and insurance 

carrier representatives told us there is growing interest among employers 

in fully replacing their traditional plans with CDHPs. For example, one 

employer we spoke with offered an HSA-eligible plan, an HRA-based plan, 

and a traditional plan as options for employees in 2005, but only offered 

the CDHPs in 2006. The findings of employer benefit surveys, as well as 

industry officials and benefit consultants we spoke with, indicated that 

large employers were more likely to offer a CDHP as one of several plan 

options, whereas some small employers that offered HSA-eligible plans 

offered them as their only option. 

When employers offered a CDHP as one of two or more options, 

enrollment in the CDHP was generally lower than in the traditional plans. 

For example, data from three large multistate insurance carriers indicated

that the average 2004 enrollment rates in their HRA-based plans when 

those plans were offered alongside one or more traditional plans was 

17 percent. According to a national health benefits survey, among 

employers with 1,000 or more workers that offered an HSA-eligible plan, 

3 percent of employees were enrolled in the HSA-eligible plan in 2005.28

Employer characteristics typically determine the type of CDHP offered. 

According to industry representatives and benefit consultants, HRA-based 

plans are typically offered by large employers that self-fund their health 

coverage. Large employers are more likely to offer an HRA-based plan 

because they have more flexibility in designing the plan benefits, they can 

specify how the funds are to be used, and they can retain unused account

balances. Small employers are more likely to purchase rather than selffund their health insurance plans and are less likely to offer an HRA-based 

than an HSA-eligible plan. 

 27Mercer, National Survey of Employer-Sponsored Health Plans: 2005 Survey Tables.

28Gary Claxton, et al., “What High-Deductible Plans Look Like: Findings from a National 

Survey of Employers, 2005,” Health Affairs, September 14, 2005. This estimate includes 

employers that offered the HSA-eligible plan as one of a number of plan options and those 

that offered it as their only option. However, employers with 1,000 or more employees 

typically offer a choice of health plans. 

Page 14 GAO-06-514 Consumer-Directed Health Plans
Most employers made a contribution to their employees’ health accounts,

and there was wide variation in the share of account funds spent by 

enrollees. Employers are required to contribute to the HRA accounts 

associated with HRA-based plans, and the contribution amounts varied.

Almost three-quarters of HRA-based plan enrollees with single coverage 

and more than 95 percent with family coverage spent a portion of their 

HRA funds in 2004, and the year-end balances varied. Industry officials 

noted that not all HSA-eligible plan enrollees actually opened an 

associated HSA, and estimated that about 50 percent to 60 percent did so. 

According to survey data, about two-thirds of employers offering HSAeligible plans made a contribution to employees’ HSAs, and the average 

employer HSA contribution in 2005 was about $553 for single and $1,185 

for family coverage. Data obtained from IRS indicate that tax filers who 

claimed a deduction for an HSA claimed an average amount of $2,100 in 

2004. Early experience with HSAs suggests that some individuals are using 

their account funds to pay for medical care, whereas others are choosing 

to pay for care with other, out-of-pocket sources, rather than withdrawing

the funds from their HSAs. 

Most Employers 

Contributed to Health 

Accounts, and the 

Share of Account 

Funds Spent by 

Enrollees Varied 

Widely 

For HRA-Based Plans, 

Employer Contributions 

Varied, and Most Enrollees 

Spent a Portion of Account 

Funds 

The amount of money employers contributed to their employees’ HRA 

accounts varied across employers, both for single and for family coverage. 

Based on HRA account data provided by three multistate insurance 

carriers, the most common annual employer HRA contribution in 2004 

ranged from about $500 to $750 for single coverage and from about $1,500 

to $2,000 for family coverage. For single coverage, a small number of 

employers contributed less than $500, and a very few contributed more 

than $2,000. For family coverage, a small number of employers contributed 

less than $1,000, and a very few contributed more than $3,500. 

Bridge amounts—which employees must pay out of pocket after they 

exhaust their HRA funds but before they meet their deductible—varied 

widely for employees whose employers purchased plans from these three 

insurance carriers. Some employees with either single or family coverage 

had a bridge amount of $0. Others were responsible for paying up to $6,750 

with single coverage or up to $8,150 with family coverage before reaching 

their deductible. According to our analysis of a recent national employer 

Page 15 GAO-06-514 Consumer-Directed Health Plans
benefit survey, the average bridge amount in 2005 was about $1,078 for 

single and $2,130 for family coverage.29

In 2004, most enrollees in HRA-based plans spent a portion of their 

account funds. HRA-based plan enrollees with single coverage were less 

likely to spend their HRA funds than enrollees with family coverage. 

Specifically, data provided by the three multistate insurance carriers 

indicate that almost three-quarters of HRA-based plan enrollees with 

single coverage and more than 95 percent with family coverage spent 

some or all of their HRA funds in 2004 (see fig. 1). The average amount of 

unspent HRA funds at the end of 2004 was $470 for single coverage and 

$401 for family coverage.

Figure 1: Average Share of HRA Funds Spent by Enrollees, 2004 

 29We calculated the average bridge amounts by subtracting the reported average employer 

HRA contribution from the reported average deductible for an HRA-based plan. In this

survey, family coverage is defined as coverage of four individuals. See Kaiser Family 

Foundation and Health Research and Educational Trust, Employer Health Benefits 2005 

Annual Survey. 

Page 16 GAO-06-514 Consumer-Directed Health Plans
According to industry officials, not all HSA-eligible plan enrollees opened

and contributed to the associated HSA. National data sources are limited, 

but officials we spoke with estimated that the share of all HSA-eligible 

plan enrollees that had opened and contributed to an HSA was about 

50 percent to 60 percent. Supporting this estimate, based on publicly 

available survey data and data obtained from IRS, about 55 percent of 

HSA-eligible plan enrollees claimed an HSA deduction or reported an HSA 

contribution in 2004. Moreover, one insurance carrier representative 

reported that about 60 percent of the carrier’s HSA-eligible enrollees who 

obtained coverage through an employer opened and contributed to an 

HSA. Regarding employer contributions, data from a national employer 

benefits survey indicate that about two-thirds of employers that offer 

HSAs made a contribution to their employees’ accounts in 2005. Some 

health policy analysts have expressed concern that some individuals who 

enroll in an HSA-eligible plan but do not open or contribute to the account 

will be unable to afford the high deductibles out of pocket. 

Not All HSA-Eligible Plan 

Enrollees Opened and 

Contributed to an Account 

Nationally representative data sources on employer and enrollee 

contributions to HSAs are limited. Data from one national employer 

benefit survey indicate that in 2005 the average employer HSA 

contribution was $553 for single and $1,185 for family coverage.30 Data 

from IRS show that among tax filers who claimed a deduction for an HSA 

contribution in 2004, the average amount was about $2,100.31 The average 

deduction amount generally increased with income level. 

CDHP experts and industry officials stated that some account holders are 

primarily using HSAs as a tax-advantaged savings vehicle. Representatives 

from three of the six financial institutions we contacted characterized HSA 

account holders as falling into one of two groups—spenders or savers. 

Spenders use their account funds to pay for medical expenses, whereas 

savers, who, according to financial institution representatives, tend to be

more highly compensated individuals, pay for care from other, out-ofpocket sources, rather than withdraw funds from their HSA, in effect using 

their HSAs as tax-advantaged savings. One financial institution provided 

 30See Kaiser Family Foundation and Health Research and Educational Trust, Employer 

Health Benefits 2005 Annual Survey. 

31Data are based on a sample of 2004 tax returns and are reported on a per-return basis, and 

thus could include contributions to more than one HSA account in some instances. 

Moreover, the data do not distinguish between deductions claimed for HSA contributions 

made by enrollees with single or family coverage or for HSA-eligible coverage obtained in 

the group or individual markets. 

Page 17 GAO-06-514 Consumer-Directed Health Plans
data showing that during the first three quarters of 2005, about 72 percent 

of its account holders withdrew funds from their HSAs, including about 

20 percent who exhausted their accounts. The average amount rolled over 

by this financial institution’s HSA account holders at the end of 2004 was 

$950. We could not determine whether HSA-eligible plan enrollees 

accumulated balances because they did not need to use their accounts—

because they paid for care from other, out-of-pocket sources or did not 

need health care during the year—or because they reduced their health 

care spending as a result of financial incentives associated with the HSA. 

The primary factor responsible for the growth of CDHPs is the rising cost 

of health care coverage. CDHP experts and employers we interviewed 

reported that employers offered the plans to lower their cost of health care 

coverage and their employees’ premiums, as well as for other perceived 

benefits. Individuals enrolled in CDHPs through an employer or the 

individual market primarily to lower their health insurance premiums, 

accumulate tax-advantaged savings, and gain greater control over their 

health care purchasing decisions, according to CDHP experts and 

participants in our focus groups. CDHP experts also reported that 

individuals were more likely to enroll in a CDHP offered by an employer 

when the employer offered a generous contribution to the CDHP premium 

and associated savings account, offered more comprehensive benefits, and 

effectively educated its employees about the plans. 

Desire to Restrain 

Rising Cost of Health 

Care Coverage Is 

Primary Factor 

Driving Growth of 

CDHPs 

Employers Offer CDHPs 

Primarily to Help Lower 

Cost of Health Care 

Coverage 

Industry officials and other experts we spoke with told us that the primary 

reason employers offer CDHPs is to help lower their cost of health care 

coverage.32 These officials reported that some employers believe one way

to restrain the growth in the cost of health care coverage is to promote 

cost-consciousness on the part of their employees by making them aware 

of the true cost of health care services. According to these officials, by 

offering the ability to roll over unspent account balances and take account 

balances from one employer to another, some believe that CDHPs provide 

incentives for enrollees to select the best treatment option at the lowest 

available price. Employers also want to offer their employees a tax benefit

that can create the opportunity to save for future medical expenses, 

 32In the group health insurance market the cost of health care coverage—or premium—is

typically shared by the employer and employee. Employees may incur additional costs in 

the form of a deductible, copayment, or coinsurance when they visit a medical provider. 

Page 18 GAO-06-514 Consumer-Directed Health Plans
including saving for medical costs in retirement. Industry officials and 

experts also noted that employers offer CDHPs in response to 

dissatisfaction among employees with tight utilization controls under 

managed care plans, such as health maintenance organizations (HMO).33 In 

addition, according to these officials, employers would be more likely to 

offer a CDHP in the future if health care premiums continue rising 

significantly or if CDHPs demonstrate the ability to reduce the rising cost 

of health care coverage. 

Publicly available employer surveys cite factors that encouraged 

employers to offer CDHPs to their employees. In four surveys we 

reviewed, employers responded that they offered CDHPs to reduce the 

cost of health care coverage and provide employees with greater plan 

flexibility and a tax benefit.34 Our interviews with five employers that offer 

CDHPs showed that the key reasons for offering a CDHP were to reduce 

company spending on health care coverage, to promote costconsciousness among employees, to lower the cost of health insurance 

coverage to employees, and to attract and retain employees. (See table 2.)

 33Some managed care plans require a referral from a primary care provider before enrollees 

can see a specialist. 

34See Aon Consulting/ISCEBS Survey Shows Consumer-Driven Health Plans Becoming 

More Popular (Chicago: March 2005); Mercer Human Resource Consulting, National 

Survey of Employer-Sponsored Health (New York: 2005); Watson Wyatt, Managing Health

Care Benefit Costs in a New Era: 10th Annual National Business Group on 

Health/Watson Wyatt Survey Report (Washington, D.C.: 2005); and Hewitt Associates, 

Health Care Expectations: Future Strategy and Direction (Lincolnshire, Ill.: February

2005). 

Page 19 GAO-06-514 Consumer-Directed Health Plans
Table 2: Factors Driving Employers to Offer CDHPs 

Employer 

#1 #2 #3 #4 #5

Factors related to employer 

Reduce company spending on health care √ √ √ √

Promote cost-consciousness among employees √ √ √ √ √

Factors related to employees 

Provide employees with lower-cost health insurance coverage √ √ √

Increase employee share of health care premiums in the future √ √

Encourage savings for postretirement medical care √

Respond to employee dissatisfaction with features of managed care, such as 

utilization reviews or the use of gatekeepers 

√ √

Respond to employee dissatisfaction with managed care’s limited provider 

networksa 

√

Attract and retain employees √ √ √ √

Source: GAO interviews with employers offering CDHPs. 

a

Certain managed care plans, such as HMOs, require patients to receive care from certain providers 

with which they have prenegotiated payment rates.

Individuals Enroll in 

CDHPs to Lower Their 

Health Insurance 

Premiums and Accumulate 

Account Balances

A broker that sells CDHPs on behalf of insurance carriers nationwide 

reported that in the individual health insurance market, individuals 

seeking to lower their premiums, accrue tax-free savings for health care 

expenses, and gain greater control over their health care decision making 

are increasingly purchasing HSA-eligible plans. An official representing the 

broker noted that some individuals—particularly low users of health care 

services—view HSA-eligible plans as an affordable way to protect against 

a catastrophic health care expense, while providing greater control and 

savings account features. Participants in our focus group who were 

enrolled in employer-sponsored CDHPs also cited the desire to lower their 

monthly outlay for premiums, build up savings to pay for retirement or 

other nonmedical care expenses, and exercise greater control over health

care decisions as the reasons for selecting an HSA. 

Industry officials and CDHP experts reported that the key factors in 

determining whether employees enroll in a CDHP when offered are the 

level of employer contributions, both toward the CDHP premiums and 

toward the associated savings accounts, and the communication and 

education efforts undertaken by employers. The officials noted that the 

appeal of CDHPs was increased where the employer offered a larger 

contribution to the CDHP premium and associated savings account and 

Page 20 GAO-06-514 Consumer-Directed Health Plans
more comprehensive benefits. A survey of employers indicated that 

employees were more receptive to CDHPs when the employees believed 

that the employer was not switching to a CDHP solely to shift rising costs 

onto them, but also to encourage them to take more control of their longterm health care needs.35 One employer in the survey achieved high levels

of employee engagement and satisfaction with its CDHP offering by using 

its employees as advocates to explain the new benefit design and the 

rationale for the benefit change to both employees and their spouses, and 

comparing its plan to CDHPs offered by other companies. The company 

also offered its employees financial incentives, wellness programs, and 

training for online decision-support tools that allowed employees to 

compare the cost and quality of different treatment and provider options. 

Industry officials and CDHP experts we interviewed cited several factors 

that could limit the appeal of CDHPs, including a lack of flexibility in the 

federal statutory provisions and guidance establishing HSAs and HSAeligible plans and insurance or income tax requirements in eight states 

that do not reflect federal statutory provisions for HSAs. Officials of 

provider associations and experts suggested additional factors, including 

the inability of the patient or provider to know at the time service is 

delivered the amount to be deducted from the patient’s CDHP account, 

and the inadequacy of decision-support tools provided by insurance 

carriers to help enrollees assess the cost and quality of providers and 

treatment options. Industry officials and CDHP experts cited other factors 

that could affect wider adoption of these plans, such as insurance carriers 

pricing CDHPs too high and a “wait and see” attitude by some employers. 

Federal and State 

Requirements, 

Inadequate Consumer 

Tools, and Other 

Factors Could Limit 

the Appeal of CDHPs 

 35McKinsey & Company, Consumer-Directed Health Plan Report - Early Evidence Is

Promising (Pittsburgh: June 2005). 

Page 21 GAO-06-514 Consumer-Directed Health Plans
A health insurance trade association and health policy analysts that 

advocate HSAs reported that certain federal tax laws and regulations may 

limit changes to the accounts or plans that could increase their appeal to 

employers or individuals. For example, these groups cited IRS guidance 

stipulating that HSA-eligible plans may not provide coverage for most 

prescription medication before the annual deductible is met as potentially 

limiting the appeal of these plans.36 In contrast, traditional plans typically 

allow enrollees to receive coverage for prescription drugs before the 

deductible is met—a benefit that is very common among employers. In 

addition, annual contributions to an HSA for 2006 are capped at $2,700 for 

single and $5,450 for family coverage.37 An industry official noted that 

higher contribution limits could reduce the gap between the allowable 

HSA contribution and the annual plan deductible, thereby encouraging 

more individuals to enroll in these plans. However, increasing the 

contribution amounts would result in additional revenue loss to the 

federal Treasury because of the tax-exempt status of the accounts. 

Industry Officials Suggest 

Certain Federal Tax Laws 

and Guidance May Limit 

Changes to HSAs and HSAEligible Plans That Could 

Increase Their Appeal 

IRS guidance precludes certain changes to CDHPs that health policy 

analysts and experts believe could increase the appeal of CDHPs to certain 

high-risk groups that typically incur higher medical expenses. For 

example, some experts have suggested allowing financial incentives for 

employees with chronic illnesses or for employees who participate in

wellness programs. With certain limited exceptions, IRS guidance 

penalizes employers that vary the amount of the account contributions 

they make to comparable classes of employees, based on factors such as 

employee participation in a disease management program, by imposing a

tax equal to 35 percent of the amount of the employer contributions. 

An industry official also noted that IRS guidance can limit the flexibility of 

HSAs for individuals who enroll in an HSA-eligible plan later in the 

calendar year. If an HSA-eligible plan is purchased after the first of the 

year, IRS guidance states that the allowable contribution must be prorated 

 36The guidance cited is based on an Internal Revenue Code provision that precludes

coverage for primary care services before the annual deductible is met. 26 U.S.C. § 223 (c)

(2). This restriction would pertain to most prescription drugs.

37The President’s 2007 budget would seek to increase the maximum HSA contribution for 

all individuals up to the out-of-pocket spending limit for an HSA-eligible plan, which for 

2006 is $5,250 for single coverage and $10,500 for family coverage. These out-of-pocket

amounts are indexed annually for inflation. See Office of Management and Budget, Budget 

of the United States Government, Fiscal Year 2007. 

http://www.whitehouse.gov/omb/budget/fy2007/ (downloaded Feb. 21, 2006). 

Page 22 GAO-06-514 Consumer-Directed Health Plans
based on the number of months left in the year, even though the enrollee is

subject to the full annual deductible. This could create a potential shortfall 

between the prorated contribution amount—available to offset the annual 

deductible—and the annual deductible. 

Health Insurance Trade 

Association Reports That 

Some States Maintain 

Insurance or Income Tax 

Requirements That Do Not 

Reflect Federal HSA 

Statutory Provisions 

According to a health insurance trade association, three states currently 

impose requirements that limit the extent to which HDHPs may be 

coupled with HSAs. HMO requirements in three states prevent them from 

offering HDHPs coupled with HSAs. These three states—Illinois, Missouri,

and New York—all specify maximum combinations of deductibles and 

copayments, allowable charges, or out-of-pocket costs that HMOs may 

charge to enrollees, thereby preventing them from offering HDHPs 

consistent with federal statutory provisions.38 New York also imposes 

another requirement on all individual health insurance plans, requiring 

them to provide coverage of certain standardized benefits, which include 

major medical, comprehensive, or comparable benefits.39 Under the 

Internal Revenue Code and applicable guidance, HDHPs coupled with 

HSAs may not provide coverage for primary care or other services 

intended to treat an existing illness, injury, or condition before the annual 

deductible is met.40

The association also indicated that five states currently offer lower 

incentives to HSAs because they do not allow state personal income tax 

deductions for HSA contributions. These states are Alabama, California, 

New Jersey, Pennsylvania, and Wisconsin. According to the association, 

the remaining states have incorporated federal tax treatment of HSA 

contributions into their own laws by referring to the relevant federal 

provision, have revised their own tax laws to parallel federal law, or do not 

impose a personal income tax.41

 38Ill. Admin. Code tit. 50, § 5421.110 (2006); Mo. Code Regs. Ann. tit. 20, § 400-7.100 (2006); 

N.Y. Ins. §4321(b) (McKinney 2006). These restrictions pertain only to HMOs. 

39See New York Insurance Department Circular Letter No. 4 (2004). 

40However, first dollar coverage is permitted for preventive care. 26 U.S.C. § 223(c)(2); IRS 

Technical Guidance, Notice 2004-23. IRS will temporarily treat health plans as meeting 

these minimum annual deductible requirements to be coupled with HSAs when the sole 

reason for not doing so is compliance with certain state-mandated benefits. See IRS 

Technical Guidance, Notices 2004-43, 2005-83. 

41Although New Hampshire and Tennessee do impose tax on certain personal income,

neither state taxes salaries or wages. 

Page 23 GAO-06-514 Consumer-Directed Health Plans
CDHP experts and provider association officials reported that the appeal 

of CDHPs may be limited by the inability of the patient and provider to 

know at the time of service the amount to be deducted from the CDHP 

account. Enrollees typically do not pay for services from their HRAs or

HSAs when they receive care from a provider because the amount to be 

withdrawn from their account is not yet known.42 Instead, an enrollee 

authorizes the insurance carrier to debit his or her account after the claims 

adjudication process is complete. Alternatively, the enrollee may elect to

write a check to the provider to settle the outstanding charge after the 

claim is adjudicated by the CDHP insurance carrier. CDHP experts and 

provider association officials noted that the current system is confusing 

for providers and patients. The association official cited an example 

whereby a provider submits a claim to the insurance carrier after the 

CDHP patient has been treated. The claim is adjudicated by the insurance 

carrier, which sends the provider an explanation of benefits detailing what 

the insurance carrier will pay and what the patient must pay out of his or 

her HSA. Based on this explanation—sometimes received up to 6 weeks

after the service was delivered—the provider bills the patient directly and

is left wondering when payment will be received. During this period, the 

patient, who may incur other health care expenses, is left uncertain of the 

amount that will be withdrawn from the HSA, and therefore cannot 

determine the remaining balance. 

Delayed Account 

Transactions May Hinder 

Appeal of CDHPs 

A few vendors have, or are developing, technologies that can

electronically determine the amount to be deducted from the patient’s 

CDHP account at the point of service and execute this transaction shortly 

thereafter. For example, a major CDHP insurance carrier recently 

introduced an integrated, real-time claims adjudication process that it 

anticipates will simplify administrative tasks and help physicians obtain 

payment for services from the patient more quickly. The insurance carrier 

reported that instead of duplicative manual keying of claims and benefit

information, the new system submits the claim and returns the adjudicated 

claim before the patient leaves the doctor’s office. Similarly, a company 

that handles commercial credit card transactions recently partnered with a 

major nationwide health insurance carrier to launch a real-time debit card 

for HSAs. According to the insurance carrier, the debit card can be used at 

the physician’s office or hospital, or to pay bills online. The card is swiped 

 42To determine the amount that should be deducted from an enrollee’s account, the

insurance carrier must adjudicate the claim by making determinations as to whether the

deductible has been met, whether the service is a covered benefit, and whether any cost

sharing applies. 

Page 24 GAO-06-514 Consumer-Directed Health Plans
by the patient at the point of service, allowing funds to be withdrawn from

the HSA automatically and a payment for the insurance carrier’s portion of 

the medical claim to be made directly to the provider simultaneously. 

Financial institutions we interviewed have expressed a desire to switch to 

these new technologies as they become available. 

Inadequate DecisionSupport Tools May Hinder 

Appeal of CDHPs 

According to CDHP experts and employers, the tools provided by 

insurance carriers to assist consumers in assessing the price and quality of 

health care providers and services do not provide sufficient information to 

allow enrollees to fully assess the cost and quality trade-offs of health care 

purchasing decisions.43 The decision-support tools we reviewed from five 

of the largest CDHP insurance carriers included hospital- and physicianspecific quality data and provider cost information that was limited. For 

example, five of the insurance carriers provided three or more measures of 

hospital quality, such as outcomes data, procedure volumes, and patient

safety ratings; however, none provided similar process or outcome 

measures to assess individual physician quality.44 Three insurance carriers 

provided information on medical board certifications, and each carrier 

provided other information about physicians, such as medical education

and hospital affiliation. Three of the insurance carriers provided average 

hospital payment rates and average physician payment rates within a 

specified geographic area for selected services, but none provided the 

actual payment rates that would be charged to enrollees that the carrier 

had negotiated with specific hospitals or physicians.45 All insurance 

carriers provided information that allowed enrollees to track their account 

balances, and all provided some information on health education. 

Appendix I summarizes the information included on each CDHP insurance 

carrier’s Web site. 

Other recent assessments of CDHP decision-support tools found similar 

limitations. For example, one study concluded that most CDHP decision-

 43The decision-support tools we reviewed from five of the largest CDHP insurance carriers

included hospital- and physician-specific quality data and provider cost information 

identified by experts as being important when making health care purchasing decisions. 

44Process measures indicate whether providers follow certain guidelines for care, and

include such measures as the share of patients for whom recommended treatment 

guidelines were followed.

45One insurance carrier had begun a pilot project to publish facility-specific, negotiated 

prices for selected medical services with plans to expand this to additional markets in the 

next year. 

Page 25 GAO-06-514 Consumer-Directed Health Plans
support tools did not provide sufficiently detailed measures of cost and 

quality to allow enrollees to identify higher value treatment options.46

Another survey found that almost 90 percent of the insurance carriers 

surveyed did not adjust their cost information and 67 percent did not 

adjust their quality information to reflect severity of illness.47

CDHP experts and representatives of health care providers cited several 

reasons that existing decision-support tools contain limited quality and

cost data. A provider association reported that the biggest challenge is 

providing the cost and quality data in a way that consumers can 

understand and interpret. The association also stated that there are 

potential legal barriers to greater price transparency, such as antitrust 

laws and health plan contracts, which may preclude the sharing of 

negotiated pricing. Additionally, there are many complexities involved in 

making providers’ prices more transparent, as well as a lack of consensus 

on what would make ideal quality measures.48 Furthermore, experts note 

that providers may resist making quality information more transparent, 

allowing consumers to shop for medical services based on price and

quality, and the data needed to build the cost and quality tools for patients 

are dispersed among several publicly funded health programs, as well as 

private insurers and self-funded employers. 

Representatives of insurance carriers whose tools we reviewed told us 

that they are currently limited in their ability to provide some of the 

information experts identified as important. Multiple representatives 

expressed concern over the lack of consensus across the industry on what 

constitutes ideal quality measures and methodologies for developing 

quality data. A representative noted that his company does not offer 

patient satisfaction ratings for hospitals or physicians because of concerns

over the difficulty in achieving a meaningful rating that is based on a high 

enough volume of respondents. Another representative told us that 

physician-specific cost and quality data would be difficult to collect and 

 46See Meredith Rosenthal, Charleen Hsuan, and Arnold Milstein, A Report Card on the 

Freshman Class of Consumer-Directed Health Plans, Health Affairs, vol. 24, no. 6 (2005). 

47Reden & Anders, Ltd, Consumer Directed Insurance Products: Survey Results 

(Minneapolis: April 2005). 

48These factors include the structure of the health plan and the rates of medical 

complications or other comorbidities of the population treated by the provider. See also 

McDermott, Will & Emery, Encouraging a Responsible Approach to Consumer-Driven 

Health Care (October 2004). 

Page 26 GAO-06-514 Consumer-Directed Health Plans
report until the physician community agreed that the value of providing 

these kinds of information to consumers outweighed any potentially 

negative personal ramifications. These representatives stated that they

were planning to offer actual negotiated physician costs in selected

markets in the coming years and that one insurance carrier has plans to 

offer hospital process indicator data.

Other Factors May Limit 

the Appeal of CDHPs 

Other factors were cited by some CDHP experts and industry officials as 

potentially affecting the wider adoption of CDHP plans. An industry 

official said that CDHPs have been priced too high by insurance carriers, 

and as a result, the difference in premiums between CDHPs and traditional 

low-deductible preferred provider organization (PPO) plans has not been

enough to attract more attention from employers interested in reducing 

the cost of health care coverage. For example, a national broker of health

insurance in the individual market reported that in 2005 its nationwide 

average single-coverage monthly premium for HSA-eligible plans with 

deductibles between $2,000 and $2,999 was $166, compared to $213 for 

non-HSA plans with deductibles under $500. Surveys by benefit 

consultants indicate that some employers have been hesitant to offer or 

promote CDHPs or HSAs, instead taking a “wait and see” attitude. One 

survey reported that almost one-third of employers not considering a 

CDHP think the concept is too new and want to gauge other employers’ 

experiences with CDHPs before deciding to offer one themselves.49

Recent studies also raise questions about whether CDHPs can appeal to

certain segments of the population—such as the aged or the sick—who 

may not have the inclination to select a CDHP or the desire to actively 

participate in making complex health care decisions.50 These studies 

caution that high users of medical services are more likely to prefer to 

remain in traditional plans, and that some employers are concerned that 

 49See Aon Consulting/ISCEBS, Survey Shows Consumer-Driven Health Plans Becoming 

More Popular, and Mellon Financial Corporation, Health Reimbursement 

Arrangements/Health Savings Accounts: National Trends, Survey Results Report 

(Pittsburgh: April 2005). 

50American Academy of Actuaries, The Impact of Consumer-Driven Health Plans on 

Health Care Costs: A Closer Look at Plans with Health Reimbursement Arrangements 

(Washington, D.C.: January 2004); Center for Studying Health System Change, Rhetoric vs. 

Reality: Employer Views on Consumer-Driven Health Care (Washington, D.C.: July 2004);

and Karen Davis et al., How High Is Too High? Implications of High Deductible Health

Plans, The Commonwealth Fund, no. 816 (New York: April 2005). 

Page 27 GAO-06-514 Consumer-Directed Health Plans
regardless of the amount of education they provide, spending accounts are 

too complex for certain segments of their workforce. Three-quarters of 

individuals polled by the Kaiser Family Foundation cited the fear of high 

medical bills when asked about HDHPs.51 Focus group participants who 

are enrolled in PPO plans cited lower and predictable out-of-pocket costs,

satisfaction with their current plan, and an unwillingness to manage their 

own health care as the reasons for not enrolling in an HSA-eligible plan. 

The focus group participants also noted that HSA-eligible plans were 

confusing and complicated. For example, participants complained that the 

HSA booklets were too confusing and convoluted and that the HSAeligible plan was more complicated and required more of the enrollee’s 

time for reviewing paperwork. 

Employers we interviewed cited challenges they faced as they 

implemented their CDHPs. These included the administrative complexity

of billing and claims processing, limited or insufficient information on the 

quality and cost of provider and treatment options, and employees’ 

unfamiliarity with and apprehension about CDHPs. (See table 3.) 

Table 3: Challenges Faced by Employers Implementing a CDHP 

Employers 

Challenge #1 #2 #3 #4 #5

Employer-related challenges

Administrative complexity of claims processing and billing procedures √ √

Inadequate resources allotted to educate employees √

Limited or insufficient availability of quality data for providers √ √

Limited or insufficient availability of data on cost for providers or treatment options √ √

Employee-related challenges

Employees unfamiliar with consumer-directed products √ √ √ √ √

Employees apprehensive about consumer-directed approach √ √ √ √

Source: GAO interviews with employers. 

Similarly, employers responding to a benefit consultant survey said that

the key challenges they faced in implementing their CDHPs were 

providing education and promoting understanding of the CDHP product, 

pricing the CDHP product properly relative to other health plan options, 

 51Kaiser Family Foundation, Kaiser HealthPoll Report (Menlo Park, Calif.:

September/October 2004). 

Page 28 GAO-06-514 Consumer-Directed Health Plans
contending with the potential for the CDHP product to attract primarily 

healthier employees,52 and selecting the right health insurance carrier and 

financial institution to administer the plan and accounts.53

In recent years, federal and state governments have taken steps to 

authorize and encourage the development of CDHPs, and insurance 

carriers and employers have begun including the plans as an option within 

their broader portfolios of health insurance offerings. While enrollment in 

the plans is growing, CDHPs currently cover a relatively small share of the

privately insured population. In addition, a significant share of individuals

who enrolled in an HSA-eligible plan did not open and contribute to an 

associated HSA to set aside funds to pay for health care expenses under 

the higher deductibles. Nevertheless, the factors that have stimulated the 

initial development and acceptance of these plans, such as the rising cost

of health care coverage and the desire to stimulate more costconsciousness among plan enrollees, are not likely to abate in the near 

term. 

Concluding 

Observations 

Further enrollment growth in CDHPs will depend on several factors. The 

likelihood that employers will increasingly offer CDHPs may be influenced 

by how, or if, the plans demonstrate cost savings. On the one hand, the 

plans may restrain costs by encouraging employees to become more 

informed, cost-conscious purchasers of health care. This may depend in 

part on the ability of health insurance carriers to improve and expand 

upon the cost and quality information they make available to enrollees. On

the other hand, apparent CDHP cost savings may result primarily from a 

cost shift from healthy to less healthy employees if healthier employees 

disproportionately migrate to these plans, thus causing traditional plan 

premiums to rise faster. The likelihood that individuals will increasingly 

select a CDHP where given a choice may be influenced by the generosity 

of the CDHP benefit package relative to other health plans offered by 

employers and the experiences of early plan enrollees. Interest among 

employees is likely to be greater if they perceive that the higher 

deductibles are largely offset by employer contributions to employees’ 

 52Some employers try to mitigate this concern by designing benefits, plan premiums, and

account contributions to be as attractive as those offered under more traditional plans. 

53Mellon Financial Corporation, Health Reimbursement Arrangements/Health Savings 

Accounts: National Trends, Survey Results Report (Pittsburgh: April 2005). 

Page 29 GAO-06-514 Consumer-Directed Health Plans
accounts and lower monthly premiums, and if early enrollees report 

positive experiences using the plans. 

We provided to IRS, AHIP, and several other private-sector organizations 

excerpts of a draft of this report pertaining to the data each had provided 

us. We received technical comments from IRS and AHIP, which we 

incorporated as appropriate. Other organizations that responded said they 

approved of our presentation of the data they had provided to us. 

External Comments 

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution of it until 30 days after 

its issue date. At that time, we will send copies of this report to other 

interested parties. We will also make copies available to others upon 

request. This report will also be available at no charge on GAO’s Web site 

at http://www.gao.gov. 

If you or your staff have questions about this report, please contact me at

(202) 512-7119 or at dickenj@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs can be found on the last page 

of this report. Randy DiRosa, Assistant Director; N. Rotimi Adebonojo; 

Pamela N. Roberto; George Bogart; and Roseanne Price made major 

contributions to this report. 

Sincerely yours, 

John E. Dicken 

Director, Health Care 

Page 30 GAO-06-514 Consumer-Directed Health Plans
Appendix I: Summary of Information Included

in Decision-Support Tools Offered by CDHP 

Health Insurance Carriers 

Table 4: Information Included in the Decision-Support Tools of Five Multistate CDHP Insurance Carriers 

Tools

Insurance 

carrier #1

Insurance 

carrier #2

Insurance 

carrier #3 

Insurance 

carrier #4

Insurance 

carrier #5

Member account access

Progress toward deductible tracked by tool z  z z z

HSA account balance z z z z z

Health education information

General preventive care z z z z z

Common medical procedures and conditions z z z z z

Treatment options for certain conditions z z z z z

Disease management programaz z z b z

Health-risk assessment toolcz z z z z

24-hour nurse hotline z z z z z

Hospital-specific quality data

Process indicatorsdz    ze

Outcomes datafz z z z ze

Procedure volumes z z z z ze

Patient safety ratingsgz z z  ze

Patient satisfaction ratings     

Links to other Web sites that contain hospital quality data    z z

Physician-specific quality data

Board certifications z z z  

Process indicatorsd    h

Outcomes dataf    

Patient volumes     h

Patient satisfaction ratings     

Links to other Web sites that contain physician quality data  z z z z

General physician-specific information

Medical education information (e.g., school, year of graduation) z z z z 

Hospital affiliation z z z  z

Personal characteristics z z z z z

Provider cost information on plan Web site 

Actual negotiated, hospital-specific payment rates     i 

Average hospital payment ratesj z  z z k

Actual negotiated, physician-specific payment rates     

Average physician payment ratesjz  z z k

Actual pharmacy-specific prescription drug prices  z z  zl

Average retail prescription drug prices z  z z zl

Appendix I: Summary of Information 

Included in Decision-Support Tools Offered 

by CDHP Health Insurance Carriers 

Page 31 GAO-06-514 Consumer-Directed Health Plans
Appendix I: Summary of Information Included

in Decision-Support Tools Offered by CDHP 

Health Insurance Carriers 

Tools

Insurance 

carrier #1

Insurance 

carrier #2

Insurance 

carrier #3 

Insurance 

carrier #4

Insurance 

carrier #5

Actual mail-order pharmacy prices z z z z zl

Estimated out-of-pocket prescription drug costs z z   

Source: GAO review of the decision-support tools provided by CDHP insurance carriers. 

Legend: 

z = Information provided

 = Information not provided 

a

A disease management program is a voluntary program offered by insurance carriers for those with 

certain high-risk conditions, such as diabetes, asthma, and congestive heart failure. Patients 

generally have access to a case manager who coordinates physician care and educational materials 

to help them learn how to effectively manage their disease and improve their quality of life. 

b

This insurance carrier does not have a formal disease management program, but it offers 

personalized information from a health coach on major medical conditions, such as diabetes, asthma, 

and heart disease. 

c

A health risk assessment generally includes a questionnaire about health-related behaviors and risk 

factors that generates a report that provides guidelines on ways to reduce the risk of disease.

d

Process indicators measure whether providers follow certain guidelines for care and include 

indicators such as the share of patients for whom recommended treatment guidelines were followed.

e

For a limited list of procedures. 

f

Outcomes data are collected by hospitals and physicians to track patient outcomes following a 

treatment or procedure, such as mortality rates, complication rates, and average length of hospital 

stay. 

g

Patient safety ratings include data on compliance with safety practices, such as meeting certain staffto-patient ratios.

h

Insurance carrier currently offers physician process indicators and patient volumes for a small 

number of conditions in one pilot market but plans to expand in the future. 

i

The information provided is limited. Insurance carrier provides the actual, hospital-specific, out-ofpocket costs (based on the plan’s coinsurance) for certain procedures. In cases where the out-ofpocket cost exceeds the enrollee’s maximum out-of-pocket spending limit, which is very often the 

case, that spending limit is shown rather than the full cost. 

j

Average payment rates were available for a limited list of services. 

k

Insurance carrier currently offers a range of hospital- and physician-specific payment rates for 

selected procedures in one pilot market and plans to expand in the future. 

l

Insurance carrier shows retail prescription drug prices for enrollees in an HDHP. 

Page 32 GAO-06-514 Consumer-Directed Health Plans
Related GAO Products Related GAO Products 

Federal Employees Health Benefits Program: First-Year Experience with

High-Deductible Health Plans and Health Savings Accounts. GAO-06-271. 

Washington, D.C.: January 31, 2006. 

Federal Employees Health Benefits Program: Early Experience with a 

Consumer-Directed Health Plan. GAO-06-143. Washington, D.C.: 

November 21, 2005. 

(290433) Page 33 GAO-06-514 Consumer-Directed Health Plans
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