Beat Rising Health Premiums With HRAs And HSAs

(Published August 9, 2007)

 

It's the third inevitability behind death and taxes — health insurance premiums will rise every year. That notwithstanding, employees still consider employer-provided health benefits to be of paramount importance. The results of a recent survey conducted by the Employee Benefit Research Institute showed that employees prefer employer-provided health benefits, even to salary. When asked, 75% of those employees said they would need at least an additional $6,700 in salary before they would think about giving up their health benefits.

 

Consumer-Driven Health Plans 

It's apparent that employers can't walk away from providing health care benefits without irreparably damaging employee relations. But rising premiums cause conundrums for employers. To lower premiums, more employers are turning to high-deductible health plans, newly dubbed consumer-driven health plans. Good news: The results of a three-year study conducted by UnitedHealth Group show that employers switching to consumer-driven health plans cut their premiums not by employees declining care, but by employees becoming more cost-conscious and actively managing their care.

 

Not all consumer-driven health plans are created equally, though. And consumer-driven health plans may not be a viable option for employers with workforce demographics that reflect mainly older employees, employees with young families, or low-wage earners.

 

When evaluating competing plans, having plan reps answer these basic questions is essential to getting employees to buy into these new types of plans, especially if employees are used to more generous health benefits.

• How big is the plan's network of doctors and hospitals?

• What are the in-network costs vs. out-of-network costs?

• Are there any fees employees would consider to be hidden fees (e.g., traumatic activation fees levied when employees with medical emergencies actually visit emergency rooms)?

• What constitutes an out-of-network charge (e.g., a hospital is in-network, but doesn't have relationships with particular specialists)?

• To what extent does the plan assist employees and beneficiaries in finding the best care providers? Since employees are shouldering much more of the financial burdens, this is becoming a particularly sticky issue, according to the results of a Kaiser Family Foundation study.

• How generous is the plan in covering preventive-care expenses (e.g., yearly check-ups, mammograms)?
  

Consumer-driven health plans are paired with either health reimbursement accounts or health savings accounts to help employees defray the hike in deductibles. Beware that health reimbursement accounts and health savings accounts come with rules that can be challenging to understand and apply on your own. Therefore, you should discuss the option that's right for you with your benefits professional.

 

Health Reimbursement Arrangements 

Health reimbursement arrangements (HRAs) operate like their older cousins, health flexible spending accounts (FSAs). HRAs are employer-funded accounts that reimburse employees for their out-of-pocket expenses, up to an annual limit. HRAs serve the same basic purpose as FSAs (and, in fact, some of the rules are the same as FSAs), without the same plan design baggage. They don't, for example, have the FSAs' use-it-or-lose-it component, mandate that the maximum amount be available for reimbursement at all times during a plan year (otherwise known as risk shifting), or require a 12-month coverage period.

 

The UnitedHealth study used 2003 as its base year. According to the study, during 2004 and 2005, costs decreased by an average of 3% to 5% for employers that switched to high-deductible health plans that were paired with HRAs. And the decrease in costs was across the board. Employees had 22% fewer hospital admissions and 14% fewer visits to the emergency room. Even employees with chronic health conditions reduced their hospital admissions by 8% and emergency room visits by 12%. Compare and contrast: Costs for employees enrolled in preferred provider organizations increased by an average of 8% to 10%.

 

HRAs aren't a slam-dunk, though. Some of the rules can be quite complicated. HRAs can't be part of a cafeteria plan, and the rules for ensuring that they aren't can be difficult to apply. Secondary disadvantage: HRA amounts, even amounts rolled over from year-to-year, can't accumulate tax-free earnings.

 

Health Savings Accounts 

Health savings accounts (HSAs) operate like FSAs and HRAs in that employees can contribute into them on a pre-tax basis (the FSA part) and amounts left over at the end of a plan year roll into the next (the HRA part). Unlike HRAs, earnings can continue to accumulate tax-free until employees take distributions.

 

The drawback to HSAs is the high-deductible health plan, which can be a real eye-popper for employees. To cushion the blow to employees, employers often contribute the amount they've saved into employees' HSAs. And according to the UnitedHealth study, employer contributions are the key to successfully implementing HSAs. When employers contribute, 90% of employees open HSAs; when employers don't pony up, only 27% of employees contribute into HSAs.

 

HSAs can be run through your cafeteria plan or not, depending on your plan design. However, while HSAs have received more favorable tax treatment than HRAs, the one thing they have in common with HRAs is complicated implementation rules.

 

Related Topic(s): Benefits - Flexible Benefits