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Saving the Insurance Dollar Through Health Reimbursement Accounts (HRAs)

By Thomas E. Roy CLU ChFC & Kim Adams FLMI, HIA

Anyone who has health insurance has probably heard of or participated in a Medical Savings Account or MSA. MSAs were the first generation of consumer driven health insurance tools. These were established to help curb the rising cost of health insurance premiums. However, as a method to contain costs, MSAs had their flaws. To correct these flaws and draw appeal, Health Savings Accounts (HSAs) were created in 2003 by the Medicare Prescription Drug, Improvement and Modernization Act. Today, both Health Savings Accounts and Health Reimbursement Accounts (HRAs) are two effective methods of saving the insurance dollar.

First, let’s examine HSAs. There are two pieces that make up an HSA. The first piece is High Deductible Health Plan (HDHP). This is the insurance piece provide by an insurance company. To be called an HDHP, the plan has to be qualified by the IRS. There are two main qualifications:

• The plan must have at lease a $1,000 per year individual deductible and a $2,000 per year family deductible. (This amount typically increases every year.)
• The plan cannot have co-pays for prescriptions or doctor office visits.

Most HDHP plans range from $1500 to $2500 for an individual deductible. After the deductible is met, an insured may or may not have co-insurance. However, the best HDHP plans are designed to have no co-insurance after the deductible so there are no additional out-of-pocket expenses for the insurance year.

Once an HDHP plan has been established, an insured has the option to combine their plan with an HSA. An HSA is a tax-deductible account that works in conjunction with but separately with the HDHP.

Employees and employers can both fund HSAs and money from the HSA can be accessed on a tax-free basis to pay qualified expenses not covered by the HDHP. Qualified expenses are those identified by the IRS as acceptable medical expenses. You can access a list of these expenses at www.IRS.gov/publication 502.

Articles are written every week about HDHPs and HSAs. Some of these are positive in nature but many are negative indicating that these types of plans are not being sold or they are not being accepted in the marketplace. Three major reasons are normally given for the lack-luster responses.

The first reason is lack of knowledge by the broker. All we can say is shame on the broker who hasn’t taken the time to understand this alternative funding of medical insurance for his or her clients.

The second is lack of understanding by the employee and/or the employer. Again, shame on the broker who has not educated the client. But, another reason for this has to do with the fact that traditionally the broker delivered the insurance plan to the employer. There was little, if any, “employee engagement.” If you don’t engage the employee a lot is lost in the translation. This becomes apparent once questions and problems begin to be filtered back to the broker’s office.

The third reason, and the second part of this article, is the lack of employer savings with an HSA/HDHP program. The reason is that for the HSA/HDHP program to work positively, the employer has to contribute to the employee’s HSA account. But, as the employer contributes, they are spending more money because the employee is immediately and wholly vested in the HSA account. Furthermore the employer has no control as to how the contribution is used. Some employers are okay with this arrangement; the majority are not.

Changing focus, let’s look at Health Reimbursement Accounts or HRAs. These arrangements are more employer-focused and help the employer contain benefit dollars better.

HRAs have the same purpose as HSAs and are still normally combined with an HDHP; however, they can also be combined with a traditional PPO plan. And they provide more flexibility in how they are arranged.

• They are funded by the employer on a tax-deductible basis.
  
• They are accessed for qualified medical expenses by the employee on a tax-free basis.
  
• The employer can specify how much they will fund the account for each employee.
  
• The employer may prefund the HRA account. Any funds not used at the end year still belong to the employer.
  
• The employer may choose to fund the HRA as needed to reimburse the employee.
  
• The employer may stipulate how the money is used. In other words, the employer may decide to cover only prescriptions or doctor visits. Another stipulation may be that an employee is responsible for a portion of the deductible prior to accessing the HRA.

We think HRAs give employers more opportunity to contain the cost associated with the company’s health plan while still providing quality coverage.

With the permission of our client, Sugar Creek Township, we have given an example of how HRAs work.

The township’s goal was to provide a good plan for their 24 employees. At the same time, like most entities and certainly governmental bodies, it was important to contain costs.

Sugar Creek’s plan prior to their renewal had a $100 individual and $200 family deductible with 100% coinsurance. They had a $15 office co-pay and prescription co-pay of $10 generic, $20 name brand and $40 non-formulary.

Their monthly premium was $34,236. We changed to an HDHP plan with an HRA. Under this plan the individual deductible is $2500 with a $5,000 family deductible. There are no co-pays and the plan has no co-insurance after the deductible. The monthly premium for this new plan is $20,748 per month. This is a savings $13,488 per month or $161,858 per year.

This is great except that you have to remember it is diminished coverage with higher deductibles and no co-pays.

Now do the math.

If every employee had claims equal to their deductible it would result in a cost of $110,000 (the cost of the deductible). If Sugar Creek Township pay for 100% of the employee’s deductible and each employee reaches the deductible (worst case scenario) the township would still save $51, 858. However, it is unlikely that all 24 employees will meet their deductible since statistics show that, on average, only 9% of the employees in a group meet their deductible. Therefore, the potential is great for more savings.

Tom Roy and Kim Adams are with Employee Benefit Consulting of Mid America, LLC. For additional information you may reach Tom at (317) 733-2603 or Kim at (317) 733-2608.