Consumer-Driven Health Care: Health Reimbursement Arrangements

In this article we will discuss the least-utilized tool in health care: the Health Reimbursement Arrangement. HRAs allow a company to fund claims expenses that its employee incur. It is a great way to enter into the self-insured arena without having to leave the fully insured marketplace. HRA’s and HSA’s are great opportunities to control the cost of health insurance to both the employer and the employee.

The easiest way to show how the HRA works is to look at a company that currently offers insurance that covers 100% of hospitalization and pays 100% of the premiums. As an example, let us assume that the cost to the company is $500 for a single-only coverage per month. Assuming all other benefits remain exactly the same, we are now going to replace the plan with one that, if you are hospitalized, has a $500 deductible, 90% co-insurance after the deductible, and a maximum out-of-pocket expense of $1,000 at the co-insurance level. Therefore, an employee, if he should go to the hospital, could pay $1,500 out of his pocket. The reduction in premiums for this plan design saves the company 15%, making the savings to the employer $75 per month or $900 per employee per year. This employer has 40 employees on the plan and now recognizes a $36,000 savings per year.

In the Health Reimbursement Arrangement, the employer will pay the employee’s $1,500 out-of-pocket expense so that, at the end of the day, nothing has changed the employee’s outlay as compared to the prior plan. So in our example, if 24 employees are hospitalized in this year, the employer would lose the savings created by the HRA. That is close to half of the employees actually being hospitalized in the given year. I ask you, if you have 40 employees, how many in a given year do you think will be asking you to cover their $1,500 exposure?

In order to introduce the concept of consumer-driven health care, most employers accept exposure to various types of health care costs, not just hospitalization, to get higher savings on the premium. At that point, they normally will leave some exposure remaining at the employee level so that employees can start to think about how they are spending their health care dollars. Employers that offer both Flexible Spending Accounts and HRAs will typically allow the FSA dollars to come out first due to the FSA use-it-or-lose-it provision and because the employer reduces its risk on HRA expenses.

The positives of the HRA are:

The employer only has to fund the account, with pre-tax dollars, when legitimate expenses are incurred and submitted.
The employer gets to decide exactly which medical costs are to be paid by the HRA account.
The employees can still receive the same benefits that they are used to, if the employer decided to cover the full exposure.9
The smaller employer can actually see employees’ claims expenses for the first time.

The last advantage is tremendous because it gives the employer the ability to make educated decisions on where to increase or decrease the exposure upon each year’s renewal. The only negative I can come up with is that the employees can over-utilize the account funds, resulting in a loss to the company. However, in the example used earlier, 25 employees would have to be hospitalized for this to occur.

In the end, the perfect company to consider for HRAs have the following characteristics: They have “rich” benefits in place, they cover most of the costs of the premium, and they have a small degree of risk they are willing to take.

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