By Kent B. Utsey
CEO of American Health Resources
Rising health insurance premiums are causing employers to either reduce the benefits they offer or shift more of the cost to employees. As an alternative, many businesses are moving to a Health Reimbursement Arrangement strategy. Although HRA’s are often touted as consumer-directed healthcare, it is far more instructive to think of HRAs as a financial strategy that enables an employer to replace a low-deductible group health policy, which has a high fixed cost, with a high-deductible health plan at a lower fixed cost. This strategy is becoming an increasingly popular one, with HDHP’s growing by almost 300% since 2009, according to Pricewaterhouse Coopers. A study by DirectPath and CEB found some organizations (13%) are even curtailing or eliminating employer contributions to Health Savings Accounts partly because an HRA costs less than an employer-funded HSA and gives employees greater initial financial protection.
HOW DOES THE HRA STRATEGY WORK?
The HRA strategy is simple to understand. The employer replaces an expensive, low deductible plan with an inexpensive HDHP plan. When coupled with an HRA, these plans minimize the financial burden on employees. Employers no longer need to rely on the insurance policy to cover first-dollar medical expenses. Instead, the employer pays for some portion of the employees’ deductibles through the HRA. If the HRA is designed properly and managed effectively, that variable cost can be controlled. The savings can be substantial, and employee out-of-pocket medical expenses can remain virtually the same as they had with the low deductible policy. The strategy works because higher deductibles mean lower premiums and employers pay only for care their employees actually receive, instead of paying insurance premiums or making HSA deposits for expenses they never incur. The HRA is (or should be) structured to incentivize employees to use their benefits wisely. Cost-conscious employee behavior results in lower overall claims expense for both the employers and the insurers, and that translates to lower premium rate increases.
Brokers play a critical role in helping businesses understand how HRA’s work so that employers can offer these solutions to employees—saving money, reducing risk and creating a happier workforce.
RISKS AND REWARDS
There is no such thing as a risk-free financial strategy, so before embarking down the HRA path, business owners should carefully consider the most common pitfalls found with HRA’s
- Higher-than-expected medical expenses. If the HRA is designed poorly, paying too much for first-dollar coverage, or if the group is particularly unhealthy, then excess medical claims may exceed the savings won by switching from a low deductible policy to an HDHP.
- Contingent liability. Take for example a 20-employee group of which 10 are single and 10 are families with HRA’s that pay a maximum of $4,000/single or $8,500/ family. The total risk exposure for the employer, or contingent liability, is 10 x $4,000 + 10 x $8,500 = $125,000. Now imagine that everyone gets ptomaine poisoning at the company picnic. The employer could be hit with $125,000 in HRA claims. While it is extremely unlikely that this would happen, it could happen, and employers must consider that risk.
- Medical inflation. Even a well-designed, well-managed HRA with no excess utilization will experience some increase in medical expenses due to medical inflation. The trend for that inflation varies by community, but it has averaged about 3.3% per year for the last 10 years, per the U.S. Bureau of Labor Statistics. This may not sound like much, and it is considerably lower than insurance premium increases, but it does add up to a 33% increase in 10 years.
It is possible for employers to put a cap on their contingent liability and structure their HRA to reduce claims costs year over year. Insurance brokers and agents can help their clients design and manage intelligent HRA’s that stabilize benefits costs and avoid the financial risk that could potentially wreak havoc on a company’s bottom line. The HRA plan design is critical and employers need to keep in mind that this is a financial strategy. The employer is replacing a high fixed cost with a variable cost – or the actual medical expenses incurred by employees. The key to success is to control that variable cost. The HRA design should incentivize employees to seek care when they need it, but not be wasteful. To do this, employers should never pay first-dollar expenses at 100%. Instead, employees should be responsible for some percentage of the cost of their care. Or employers can provide some other incentive, such as a rollover provision, so employees use the money wisely. Employers should never cover all medical expenses allowed by the IRS at 100%. It is essential to limit the HRA initially to c over only those expenses that apply to the HDHP deductible. Then perhaps some portion of unused funds may be used for dental, vision, etc. in subsequent years as an incentive. Finally, employers must be prepared to build up plan assets. This means putting aside money that can be used to cover the contingent liability and be drawn down to offset claims and medical inflation in the future. An innovative approach was recently developed by National Prosperity Health Matching Services through its proprietary Health Matching Reimbursement Arrangement. Used in this fashion, a HMRA becomes a funding mechanism that supports and enhances an HRA. Here is how it works:
- The employer deposits money in the HMRA on a monthly basis.
- The HMRA deposits are “matched” by National Prosperity Health Matching Services using actuarial principles, and grow at a very rapid rate.
- The HMRA balances grow to offset the employer’s contingent liability and may be used to offset medical inflation and claims expenses year over year.
- The employer may set a cap on how much it will pay for medical claims each year because the HMRA can pay claims above that cap or limit.
BENEFITS OF THIS STRATEGY
The employee out-of-pocket maximums remained the same as with the low-deductible plan ($500/single, $2,000/family) and the savings to the group are quite substantial. The downside is that this strategy is initially more expensive than the HRA alone. There is no escaping the fact that money has to be deposited in order for it to be available in the future. However, as Warren Buffett once said, “Someone is sitting in the shade today because someone planted a tree a long time ago.” The only way to prepare for expenses in the future is to save for them in the present, and the HMRA is an excellent way to do that. For clients, this approach is like putting money in the bank and living off the earnings. It can result in significant cost saving for a company. It is an undeniable fact that group health insurance premiums are going up. The key to success in benefits selling is being able to provide your clients with multi-year strategies that meet that reality head on: strategies that decrease costs and increase employee satisfaction. The HRA-HMRA combination does both. It saves employers money and protects them against medical inflation and claims risk. By making employers aware of new, more cost-effective and risk-reducing choices, brokers stand to build their customer base and bottom line.
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