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Health Reimbursement Arrangements (HRA) and How Plan Designs Deviate Employee Utilization

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healthcare on January 23, 2014 - 3:31 pm in Self Funding

A Health Reimbursement Arrangement (HRA) is a type of employer funded account regulated by Section 105 of the Internal Revenue Code. It enables employers to purchase group health insurance plans with high deductibles, then self insure a portion of the plan to keep out-of-pocket expenses manageable for covered employees. There are countless options in designing an HRA. The most common HRA, funds a portion of the plan deductible. Many employers add funding for co-pays, prescription drugs, and other expenses to the HRA. However, the employer must identify qualified claims at the plan inception. HRAs may “rollover” all or some of the unused account balances.

E.g. An employer with 250 employees in a PPO group medical insurance plan, with a $1,000 deductible single and $3,000 deductible family (total employee health insurance costs of $695,400) may see renewal premiums increase of 40% (an additional cost of $278,160 for a total of $973,560 annually). It is difficult to control profitability for the company when insurance premiums increase dramatically year to year.

Implementing an HRA could be just the very thing that you or your client needs to help curb those pesky double digit increases. The idea behind the HRA as you’ll see to the right is to switch to a higher deductible plan, thus lowering the premiums across the board. The first concern is, “What about the higher deductible?”  Well that’s easy, in the example to the right the employee deductible increases from $1,000 to $3,000 for single and from $3,000 for family to $6000. That’s quite an increase that employees with very “benefit rich” plans would not want to take on. What the employer does is make a contribution tax free through the HRA to help “buy down” the deductible.

The below HRA plan design (employee pays first portion of the deductible and the employer pays the second portion of the deductible if needed) is the most common type of HRA plan design in the market today. Though there are many different plan designs that yield several different results.

E.g. $3,000 single deductible/ $6,000 family deductible.

for single and from $3,000 for family to $6000. That’s quite an increase that employees with very “benefit rich” plans would not want to take on. What the employer does is make a contribution tax free through the HRA to help “buy down” the deductible. 

The below HRA plan design (employee pays first portion of the deductible and the employer pays the second portion of the deductible if needed) is the most common type of HRA plan design in the market today. Though there are many different plan designs that yield several different results.

E.g. $3,000 single deductible/ $6,000 family deductible.

As you can see in the example to the right the employer is saving a staggering $695,400 in medical insurance premium just by switching to a higher deductible!  The idea is the funds you save in insurance premium can be used to fund a portion of the higher deductible for the employees. This helps the employee with the switch from “benefit rich” to higher deductible. In essence you are switching to a different philosophy, but still providing the quality. The roads lead to the same destination, just different methods of getting there. In the example the employer offers to pay 50% of the single and family deductibles. Even still, if 100% of the funds offered were utilized, the employer would still save $95,400!  

There are some major concerns that arise when an employer decides to implement an HRA plan. Below you’ll find some of the most common;

1) What if all of the Estimated Annual Premium Savings from switching from my current plan to a High Deductible Health Plan (HDHP) are used? This can be a concern, especially if the estimated annual premium savings are less than the total amount offered in HRA contributions i.e. if 100% of the HRA contributions were utilized by employees  the employer would potentially end up spending more in insurance premium costs + HRA claims payments, than saved from switching to a HDHP.  

 

This is easily discounted, as you can adjust your contributions to mitigate your risk. Also, you will see shortly a study that provides average utilization statistics that indicate the risk being very low of anything like 100% utilization. 

2) How can I be sure my employees will get their money back fast? Anytime you are choosing an administrator there are some things to look for:

a) What are your average claims turn around? This is very important, you don’t want to be going with an administrator that doesn’t have a very good average claims turn around i.e. 24 to 48 hours. Yet alone, one that doesn’t even know their average!

b) Am I assigned an account administrator? If you aren’t assigned one point of contact, it’s very difficult to get the help you need. If you have questions or issues arise you want to be able to hold the administrator accountable and having a point of contact helps greatly with questions and also there is much less frustration for you or your clients. 

c) How do my employees get reimbursed? Finding out the reimbursement schedule for claims is very important. The faster your employees get their monies the happier they’ll be. Some administrators only process claims once per week or even monthly reimbursements. See standard claims process below.

Surely by now you are curious to discuss HRA average utilization statistics aforementioned. These statistics were based upon a four year study based on six hundred and fifty groups of all HRA plan de signs. The study was performed by a national Third Party Administrator (TPA) headquartered out of Madison, Wisconsin. They specialize in Health Reimbursement Arrangements (HRA), Flexible Spending Arrangements (FSA), COBRA, Transportation, and Health Savings Accounts (HSA) administration.

What this TPA discovered is that plan designs deviate utilization with the HRA. Now if you are from the insurance arena or just a novice of human nature, you already know that the more you give the more people take. In this sense the HRA is no exception. Over these some 650 employer groups, the TPA had a wide array of plan designs. Generally speaking they all fit into seven broad categories, that are further refined by employer pays first or employee pays first in terms of the deductible. There was a stark contrast between employer pays first and employee pays first for utilization.  In the employee pays first utilization, over the four year study there was only 17.2% utilization of the funds offered to employees. 

 

In our first hypothetical example employer who saved a staggering $695,400 in medical insurance premium. Applying the average 17.2% utilization factor would mean of the $695,400 offered to the 250 employees, only $111,960.88 would be utilized. This means even after the HRA claims, the employer still saved $563,830.32 annually!

The employer pays first plan design yielded almost double utilization by employees 33.14%. In our employer example that would mean $230,316.48 in HRA claims and an annual savings of $465,083.52. The variance between employee pays first and employer pays first in our example is $118,355.60 or an increase in claims by 15.94%. 

The last category was called, “all 213d expenses.” This comes from the section of the IRS code that covers any and all eligible expenses that the IRS deems to be allowed under the Section 105 plan or HRA plan. It’s essentially like giving away free money and if designed properly can work well depending on the situation. Naturally in a scenario where there is more freedom of choice on what you use the HRA funds on, you will have higher utilization. The average utilization factor is 47.56%. So almost 50% of the money given was used!  In our example that means $330,732.24 would be claimed, leaving the annual savings at $364,667.76.  While that still is quite a bit of money, it still isn’t as much as the other two examples.  It speaks volumes about plan designs and what a dramatic difference they can make on utilization. 

Consumer driven healthcare is a theory that the HRA falls under. This theory essentially states that if you wall the employee off from the cost of his or her care they will spend like gluttons! However if you get the employees involved in their care i.e. transparency with the cost of the care they utilize they are more apt to shop around for the best price coupled with quality. 

E.g. I do employee meetings all the time, when asked where they go to get their prescriptions filled they invariably say, “Walgreens.”  Or if you are from the south “CVS.”  

These two on average are more costly than other U.S. pharmaceutical retailers.  Make these prices transparent and you’ll see a big difference in the way they are consumed. This doesn’t only apply to pharmaceuticals, but all medical care where prices are made transparent. Consumer driven health plans like the HRA to assist in that process. 

In 2008 the U.S. spent 2.3 trillion dollars on healthcare. This lofty number accounts for 16% of our gross domestic product. This is more than any other industrialized country in the world. The cost of healthcare has risen higher than inflation in the U.S., which causes there to be a variance between what the average person makes and the cost of care in terms of affordability.  (Kaiser Family Foundation, 2010) This is not new to most, given the Health Care Reform Act or what the GOP likes to call Obamacare.  

Promoting consumerism to help create a new kind of consumer is one of many ways to assist in the process of helping to reshape our healthcare costs. The HRA is one way to assist and should be looked at as a tool in the war against rising healthcare. 

About The Author

Isaiah D. Joyner | Regional Sales Manager

ij@eflexgroup.com

eflexgroup.com (eflex)

2914 Beach Blvd. | Gulfport, FL 33707

PH: 727.235.6479  | 1.877.933.3539, ext. 305

CL: 727.249.5368 | FX: 608.316.7290 

Isaiah has worked with eflexgroup.com or “eflex” for more than five years working in various roles such as COBRA compliance and in a sales capacity for CDH benefits. Isaiah is a certified continuing education teacher and provides such CE on a national scale.  Please feel free to contact Isaiah for questions on this article or on Consumer Driven Healthcare (CDH.)

Resources:

Kaiser Family Foundation, Initials. (2010, Mach 1). U.S. healthcare costs. Retrieved from http://www.kaiseredu.org/Issue-Modules/US-Health-Care-Costs/Background-Brief.aspx

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