Health Reimbursement Accounts (HRAs) Introduce Employees to Healthcare Consumerism
Originally Published in RMP Advisor, January 2010Readers of this newsletter know that RMP supports consumer-driven healthcare. Consumerism is one of the most effective tools for adding value and increasing the efficiency of our healthcare delivery system. Consumerism is about giving employees greater responsibility or “skin in the game.” Data show that when employers do this, their employees will make better decisions.
Why Not an HSA?
Discussions of consumer-directed health plans frequently focus on high-deductible health plans (HDHPs) coupled with health savings accounts (HSAs). Sometimes overlooked are health reimbursement accounts (HRAs)—employer-funded accounts that can be a solid first step in transitioning to a consumer-directed approach to healthcare. Employees can use an HRA to pay for their qualified medical expenses, along with those of a spouse and children. Such expenses could include deductibles, copayment and coinsurance amounts, and any type of expenses that fall under the Internal Revenue Code definition of a qualified medical expense. Funds withdrawn to pay for qualified medical expenses are not taxable to the employee.
Like HSAs, HRAs have the advantage of helping employees develop more awareness of the cost of healthcare. Each time employees contemplate using their HRAs to pay for a medical expense, they must determine whether they’re meeting the medical expense in the most cost-effective way possible. Such thinking is an incentive to take the steps necessary to make informed, cost-conscious healthcare spending decisions. And, since HRA funds carry over year to year (and are not forfeited, such as are unused amounts left in flexible HSAs), employees have additional reasons to be careful about how they spend HRA money. By design, however, an employer can limit the carryover feature of the HRA; for example, employers can decide whether to make unused funds available for retirees to use.
Attractiveness of the HRA Model
Some employers prefer the HRA model because the employer (not the employee, as in the case of the HSA) owns monies contributed to an HRA. Therefore, money left over in an HRA account at the end of a benefit year or when any employee leaves their company remains the employer’s property. Yes, that can be an advantage and a good reason to get your feet wet with consumerism with the HRA model.
Our experience tells us, however, that the HRA is not as strong a tool as the HSA for changing behavior. In other words, employees with an HRA are still spending someone else’s money, as opposed to their own. As a result, incentives around lifestyle and use of healthcare services have indirect, rather than direct, economic consequences. We do tend to see that the associated premiums of an HDHP coupled with an HRA are somewhat higher than when coupled with an HSA. The simple reason for this is actuarial predictions of costs (as a result of expectations for changed behavior) are somewhat higher with an HRA compared to an HSA.
From an employer’s perspective, one of the great advantages of HRAs is that they have tremendous design flexibility. Unlike HSAs, HRAs do not need to be tied to a HDHP. Their design, however, can complement the company healthcare plan; for example, an HRA can be a way to provide some healthcare benefit to employees for employers unable to sponsor a comprehensive type of medical plan. The cost of the plan would be predictable—whatever amount the employer chooses to contribute to employees’ accounts—and could vary year to year. Employees could use their HRA funds to pay for medical expenses or apply them toward the premium of a health plan they purchase on their own. Since HRAs are employer-funded accounts, no employee contributions are permitted.