How to Trim Healthcare Costs with HSAs and HRAs

By: Mark Rose
Submitted: 2007-01-17 16:15:25
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Health Savings Accounts, or HSAs, have been the subject of much discussion lately as employers research whether these relatively new health benefit accounts are right for their company and its workers.

The HSA, created in Medicare legislation and signed into law in December 2003, allows employers and employees to fund a tax-sheltered account that is used to pay for current and future medical expenses. The account is fully owned by the employee and must be coupled with a High Deductible Health Plan (HDHP) to meet IRS requirements. However, the less discussed Health Reimbursement Arrangement, or HRA, may be a better option for small and medium-sized businesses to consider.

The HRA, which has been around since the 1970s but was adopted in its current form in June 2002, allows employers to pay for employee health care expenses similar to the way they would with an HSA. But HRAs give employers much more flexibility. Under these plans, the employer pledges to set aside a certain amount to cover employee health care expenses. Unlike an HSA, the employer maintains control of the funds until a claim is made. These plans also differ from HSAs in that they do not need to be set up in conjunction with an HDHP and can have a prescription drug rider. Employers that are interested in encouraging employees to take more responsibility for their health care spending would be wise to consider establishing a Health Reimbursement Arrangement. We’re finding that 15 percent to 20 percent of our clients are using HRAs and that number is increasing.

These plans are increasing in popularity because they are simple for the employer to implement and manage – and because the employer can control the funds. In fact, some employers that had set up HSAs are converting to HRAs. Let’s consider why:

No free money: Unlike an HSA, which requires an employer to put money into an employee owned account, an HRA isn’t funded until the employee actually makes a claim. With an HSA, if the employer agrees to contribute to each employee, the money goes into a portable account that is there for the employee to spend or keep – even after he or she leaves the company. With an HRA, an employer commits to fund unreimbursed health care expenses, but won’t actually have to pay until the employee makes a claim. The money stays with the employer until it is spent and doesn’t automatically go with employees when they leave the company (unless the employer sets it up that way).

Employer control: With an HSA, any money in the account belongs to the employee. The money rolls over from year to year and the employee can essentially use the account as a savings account. Once they leave the company, the money is theirs to keep – and to spend in any way that they choose. (There is a 10 percent penalty for non-qualified use of the funds). With an HRA, the employer determines how much of the money carries over from year to year and whether employees can spend down the balance when they leave the company. Some companies, for example, choose to let the employee spend the money when they retire – and use it to cover medical costs. But that is not required. Other employers offer varied vesting schedules that dictate how much money employees can use when they leave.

Flexible medical plans: The IRS requires that HSAs accompany specific types of health benefit plans. Currently, that means the plan must have a $1,050 per person and $2,100 per family deductible and those deductibles must be satisfied before any medical benefits outside of preventative care may be paid by the medical plan. This includes prescription drug benefits.

The IRS does not require that HRAs accompany any specific type of health benefit plan. It’s totally up to the employer to decide. HRAs work with both Preferred Provider Organization (PPO) and managed care plans. The employer can choose to set up a higher-deductible plan that includes an HRA. This encourages employees to take more responsibility for their own health care dollars. For example, under this arrangement, employees may be more inclined to research the most cost effective alternative for a type of test if they have a limited amount of money to spend. In addition, the employer can determine which services - within IRS guidelines - an employee can use the dedicated funds for. An HRA can also be set up to work in conjunction with a Flexible Spending Account - an account funded by employees with their own pre-tax dollars to cover additional medical expenses.

Do HRAs save the company money? It depends on the health plan. In the long term, such plans should save employers money as employees take more responsibility for their own health care decisions. This encourages employees to make smart financial decisions about their health care. Giving employees more control over how their money is spent is a way to change behavior and improve accountability within the workforce.

In the short term, HRAs should save employers money by allowing the use of higher deductible health insurance choices. But it all depends on how much employers pledge into an HRA and how much of that money is spent by employees. Employers should review such plans cautiously to assess the health care needs of employees and be aware of significant, ongoing health conditions that could increase costs.

Both HRAs and HSAs allow consumers to take more control over health care costs. Employers would be wise to consider the ways to help them.

[Mark Rose is Vice President of Commercial Employee Benefits with Bellevue-based Baldwin Resource Group, which specializes in insurance, risk management and business consulting. He can be reached at 425-285-2301.]

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