How To Determine If A Consumer-Directed Health Care Plan Is Right For Your Business White Paper 2006 Kevin Carmelengo Vice President Insurance Brokerage and Consulting
With the advent of consumer-directed health care plans, many organizations are evaluating their health care plan options to realize greater cost efficiencies. While Health Savings Accounts (HSAs) are one option with distinct advantages, these high-deductible health plans may not be the right choice for every employer or their employees. There is another option to consider: the Health Reimbursement Arrangement (HRA). By comparing the advantages of both consumer-directed health care plans, employers can choose the one that will bring the best results for their bottom line and their employees health care coverage. What Is An HSA? Signed into law by President Bush on December 8, 2003, HSAs are savings accounts used exclusively to pay for qualified medical expenses. Funds can be used for current expenses or saved for the future. HSAs can only be offered, however, in conjunction with a high-deductible health plan. In order for a plan to be considered high-deductible, the Department of Treasury stipulates that the plan must have a minimum in-network deductible of $1,050 for a single enrollee and $2,100 for a family enrollee. Regulations also require that all services covered by the plan, including prescriptions, must be subject to the deductible. The only exception is preventive care (annual physicals, well-child care, mammograms, etc.), which can be covered on a first-dollar basis, with or without a copay. Employers, employees, or both can make contributions to HSAs, but regulations currently limit the total contribution amount annually to $2,700 for single enrollees and $5,450 for family enrollees. In addition, enrollees age 55 and over can make catch-up contributions, based on a maximum annual amount. The maximum catch-up contribution limit for 2006 is $700, and it will increase by $100 each year through 2009, at which point the limit is set for $1,000. Contributions are tax-deductible for both employees and employers. It s important to note that employees can withdraw funds for reasons other than qualified medical expenses. However, these withdrawals would be subject to ordinary income tax and a 10 percent excise tax penalty. There is no tax on funds used for qualified medical expenses. How Will HSAs Benefit My Organization? HSAs offer employers several advantages. The highdeductible health plan can encourage employees to become more conscious of their health care expenditures and help lower costs. Also, some of the expense of the health plan is shifted from the employer to the employee, generating additional savings for the employer. Employers can invest some or all of the savings associated with this consumer-directed health care plan in the form of contributions to employee HSAs. However, the employee owns the HSA, not the employer. And HSAs are portable, which means that if an employee changes jobs, his or her HSA and any contributions you have made to it go with the employee. For businesses with a high employee turnover, a more costefficient option would be to structure contributions in such a way that the employer would be passing on all or part of the savings associated with the consumer-directed health care plan to the employees. Employers can then educate employees on the benefits of diverting their payroll deduction savings into their HSAs to help offset the higher deductible. While HSAs help employees shelter income from taxes and save for retiree medical expenses, it s not always the most affordable plan for some workers; families who live from paycheck to paycheck, for example, often cannot afford to pay for the first $2,100 of their health care expenses. The most important factor to consider with an HSA is that the employee controls the account whether the employer makes contributions to the account or not. The employee directs the investment of the funds, determines which medical expenses to pay from the account, and decides the amount of funds to deposit. And, of course, if the employee leaves to take another job, the HSA goes too. Another Alternative: The HRA Employers interested in converting to a consumer-directed health care plan should also consider the Health Reimbursement Arrangement (HRA). An HRA plan can be offered alongside of an HSA plan, but an HRA and an HSA cannot be offered on the same plan design. And, similar to the HSA, an HRA can encourage employees to 1
become more aware of their health care expenses and help lower plan costs, generating additional savings for the employer. What Is An HRA? An HRA is an account that is funded solely by employers. A typical plan design might provide an HRA fund of $500 for a single enrollee and $1,000 for a family enrollee. The funds are used exclusively to reimburse employees for qualified medical expenses, before their deductible kicks in. Once the HRA is depleted, all other qualified medical expenses are applied against a deductible, typically $1,500 for single enrollees and $3,000 for a family enrollee. Here s how it works: Let s say an employee who is a single enrollee incurs a $500 medical expense. If he has $500 in his HRA account, he would be reimbursed for the full $500, leaving his HRA balance at $0. If the same employee later incurs a medical expense of $150, this would be applied to his $1,500 deductible, along with the $500 reimbursed from his HRA, reducing the deductible to $850. Unused HRA balances may be rolled over from one year to the next. Similar to HSAs, preventive health care services are covered on a first-dollar basis by the underlying plan therefore, HRA funds would not have to be used to pay for preventive care. Unlike HSAs, prescription drugs are not required to be subject to the remaining deductible in an HRA. However, it makes sense to design the plan with this requirement, as it may help increase utilization of formulary drugs, encourage use of generics, and help reduce discretionary prescription usage generating additional cost efficiencies. employer giving employers control of the funds. And while an HSA is a funded account, HRAs are an unfunded liability. Money is wired to accounts on an as-needed basis. And whereas HSA accounts are portable, HRA accounts stay with the employer, an important benefit for employers with high employee turnover. Both HSA and HRA plans must be offered with a highdeductible health plan. But while the Department of Treasury dictates minimum deductibles and maximum outof-pocket limits for a high-deductible health plan that permits contributions to an HSA, an HRA is not regulated by the government, so employers may have more flexibility in designing an HRA-based plan design. In the HSA model, employees must meet the deductible first, before most medical expenses (excluding preventative care) are paid. An HRA plan, on the other hand, reimburses employees for qualified medical expenses on first-dollar basis, up to the amount in their HRA account. If and when the HRA fund is depleted, employees qualified medical expenses are then subject to the predetermined deductible. The Effects Of Future Regulations On HRA And HSA Policies High-deductible health care plans and policy regulations are still evolving, so there may be modifications in some plan restrictions down the road. For example, Rep. Eric Cantor, (R-VA) has proposed legislation that would allow the use of HRAs and FSAs with high-deductible plans and HSAs. His proposal would also allow enrollees to fund HSAs up to the limits defined by the Treasury Department without being subject to the current deductible limit maximums. Under an HRA arrangement, the employer owns the HRA and has greater control over use of the funds. Also, if an employee quits, the HRA funds revert back to the employer. Last but not least, employers may have additional flexibility in determining a plan design, since they are not held to a government-mandated plan design. How Does The HRA Compare To The HSA? Employers may have several distinct advantages with the HRA. Unlike HSA accounts that are funded by employees and/or employers, HRA accounts are funded solely by the 2
HSA Vs. HRA: Which Plan Is Right For Your Organization? HSA HRA Can only be offered with a high-deductible health insurance plan, as defined by the Department of Treasury. Can be offered with a high-deductible health insurance plan. Employer contributions must be funded. Can be an unfunded liability under most insurers HRA plans, funds are wired on an as-needed basis. Controlled by the employee. Controlled by the employer. Portable moves with the employee. Not portable stays with the employer. Can be used for any medical service covered under Section 213(d), including such nonessential services as laser vision correction. Employers can limit services to those usually covered by a traditional managed care plan excluding services such as laser vision correction. Cannot be offered along with a Flexible Savings Account (FSA) under current regulations, unless it meets certain criteria. Can be offered along with an FSA, allowing employers to pass on savings via lower payroll deductions, and to encourage enrollees to put all or part of that money in an FSA to help fund out-of-pocket expenses for deductibles, coinsurance, etc. Favorable tax benefits for both employers and employees. Favorable tax benefits for employers. Encourages employees to make informed choices about health care services in order to limit their out-of-pocket expenses and increase savings for retirement health care costs, helping to lower overall plan costs. Encourages employees to make informed choices about health care services, using their HRA fund wisely, helping to lower overall plan costs. Unused HSA balances are carried over from year to year. Funds are available to employees for use in the future. HRA balances are carried over from year to year. Funds are available to employees for use in the future. Employers may eliminate or limit amount of funds to be rolled over into subsequent years. Employees and employers determine contribution amounts; total contribution amounts for both employers and employees are limited annually. Employers determine funding amounts. 3
Putting It All Together What s Right For Your Business? For any organization that is evaluating its health care programs, it s important to consider that high-deductible health plans coupled with HSAs are not the only option; other alternatives, such as the HRA, may offer employers more flexibility and control. At, we can help you determine your organization s readiness for consumerdirected health care and work with you to develop a longterm strategy to determine which option is right for you. has the resources, experience, and knowledge to help you design, implement, and communicate consumer-directed health plans to your eligible enrollees, including Wells Fargo Member Service a special call center dedicated to assisting enrollees with questions about their benefit plan. If you would like more information regarding consumerdirected health care, please contact your local Wells Fargo Insurance Services professional. 4