Between rising healthcare costs, changes to community ratings and healthcare reform efforts, there’s no question the employee benefits landscape is continually changing — and keeping the hands of benefits managers full.
With all these changes, employers need to think creatively when it comes to building and administering their health plans. While consumer driven plans and health reimbursement accounts are not new, they are becoming much more commonplace and their importance is now greater than ever. HRAs, in particular can help employers create a self-insurance plan for their employees and maintain rich benefits.
HRAs help employees pay for medical expenses before a deductible is met. They’re essentially employer-funded group health plans that reimburse employees for medical expenses up to a certain dollar amount. Employers fund and own the accounts — which means they get to keep all savings and any unused funds. HRAs can help employers in a number of ways.
A first step toward self-insurance
One of the many changes we have seen over the past few years is a growth in the self-insured marketplace. While in the past self-insurance was only for the larger, cash-rich employers, more and more mid-market businesses are now looking into it in order to cut cost and regain control of their benefits.
For businesses that can’t self-fund, are not yet ready to move to a self-insured plan, or are looking for a way to just dip their toe in the water, HRAs are a great alternative and option. HRAs allow businesses to self-insure only a small portion of the healthcare plan (copays, deductible, pharmacy benefits, etc.) while still seeing substantial savings and having access to detailed claims information.
Maintaining rich benefits and combatting community rating
Since community rating rules have expanded in some states, small to midsize employers have been forced to conform to “metal tier” plans — bronze, silver, gold and platinum — that determine how costs are split. Companies no longer have the opportunity to customize benefits and offer low copays and a high hospitalization rate or high copays and a low hospitalization rate, for example.
Besides the cost-saving mechanism, HRAs enable employers to keep their plan creativity. This translates into a customized benefit plan design that fits a company’s needs at an affordable cost.
How HRAs work
Consider a 200-life group called “H-Corp.” H-Corp offers rich benefit plans with $20 office and specialist copays and a $1,000 deductible. H-Corp pays $1,500,000 annually for their benefits.
The company decides it is spending too much on healthcare and seeks a way to offer the same benefits while lowering the annual cost. H-Corp’s insurance broker recommends a plan with a $50 copay and a $3,000 deductible, which would reduce their annual spend to by $500,000. In order to keep the same benefits, H-Corp implements an HRA to reimburse employees for the difference in copays and deductibles. Based on the last three years, H Corp predicts their HRA claims to be $100,000 to $150,000. Therefore, using an HRA translates into a $350,000 savings for the exact same benefit plan.
Here’s another scenario: A 90-life group in New York, “B-Corp,” was manually rated last year but this year was forced to lay off 10% of their workforce, moving them into the community-rated pool. Their employees are accustomed to a certain level of benefits and while B Corp wants to maintain as much continuity as possible, none of the metallic tiers are close to what they currently offer. The company could consider choosing a bronze or silver plan and use an HRA to build the plan back up to a level closer to their current offering.
What to watch out for
There are some pitfalls in administering an HRA. Because an HRA is a self-funded plan layered over a fully insured plan (rather than a reimbursement plan), all self-insured guidelines apply. For example, self-insured employers, as well as all insurance issuers, must help fund the Patient-Centered Outcomes Research Institute by paying the PCORI fee. Employers administering HRAs must also abide by nondiscrimination rules. Most employers work with a third-party administrator to pay claims, handle fees and ensure compliance.
It’s vital for employers to ensure HRAs are being administered properly to avoid penalties. But as health insurance costs continue to rise, HRAs are becoming a more popular way to control costs and provide a level of benefits that employees will appreciate.
