Increasingly, employers are turning to consumer-driven health plans to rein in rising medical benefit costs. Consumer-driven programs shift some of the responsibility for managing health costs to employees.
Often called Health Reimbursement Accounts (HRAs), the plans require the setting up of company funded expense accounts. Typically, employers put about $1000 to $2000 into each account. Employees, who manage the accounts, use the funds to buy health services and prescription drugs.
The thinking behind HRAs? The vast majority of workers don’t spend more than $2,000 a year on their health needs. Says Chris Delaney, marketing director at Definity, a consumer-driven plan provider: “For about 75 to 80 percent of Americans, that personal care account is going to be enough.” If employees stay within their account limits, they have no co-pays or deductibles.
Usually, plan sponsors supplement an HRA with a high-deductible medical plan, with annual employee contributions ranging from $1000 to $1400. Those deductibles kick in only when an employee’s HRA has been tapped. Once the deductible has been met, the coverage then rolls over into a traditional PPO (preferred provider organization) plan.
Some corporates see HRAs as a low-cost alternative to health maintenance organizations (HMOs). And employers say they need some alternatives to those plans. Once considered the solution to high corporate health-care benefit costs, HMOs have started to get pretty pricey of late. The trend doesn’t appear to be reversing any time soon, either. According to consultancy Hewitt Associates, premiums for HMO plans will increase an average of 22 percent in 2003.
Certainly, HRAs incent employees to spend their healthcare dollars judiciously. Because workers face a high deductible when an HRA is tapped, there is compelling reason to the stay within the preset spending limits “The power of the account is that it makes employers think harder about whether they should take a generic versus a brand name drug,” says Delaney, “and whether they really should be using emergency rooms, for example.”
Since employees can often roll over unused health reimbursement account funds for use in future years, some observers believe HRAs help employers hold on to prized workers. “Most of our members roll over money each year,” says Delaney. “In average years, they can save for the rainy days when their health is not so great.”
This is not to say that health reimbursement accounts don’t have drawbacks. HRAs will never be confused with IRAs, that’s for sure. While most companies don’t impose a cap on the roll-over from year to year, employees can’t take any left-over funds with them if they jump to a different company.
In addition, employees who unexpectedly experience serious health problems can find themselves woefully under-covered. “I would not ask my employees to abandon their PPO and HMO options in favor of an HRA,” says Jon Kessler, CEO at consultancy WageWorks. “If they’re wrong about their estimated annual health-care expenses, they’ll face serious financial hardships.”
So what’s the attraction of HRAs for workers? Well, for starters, if an employee leaves a company, any leftover funds in an HRA can go toward COBRA payments. Beyond that, money in a health reimbursement account can be spent on services that traditional plans don’t generally cover — things like physical therapy and alternative medical treatments. Moreover, since an HRA is treated as a benefit and not compensation, it reduces an employee’s overall tax rate.
Whether HRAs actually cut health-benefit costs remains to be seen. The plans are so new that it’s hard to assess their effectiveness. But employers seem to like them. “Many more employers are going into this type of plan,” says Leslie Schneider, a consultant at HayGroup. “There’s lots of interest.”
Still, Schneider concedes many employers are taking a wait-and-see approach to HRAs. “The reported savings thus far are around 7 to 8 percent annually,” she claims.
For his part, Delaney asserts that renewal costs for HRA plans for next year are actually 7 percent to 10 percent less than the premiums for 2002 — a far cry from the double-digit increases expected for traditional managed care plans. The growth in Definity’s client base certainly would seem to indicate growing corporate interest in HRAs. Definity started off with three clients in 2001; it now has 60 clients, including twenty Fortune 1000 companies.
Budget-Rent-A-Car, for example, has approximately 650 employees (out of 7200 total) under Definity’s HRA plan this year. “The employees that are in it have been very receptive and like the plan,” says Chris Lanning, head of HR at Budget. “It has really helped us turn our employees into more conscious consumers of health care.”
Lanning estimates that his company will save about a $1 million this year with Definity’s HRA plan. And that estimate assumes that employees will spend all their HRA dollars without rolling over any of the funds. Lanning underscores the cost advantages of an HRA over more traditional plan structures. “Our HMO is costing us $1000 more per employee this year than the HRA plan,” he claims.
Budget provides its individual employees with a $750 personal care account for covering health services and prescription drugs. The account does not cover non-traditional expenses such as acupuncture, alcoholics anonymous, and laser eye surgery. Once the account has been exhausted, the employee is responsible for the next $1000 of health-care costs. It then rolls over to a PPO plan that covers 100 percent of costs within network and 60 percent out of network.
Even workers who took a haircut with their HRAs this year at Budget seem to like the reimbursement account concept. Says Lanning: “The employees who lost out on the plan this year are calling to sign up for next year.”