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.