HRA vs. MSA

[Guest deacon]

Could someone explain the difference between a Medical Savings Account and the new Health Reimbursement Accounts. With an employer who currently payroll deducts for employee coverage, to implement an HRA, the employer would have to eliminate payroll deductions and raise the deductible. For example current deductible is $400 with 80%/20% coinsurance, the employer would raise the deductible to $1,000. How would the employer (with 300 employees) cut costs unless all employees were healthy and did not use the full amount (this is unrealistic). Could someone provide an example of how an HRA would work.

[mroberts]

I don't know all the intracacies of each, however, I do know that MSA's are going to only be for groups less than 50 lives and have to have a certain plan design with respect to the deductible and out-of-pocket maximum. HRA's, on the other hand, can have a lot more options for plan designs and can be rolled out to any employer regardless of size.

[Guest Carma Christensen]

My company is looking into this as we see several advantages with the HRA. An MSA requires a high deductible, which may or may not be offset by employer contributions. Many employees are nervous about a high deductible and the fact that they are responsible for first-dollar coverage. An HRA allows for the employer to determine the health insurance coverage, in addition to allowing payment for items not always covered by insurance, like eyecare or dental.

Another plus is equalizing employer contributions--should the single employee be compensated less in employer contributions than the employee with family? The HRA allows employer contributions to be fairly allocated to employees based on non-discriminatory elements like tenure, with the employees benefiting equally; the single employee can pay his insurance premium and have money left over while the employee with family may end up subsidizing the premium. But at least it's fair.

There are still issues we haven't resolved, and we're a little nervous about jumping in when even the consultants are giving us contrary advice, but we think the HRA concept could be of real value to our company.

[mroberts]

Carma - have you explored any of the caveats in the HRA plans you've looked at? At first I was on the HRA band wagon, however, upon really reviewing them, I'm not so high on them. How many employees is your company? Are you looking at a full takeover plan for the HRA or are you going to offer it side by side with a conventional managed care product. What are the advantages that you feel and HRA provides?

[Guest Carma Christensen]

The main caveat I am aware of is the possibility of "double benefit" like Flex or COBRA, and while that is disquieting, it seems companies are dealing with it. Our company has about 35 employees and is profitable--the owner looks for opportunities to provide tax-free compensation where she can. We like the idea of not being liable for the entire elected amount before payment (like the Flex) and we like the thought that we can decide what to do with unused benefits. I must be missing something--Please enlighten me!!

[Guest Carma Christensen]

Sorry--didn't answer the whole question. Our thought was to provide a moderate health insurance plan per our discretion and provide all employees with enough contribution to cover employee w/children premiums plus an additional amount as profitability dictates.

[mroberts]

The main caveat is communicating the plan to your employees. It's not a very easy concept to grasp and I even see people in the consulting area having a tough time with the concept. And these are the people that deal with benefits!

The bottom line is that 15% of people make up 78% of the medical claims. Most of these claims dollars go towards catastrophic illnesses or injuries such as AIDS, cancer, transplants...... There just isn't going to be any consumerism when it comes to these types of claims. If I have cancer, the last thing I'm going to be thinking about is which hospital is going to be the least expensive overall. Therefore, what you're really looking at these HRA plans to do is control the other 22% of claims that have a chance to be geared towards consumerism. For a group your size, even if all 22% of these claims can be reduced, which definitely won't happen, what kind of savings will you be achieving?

[Guest Carma Christensen]

I think the main issue is choice and equalizing company contributions. I see it possibly rewarding those who are healthy. After many years of good health, my husband had cancer last year. A few thousand dollars of "held-over" benefits would have been a real blessing to us. I just put an employee on disability, recognizing that the future will involve many medical expenses when he can least afford them. I agree with your approach to the "consumer-driven" aspect--many expenses just aren't negotiable, but for the healthy or prudent, future benefits could be of value.

Communication--now there's the rub-especially with my construction crews!! And we're a little worried about Davis-Bacon compliance. So there are still lots of issues out there.

[mroberts]

I like the idea that if you've been healthy for several years it will come back and help you as well. The only thing about some of the major catastrophic claims is that even with several years of rolling your bank over, an employee is still going to hit that corridor deductible regardless. For example, a cancer claim could run $70,000 plus. So even if we were talking about a single employee given a $1000 for his bank each year, it would take him 70 years of savings to avoid that deductible.

Obviously that's an extreme example, however, that concept is somewhat embedded in the managed care system we have today, especially for companies that have a PPO. I think a strong wellness program could be a lot less confusing and a lot more beneficial in the long run. Everyone knows that going to the gym is a good health initiative. Everyone knows smoking is bad. Therefore, it's not hard for employees to understand why you would give them a free gym membership or invite a nurse out to counsel any smokers. If companies can focus on making their employees healthier without focusing solely on preventive care, since that only goes so far, I think both companies and their employees will be more satisfied in the long run.

[Guest Carma Christensen]

So maybe there's something I don't understand. We were not considering a high deductible plan, so health insurance would still pay catastrophic and most of regular medical. So why is the deductible an issue?(and incidentally, the idea of the health club rocks!) But under an HRA there's a chance it might be pre-tax for the employee where it wouldn't otherwise. Is that right? I'm still looking for a better understanding.

[mroberts]

What I am basically saying is that a $500 deductible PPO plan and an HRA that gives individuals a $1000 per year which can roll over is going to pretty much be the same in the long run, especially for a group your size. If you would like to discuss further, shoot me an email with your number and I'll give you a call. It's hard presenting everything in a message board without spending hours typing.

[Guest Rae Posey]

deacon-

This is long but maybe it can shed some light on your issue. Actually it looks as if you may have a few very common misconceptions of HRA's.

For detailed differences between HRA's and MSA's, please see the attached comparison sheet.

Also, contrary to what people may be hearing, HRA's do not require any changes to your current benefit plan, including payroll deductions, plan design etc...yes this includes deductibles! Although many consumer driven programs require complicated changes to networks, TPA's and plan design (including implementing a high deductible), these changes are not required by the IRS, nor are they necessary to make the plan successful.

I will attempt to explain the major mechanics of the HRA as best I can:

The employer might start by determining the average medical cost per employee per year ...let's say it is $5,000.

The employer then decides to let the individual employees "manage" say $1,000 of that expense by establishing a HRA. (The account does not have to be funded up front.)

Now the employee has the responsibility for how $1,000 of their health dollars is spent. The employee receives educational materials to help them purchase health services prudently.

If the employer chooses, they may retain the current plan design, TPA's and networks. Meaning, the employee will have the same deductible as before they had the HRA. Their co-payments will remain the same etc.

At the end of the specified year, any unused portion of the HRA may be rolled over for use on qualified medical expenses (IRC 213(d) in subsequent years.

Effects on the employee and employer:

When the employee visits a physician, the employee pays the co-payment (or deductible if applicable) as usual at the point of service. The remainder of the bill is deducted (reimbursed) from the employee's HRA. If the employee uses the entire HRA, their claims will still be paid as usual. This only means the employee will not have funds to roll over for future health expenses this year. Meaning that the program does not cost the employee more out-of-pocket than they would have paid prior to having the HRA (in case they have a poor health year).

The HRA saves money for the employer by reducing overall healthcare expenses since now the employees are exposed to the true cost of care and are sharing in savings. They see how the medical costs effect their balances and look for ways to cut costs. Also, when wellness and preventative programs are implemented the workforce will be healthier and happier, reducing absenteeism. Also, rollover balances may or may not ever be spent. If the employee terminates employment for example balances may be forfeited.

Hope this helps.