HRAs: A group health plan solution that could be right for you

Health Reimbursement Arrangements (HRAs) are quickly becoming another solution to the increasing cost of employer- sponsored group health plans. As health care premiums have continued to rise at double-digit rates, many employers have been forced to reduce benefits, shift more of the cost to their employees or drop their coverage completely. Employer groups and the insurance industry are constantly seeking alternative methods to contain premium costs and maintain a viable employee benefits program to attract and retain employees.

The HRA became effective June 26, 2002. The most common HRA plan design partners with a high-deductible medical plan. Preventative care benefits (usually includes a complete physical examination, select blood and urine tests and an EKG) are usually paid on a "first dollar" basis, that is, not subject to the plan deductible. Each employee can access the HRA to be reimbursed for out-of-pocket medical expenses that may include deductibles, co-payments and prescription medications.

Each employer establishes their HRA with a plan document. The employer determines the amount of money available in each employee's HRA for the coverage period. The employer also decides the specific types of expenses which can be reimbursed. The employer reimburses employee claims as they are incurred; therefore, the employer is not required to prepay the fund accounts. The decision to have funds roll forward from year to year and how much rolls over is also decided by the employer in establishing their plan.

Employers can deduct the cost of funds placed in an HRA in the same way they can deduct the cost of the insurance plan premiums. This is an allowed business expense under IRS Code 162. Reimbursements claimed by the employee are tax free, provided they are linked to the qualified health care expenses as set forth in the plan document.

The savings strategy for the employer is to change his or her core low deductible, low co-payment plan to a design that will now incorporate much higher deductibles and copayments. This results in an immediate reduction in premium expense. At the same time, the HRA is established to help fund the higher deductible that must be met before the insurance benefit can begin. As part of a consumer-directed health plan (CDHP), HRA members now have a financial stake in how their health care dollars are used.

One major national health insurer found that its new HRA employer group customers experienced low, single-digit medical rate renewals after their first year of adopting the HRA design. This was significantly below the industry average. At the same time, preventative care utilization was increased by as much as 23 percent, compared to eight percent for similar members. Typically, with 100 percent coverage of preventative care upfront, HRA members can obtain the quality of care they are seeking. Concurrently, the level of consumer awareness of the real costs of health care has increased. This provides members with greater decision-making control over their health care spending. Research clearly has demonstrated that total health care spending is reduced when consumers bear more financial responsibility for their health care expenditures.

Which plan is best for your employer group? Contact your agent or consultant to have a cost/benefit analysis performed. Firms of any size can establish an HRA program. You, as the employer, can tailor benefits to suit different types of employees' medical needs. To encourage wellness and preventative care, employers might stipulate a portion of the HRA as forfeited if not used with the benefit year. The flexibility of plan design and potential cost savings may just be the solution you are seeking.

Jim McDonnell, CBC, is a principal at the Ford Insurance Agency in Traverse City. He is a three-year member of the Leading Producers Round Table of the National Association of Health Underwriters. He also holds seats on the BCBSM Agent Advisory Board of NW Michigan and also belongs to the BCBSM Managing Agents Executive Advisory Board; 231-941-0450. BN