will
likely continue to escalate in 2007 and beyond. That’s the
prediction of most employers and employee benefit specialists
around the country. It follows then that the need to control or
slow down those health care cost increases is also growing every
year.
“That’s true for the Jan/San industry as well as
any other industry,” according to Chris Kramer, vice president
of Diversified Benefit Services, an employee benefits consulting
and administration firm in Hartland, WI.
A recent survey found that premium increases
approaching 12 percent in 2007 are expected. That’s an
improvement over recent
years’
increases, he says, but employers are struggling to maintain a
quality health plan in the face of those double-digit increases.
Many employers have implemented Health Savings
Accounts (HSAs) and Health Reimbursement Arrangements
(HRAs)
to control those costs and soften the impact of plan design
changes, says Kramer.
“HRAs are an important answer to rising health
insurance costs, which are in part caused by the
over-utilization of
health
care by some employees covered by medical plans. That’s not the
only driving force, but it is a significant one because it goes
directly to the cost of health care packages. Important
considerations are how medical benefits are used and if they are
being used wisely,” he says.
The HRA is not a silver bullet—but it is a
better way to take aim at the problem, Kramer maintains. “HRAs
are beneficial because employers can direct how the HRA health
care dollars are spent. This is an incentive for employees to be
more discerning consumers of healthcare, which can potentially
help to control those rising insurance costs. The plans are also
beneficial because of the numerous plan design options that are
now allowed.”
Under Section 105 of the IRS Code, employers can
reimburse employees taxfree for medical expenses if and when
they incur them. “Organizations of all sizes have incorporated
higher deductibles and co-insurance amounts into their health
plan design to lower the premiums.
They then implement an HRA that reimburses them
a portion of the deductible or co-insurance if the employee
incurs the expense.”
The big word is “if”, Kramer maintains. “Monies
are only reimbursed if the employee has the expense. If they do
not, the monies stay with the employer. Statistically, most
employees are not high users of health insurance, so many times
the employers’ premium savings is larger than the amounts
reimbursed.”
“With HRAs, an employer can have any type of
health insurance plan design. It is not regulated by the
government,” he says. “Each year the employer can change the
reimbursement parameters under the HRA. We have seen many
employers raise the deductible or co-insurance each year to
temper their health insurance renewal increases. Others have
implemented an HSA qualified health plan but implemented an HRA
instead of the savings account. The employer and employees reap
the rewards of the lower insurance premium and the employer is
assured their dollars are only being used for qualified medical
expenses. The flexibility of the HRA and the fact that they
control the HRA dollars are attractive to employers of all types
and sizes.”
HSAs were created three years ago to provide
people with more control of where healthcare
dollars
are spent, he says. “The basic premise? An employer purchases a
health plan with a high deductible. Because of the high
deductible, the insurance coverage costs less than traditional
plan designs. The employer and/or employee then contribute money
into a tax preferred HSA to cover the persons’ health care
expenses. If he/she doesn’t utilize the money, it rolls forward
to the next year.”
Kramer explains that monies in an HSA are held
in an individually held tax-exempt trust, where the dollars are
owned by the employee. This provides incentive for people to
become better consumers of health care since they can keep any
unused dollars.
“There are important medical plan design
requirements that cannot be overlooked in an HSA. To be
eligible, a person must have a specific level of deductible. In
addition, all medical care covered under the health plan must be
applied toward the deductible with the exception of preventative
care. Medical care includes prescription drugs and office
visits. This type of insurance design keeps the premium more
affordable but it is also one of the biggest complaints we’ve
seen from participants as they are now paying for these services
as they meet their deductible.”
According to Kramer, another challenge is the
fact thatsome people are poor savers. “Switching to an HSA plan
may lower the premium paid for health insurance on employees’
paychecks, but, like retirement plans, if they don’t save a
little, they’ll be in for an unpleasant surprise down the road.”
Kramer has seen a growing interest in HSAs by
employers, yet at the same time many do not feel HSAs are fit
for their employees. One of the big reasons, he says, is that
under an HSA, all employer contributions are owned by the
employee. The HSA participant can withdraw the money for
non-eligible health expenses (they must pay taxes and a penalty
on the monies). Employers do not like the idea of their money
being used for non-health care expenses.
“Employers have liked the basic concept of the
HSA (implement a higher deductible to lower the premiums).
Because of this, we have also seen a tremendous increase of
interest in Health Reimbursement Arrangements (HRAs).”
One of the biggest employer concerns with HRAs
and HSAs, according to Kramer, is that they are too difficult to
communicate. “This isn’t so. The hardest part is for the
employer to understand the rules and regulations of both plans
and then decide which is the best fit for their organization.
Once the plan is designed, it’s rather simple to communicate. It
does take time to communicate adequately, but it’s well worth it
when employees learn how to use the program effectively and
understand the true costs of health care.”
These are some of the things to consider when
contemplating whether to adopt a Section 105 HRA plan for
employees, says Kramer. “The bottom line is this: HRAs finally
provide employers with an opportunity to better manage rising
health-care costs while preserving choices for employees.
Consideration of an Section 105 HRA plan should be a part of the
benefit planning process for all employers because of the
numerous plan design features combined with potential cost
savings and tax advantages.”
