By Mike Pattison, Assistant Vice President, Employee Benefits
A long-time client recently asked me for help after receiving a renewal notification that showed a 22 percent premium rate increase for the company’s health insurance plan. The business owners faced a common predicament: either pass along the higher costs to employees, putting the plan out of reach for a large number of workers, or offer a high-deductible plan that would require employees to pay thousands more out-of-pocket for medical care. Fortunately, we were able to keep the plan cost low and still provide employees with affordable coverage through a Health Reimbursement Arrangement (HRA), resulting in a win-win for the business and its valued team members.
The HRA Makeover
A Health Reimbursement Arrangement, also known as a Health Reimbursement Account, is an employer-funded add-on to a standard health insurance plan that can make an otherwise ugly high-deductible plan far more attractive. The employer sets aside funds in the HRA to cover the plan deductible or other costs, such as coinsurance and copays, on behalf of employees. In this way, the company is able to offer a high-deductible plan to keep premiums low, without burdening employees with high out-of-pocket expenditures or limiting their access to healthcare.
In the client scenario described above, the proposed premium increase meant an additional $160,000 in medical costs that the employer either would have to absorb or pass along to the company’s 60 employees. With this in mind, we calculated the company’s expected exposure to determine how much to fund in the HRA. Rather than renew the firm’s existing healthcare plan at the higher premium rate, we replaced it with a plan from the same carrier that had lower premiums but required a $6,000 deductible. (The previous deductible was only $3000.) Since typically no more than 10 percent of employees have significant medical expenditures in a given year, we set aside $20,000 to fund reimbursements for out-of-pocket expenses, such as surgeries, diagnostic imaging and hospital stays. As a result, premiums stayed the same for employees, and the company absorbed the burden of the higher deductibles. The employer only was responsible for $20,000 in anticipated medical costs, and saved $140,000 by combining an HRA with a high-deductible plan.
A Fresh Alternative
Although larger employers have used this strategy for some time, HRAs are becoming increasingly popular with small and mid-size businesses that have 50 employees or more. Rather than shopping multiple carriers or offering employees a choice between an ugly high-deductible plan and a Cadillac plan, adding an HRA lets the employer offset healthcare costs without taking anything away from the employees.
An HRA also gives employers near limitless flexibility, in terms of how to structure the reimbursements. The company can determine where to set the deductible, and which medical costs to cover, from prescriptions to copays. Employers also can combine an HRA with a traditional insurance plan that includes a Health Savings Account (HSA). The concept is the same, in that the employee benefits program offers a high deductible health plan that has lower premium costs together with an HSA that lets employees put away pre-tax money for qualified medical expenses. The HRA is used on the back end to fund anticipated medical expenditures keeping the plan H.S.A. compatible.
The Right Structure
Of course, even the best solutions often come with a catch. The downside to the HRA model is that it requires more administration. Most employers work with a third-party administrator to process claims and, if necessary, employee reimbursements for medical costs paid for out of pocket. Employers typically pay a small administrative fee around $5 per employee per month, which is negligible in comparison to the amount that can be saved by implementing an HRA.
The other drawback is that business owners generally are not eligible to receive reimbursements. Although they may have to take one for the team in this regard, the big picture reality is that only a small percent of the employees max out their deductibles, and the business will save thousands of dollars through the Health Reimbursement Arrangement.
Many less experienced brokers are not familiar with HRAs, and some companies choose the path of least resistance by simply offering an inexpensive, high-deductible healthcare plan and a Cadillac plan. Still, many business owners recognize the importance of offering a strong benefits plan to recruit and retain top talent, and ensure that their employees stay healthy and productive. Our employee benefits experts at Marsh & McLennan can conduct a needs assessment to help determine whether an HRA is right for your business. We help you project the cost of future reimbursements in comparison to the premium savings you can achieve by combining a high-deductible healthcare plan with an HRA. We can also structure the plan design to incorporate additional cost-savings by bundling in the HRA rate with medical plan withholdings.A Health Reimbursement Account is not right for everyone, but it’s an option that I recommend every group explore to offer the best healthcare plan at the least expensive price. This simple tool can save your business 20 percent or more on insurance premiums, and provide a win-win for your company and employees. To learn more about the benefits of HRAs and other employee benefits solutions, please give us a call.