Diversified Benefit Services: Employers Fighting Rising Costs of Health Care With HSAs, HRAs

Hartland, WI 53029

Contact: Chris Kramer, 800-234-1229

or Jordan Fox, 414-352-2645

(Hartland, WI, Feb. 19, 2007–) Health care costs will likely continue to escalate in 2007 and beyond. But there’s something employers can do about it, according to Chris Kramer, vice president of Diversified Benefit Services, an employee benefits consulting and administration firm in Hartford, 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.

“To control those costs and soften the impact of plan design changes, many employers have implemented Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs),” 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 tax-free 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. “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 that some 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-are 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.”

DBS, under the leadership of Tim Pederson, president, has been designing and administering Flexible Benefit Plans, HSAs, FSAs, and other unique employee benefit plans for more than 20 years.