HSAs Vs HRAs –Self Funding Byline
Jan 12, 2012
The past few years have been tumultuous for both the economy and healthcare industry – and it seems it is not over yet. With unemployment hovering around nine percent – and many taking jobs that pay less than their previous employment -health insurance is becoming a luxury item for both employers and employees ashealthcare costs rise faster than the cost of living.
The Kaiser Family Foundation and the Health Research & Educational Trust’s 2011 Employer Health Benefits Survey found that workers’ contributions to premiums have risen to $15,073, which is nine percent higher than 2010. For this reason,employers see consumer driven health plans, which have proven to lower costs,as a way to continue to offer benefits.
A new multi-year study of healthcare claims of 655,000 CIGNA customers shows that as overall medical costs continue to jump annually, medical costs for individuals in account-based consumer-driven health plans (CDHPs) actually went down 26 percent over four years.Similarly, the Kaiser Family Foundation survey found that average premiums for high deductible health plans with a health savings option are lower than the overall average for both single and family coverage.
The new consumerism, which givesan employee "ownership" of his or her healthcare, seems to have the largest positive impact in recent years on lowering healthcare costs. Managed care plans led to a disconnect between the cost of health insurance and an employee’s perception. The average employee had the impression that they hadalready paid for their healthcare via premiums and, therefore,were free to use as many services as the plan offered. This rationale led to wasteful spending on healthcare services.
To control spending – and remedy this costly misperception- many employers are now offering a consumer-driven health plan, including a high-deductible plan (HDHP)with a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA) all available on a convenient debit card. These pre-tax account-based plans offer tax breaks to employers and employees alike. And employees now feel the direct impact of their spending decisions where it counts the most – their wallets.
The numerous studies conducted on the issue continually find that CDHPs provide quality healthcare at substantially lower costs – and are now catching on in popularity. In fact, twenty-three percent of firms that offer health benefits offer a HDHP – up from 15 percent in 2010.
Growth of HSAs and HRAs
While there is no single source to turn to for data on these account products, it is safe to say the number of HSAs and HRAs nationally, is on the rise. Some industry insiders predict HSAs will overtake HRAs in the years to come, but at this point in time both seem to be growing at an equal pace.
In order to determine just how many HSAs and HRAs are in use today, it’s best to examine various industry surveys and data points. The growth rate of these account products continues to be strong.
The number of people with HSA/HDHP coverage rose to 10 million in January 2010, up from 8 million in January 2009 and 6.1 million in January 2008, according to the AHIP Annual Consensus of Health Insurance Carriers. And the 2011 Kaiser Family Foundation survey shows that 17 percent of covered workers enrolled in an HDHP with a savings account, or savings option, compared to only eight percent in 2009.
Large corporations too are responding to growth – and subsequent market demand. J.P. Morgan Treasury Services, one of the largest administrators of HSAs in the United States, recentlylaunched an HSA broker programwhich will provide brokers and third party administrators (TPAs) with a dedicated service and support unit.As of January 2011, HSA Bank has now surpassed $1 billion in Health Savings Account deposits, with the president of the organization noting the significance of this milestone for the industry as a whole.
As HSAs and HRAs continue to be two popular pre-tax account products, there are a number of pros and cons of each that employers and employees need to consider to determine which is best for their needs.
Pros and Cons of HSAs
The newest and most widely publicized option, HSA, offers a triple threat. First, money deposited is pre-tax; second, it grows tax-free in the account; and third, it can be withdrawn tax-free for medical expenses at any point in life.
Similar to an IRA, funds deposited into a HSA can be invested into a wide variety of high interest-yielding investments, such as stocks, bonds, CDs, and money market accounts. Funds deposited into the HSA can be retained as cash in the account and readily accessible for use when the HSA holder wishes to use them to purchase qualifying health care services or products. Worth noting, interest earned on HSA accounts is not subject to federal income taxes.
This is an employee-friendly account, in part because all money accrues to employees – and is portable if the employee leaves the company. HSAs aren’t always the first choice with employers, however, because they have no control over the funds.The largest downside to an HSA is that it can only be sold in conjunction with a qualified high-deductible health plan. To cover these high-deductible costs, employees can put pretax money into an HSA – up to $3,050 for individuals in 2011, $6,150 for families, plus $1,000 more if participants are 55 or over.
High-deductible plans and HSAs can make sense for both the young and old alike. Young people,who generally tend to be healthier, can save money and build their HSAs over the long term by paying lower premiums because they don’t need as much care. Similarly, older individuals can use an HSA to pay for healthcare out-of-pocket costs and supplementa nest egg. Even in retirement, the funds can be tapped tax-free for medical expenses and long term care insurance premiums.
Pros and Cons of HRAs
HRAs offer another, more employer-friendlyoption – a tax-advantaged accountwhich allows both employees and employers to save on the cost of healthcare. Of particular interest: all employer contributions are 100 percent tax deductible to the employer and tax-free to the employee.
Employers typically set aside a specific amount of pre-tax dollars for employees to pay for healthcare expenses on an annual basis and generally determine what medical expenses will be covered under the HRA. While HRA plans are flexible, the primary requirements for an HRA are that the plan must be funded solely by the employer–and not through a reduction in salary – and thatthe plan may only provide benefits for substantiated medical expenses.
The employer can also control how much of the unused balance in an HRA can be carried over from one year to the next, and these funds are also not portable. If an employee should leave the company, he or she would forfeit all money in an HRA account – another large differentiator with an HSA.
Depending on how the employer sets up the plan, expenses that may be reimbursed include deductibles, co-payments, prescriptions, and other out-of-pocket health-related expenses.
Simplifying Account Access
It should be noted as well, that while accounts like HSAs and HRAs are beneficial to consumers, having convenient tools to access these accounts provide an additional benefit. Benefit debit cards, for example, allow participants to simply swipe their card at the point of care and funds are automatically deducted from the right benefit account(s) for payment. Cards eliminate most out-of-pocket cash outlays and paper claims, as well as the need to wait for reimbursement. This convenience and improved cash flow leads to increased enrollment, contributions, and FICA savings for employers.
Further underscoring the popularity of cards, Celent consultants issued a report that found multipurse and multifunction cards will increase to approximately 18 million on the market in 2012 – up from only six million on the market just four short years ago.
Additionally, benefit cards allow consumers to decide how to use and spend the dollars in their HSA or HRA – as opposed to a plan that only allows for automatic rollover which automatically debits the employee’s FSA or HRA for patient responsible balances. With a debit card, employees can save their pre-tax funds for something specific – like an expensive Lasik surgery or contact lens.
Final Thoughts
Right now, the employee benefits industry, as well as most employers and employees, arewaiting to see what the full impact of the new healthcare legislation will become in 2014 – although, the signs are continuing to point to more and more consumerism.
The bottom line: consumers need to be more involved in their healthcare. The more consumers are responsible for their healthcare choices, the more likely they are to make the most cost-effective decisions. And that translates into better informed, healthier consumers, and healthcare costs that are more affordable for everyone.
About The Author
Anne Carpenter is a Vice President atEvolution1™, the leading provider of comprehensive electronic card payment, on-premise and cloud computing solutions for the administration of flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement accounts (HRAs), VEBAs, wellness and transit plans. Evolution1 serves more than seven million consumers, 50,000 employers, and 400 administrators, health plans, and financial institution partners. For more information, please visit www.evolution1.com or contact the author at acarpenter@evolution1.com.
