Health Reimbursement Arrangements, or HRAs, are employer funded plans that reimburse employees and family members for out of pocket medical expenses not covered by insurance. HRAs are established under Sections 105 and 106 of the Internal Revenue Code, and they can be an effective tool to help employers contain health insurance costs when paired with a high deductible health insurance plan.
Employers have a great deal of latitude when designing these plans, but they don’t always consider the potential for behavior changes based on that design.
A common health insurance plan in our area has a $2000 deductible for a single person and $4000 for a family. Let’s say an employer chose to fund half of the deductible with an HRA. Here are three simple ways it could be done:
- HRA covers the first $1000 for a single and $2000 for a family
- HRA covers the second $1000 for a single and $2000 for a family
- HRA covers $1000 for a single after the employee pays the first $500 and it covers $2000 for a family after the family pays the first $1000
Would the medical utilization behaviors of the employees differ based on one of the above selections? It’s probably not too likely, but intuitively you might think that people might be more likely to seek care if they know the first portion of the deductible is covered.
Some of the health plans have begun to take this into account. They know that richer plan designs lead to higher claims activity, so they sometimes take the presence of an HRA into account when pricing larger groups. If the plan deductible is $2000/$4000, but the HRA makes it feel like a $1000/$2000 plan to the members, utilization may more closely mirror the $1000/$2000 plan than the $2000/$4000 plan.
Last week, I had a conversation with an employer whose HRA was a bit unique. Not only did they reimburse almost all of deductible expenses, but they also cover prescription drug costs in excess of the cost of generics. We typically see HRA costs running between 25% and 40% of maximum potential liability. This plan was tracking at more than 50%, which made complete sense given the plan design. The employer readily acknowledged this, but the plan design is perfect for them given their corporate goal of having a very robust health insurance package.
I think plan designs do have some impact on medical utilization behavior, and given the wide range of HRA possibilities, it makes sense to try to create a plan that properly reflects corporate objectives or if they have one, their Employee Benefits Philosophy Statement.
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