Insurance Companies have developed high deductible options available for their clients to help reduce the premiums experienced in today's fully insured market. However, employers must have competitive benefit levels to hire and retain employees. In today's job market, employers find that a $5,000 or even a $2,000 deductible is not competitive. While premiums are reduced significantly for these higher deductible plans, it creates an employee relations problem.
To address this issue, employers can provide dollars to cover services for plan participants before the insurance company's deductible is satisfied. To assure proper claims review as required by federal law, an independent Third Party Administrator processes these benefits for the employer.
The employer defines a level of benefits in dollars for plan participants and this value can be used to purchase the eligible services the employer decides to cover. Eligible services can include medical, dental or vision services, as limited by Federal guidelines. The employer, if desired, can limit the covered services to a much more restrictive level than Federal guidelines allow.
The Internal Revenue Services calls these accounts Health Reimbursement Arrangements and has deemed that dollars not spent by a participant in a year are allowed, but not required, to be carried forward into the participant's benefit value in future years. Dollar values carried forward would be a family personal benefit value to be managed by each plan participant with the ability to accumulate dollars toward future care. Benefit experts predict that this will help reduce costs by leading plan participants toward being prudent purchasers of care.
If the employer wants to allow the carry forward of dollar values, the employer decides on the percentage of remaining value to carry forward to future years. Since most employees will accumulate an increasing value in their HRA each year to cover higher out-of-pocket costs, the employer has more flexibility to reduce insurance premiums by increasing the cost sharing in their plan. Since the value of future benefits available to the employee is impacted by how much the employee spends on care each year, the HRA is a long-term strategy of engaging employees and their dependents to be prudent purchasers of medical care. Covered participants will learn that by being prudent purchasers of care, their benefits will be protected in future years.
Under this arrangement there are actually two benefit plans:
This arrangement allows employer's to reduce insurance premium levels but also to continue to provide a competitive benefit level to their employees. The goal is that the insurance premium will be reduced by an amount that is more than is spent from the HRA. History shows that only a small portion of the promised HRA value is spent.
- A Health Reimbursement Arrangement with payments limited to an amount and coverage scope determined by the employer.
- A Fully-Insured Plan that covers claims according to the insurance benefit schedule.
Reasons Why This Plan Design Will Save Dollars
Our clients have averaged savings of 19.8% when implementing a high deductible plan coupled with a Health Reimbursement Arrangement. The list below explains why the savings has averages these double-digit levels.
It is never certain that the actual payout will be less than the current insurance premium and experience varies from employer to employer and from year to year, but history has demonstrated and that many employers have benefited from similar approaches. As listed above, the groups administered by Avalon Benefit Services have averaged savings of 19.8% over time.
- The plan participant is no longer isolated from the purchase decision and the dollars spent become their personal dollars to be managed and conserved.
- Insurance companies use only about 65-70% of each premium dollar for claim payments. Since premium dollars will be lowered, more of this "lost" 30-35% will be allocated toward paying claims, the real reason for a benefit plan existence.
- The employer controls more of the benefit cost since they have full control of the amount contributed to the HRA. The employer may elect to freeze the amount contributed to the HRA for a multiple year time period. While benefit costs rise, this portion of benefit costs would remain stable. This defined contribution approach is an important step towards saving significant dollars in future years.
- Employers historically have addressed the rising cost of health benefits by reducing benefits to save insurance premiums. The reduction of benefits has always resulted in dissatisfaction from plan participants. Implementation of a Health Reimbursement Arrangement with a carry-forward of a percentage of unspent dollars at year-end helps reduce the level of dissatisfaction when benefit reductions are required. Since on average 15% of plan participants spend the most dollars on benefits, most employees will have accumulated benefit value in the Health Reimbursement Arrangement overtime. As benefits are reduced to save premium dollars, the employees with accumulated value will be more accepting of the reduced benefits. This gives the employer more flexibility in the future to reduce benefits to save premium dollars.
- The compounding effect of insurance rate trend over time, when applied to the lower starting premium of the high deductible Plan, leads to significant premium savings over time.
This dual approach gives the employer control over a significant portion of their benefit payments for future years and brings the employee and their dependent back into the purchase decision.
How The HRA Works
The employee and their participating family members are provided a promised benefit value equal to the amount indicated above to cover the cost of the eligible categories of services not covered by the deductible health plan. The benefit value is only a promise to pay for covered services if the employee or an enrolled dependent has a covered service. These dollars are not spent if covered services are not experienced.
Avalon Benefit Services will review HRA submitted claims and based upon available benefits, will determine the payment due from the employee's HRA benefits. ABS will inform the employer of the amount ready for payment and request for funds to be deposited to cover the current claims. The payment can be paid directly to the provider of service or to the employee, depending upon the arrangement.
The employer is not required to have money deposited until there are plan costs to pay. If the employee does not spend all the values allocated to their account, they may carry forward values to the next year. It is the employer’s decision on how much the employee is allowed to carry forward. Many plans allow 50% to 75% of the dollars remaining at year end, after all claims are paid, to be carried forward into the new plan year. There is no requirement that unspent values must be carried forward.
The actual out-of-pockets for the Plan Participants usually change little with the new Plans, since the Health Reimbursement Arrangement fills much of the gap created by the high deductible Plans. This help lead to acceptance of the new Plans by the Plan Participants.
The financial impact is demonstrated in the next section by displaying a portion of an actual proposal presented to a smaller group.
Sample Summary Of Financial Impact For Small Group
|Current Year Summary
||$ Not Used
|Five Year Savings
The above chart is a sample of a small group with twelve employees. It demonstrates the principles that lead to the savings when using a Health Reimbursement Arrangement with a high deductible Plan.
The premium for the high deductible Plan is much lower than the premium for “Current” lower deductible Plan. This immediately leads to more dollars being allocated to paying claims because it reduces the insurance company’s margin of 30% to 35% for the saved dollars.
The fifteen (15%) premium trend on the high deductible Plan leads to much lower premiums over five years when compared to the same trend on the lower deductible “Current” Plan. The spread becomes almost $45,000 a year for this small group of twelve. This premium dollar spread can be very high for larger groups.
The HRA Promised Maximum remains the same each year, thus the defined contribution portion of the Plan has no premium trend associated with it.
The total HRA promised value is not used each year, and these dollars not used belong to the employer, thus leading to additional savings. The HRA promised dollars used vary based upon the high deductible benefit design, the coverage provided by the HRA and the actual claims experience of the group being covered.
Health Reimbursement Arrangements and Wellness Programs
Health Reimbursement Arrangements have tremendous potential to save benefit dollars over time. While a wellness program is not required, we recommend that HRA implementation be coupled with a wellness program that will lead to more healthy Plan Participants, thus leading to lower benefit costs in the future.
The wellness program is designed to provide information related to overall health and wellness, and includes disease prevention and/or disease management and age specific screening recommendations. The intention is to engage individuals in the process of health promotion before they develop chronic illnesses that have the potential to affect their quality of life. For those individuals with a chronic condition, the focus is to educate the enrollee to be better informed about the management of their condition.
Plan Participants are impacted through frequent contact, intensive education and support, leading to the accomplishment of the goal of health promotion and wellness. The steps of the wellness program are outlined below:
An Aggregate report of the data collected from the HRA is provided to the client annually. After the first 60 days in the program, a demographic summary of those enrolled in the Health Promotion Program with chronic conditions is presented. A clinical report highlighting key data elements for those with chronic conditions is presented at the completion of the first six months in the program and again following the completion of twelve months. Applicable objectives from the national Healthy People 2010 Project are included in the reports. This allows the client to benchmark their findings against national data.
- The Health Risk Assessment (another HRA) is utilized. The assessment includes tests for Diabetes, Cholesterol, Blood Pressure, Resting Pulse, Triglycerides, Bone Density, Pap Test, Mammogram, and other indicators. The assessment also includes questions related to factors impacting their health habits including smoking habit, height, weight and other health indicators.
- The HRA is analyzed and risk factors are identified.
- Individual contact with the Plan Participant to review HRA results and to encourage appropriate follow-up.
- Educational materials, appropriate to the individuals needs, are made available to enrolled members. These materials cover nutrition, exercise, stress management, smoking cessation, and preventive screenings/interventions. Educational materials are from nationally recognized organizations. Web sites are included for enrollees to access for additional education.
- The program is made available to employees and all dependents covered under the Health Reimbursement Arrangement. There is no limit to the number of participants and no limit to the number of programs one person can enroll into.
- Education and support to adhere to the established treatment plan is reinforced.
- Follow up calls are tailored to the needs of the enrollees. There is no limit to the number or length of calls. Email is an option if member request.
- To obtain other pertinent information on a “need to know” basis, the primary care physician is contacted for individual cases.
Please see the Wellness Program portion of our web site under for an example of available services.
By combining a wellness program with a high deductible plan and a Health Reimbursement Arrangement, the employer is establishing a strategy that includes the Plan Participant as a valuable partner in the use and cost of their health care and thus their health benefits. This leads to significant savings for the employer in benefit costs.