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HRA Cost Savings Strategies - December 2007

By Richard J. Hughes, CEBS

Health Reimbursement Arrangements (HRAs)
Cost Saving Strategies Using Consumer-Directed Health Plans

By Richard J. Hughes, CEBS
Founder, President & CEO
MagnaHR, Inc.

A Health Reimbursement Arrangement (HRA) is a type of consumer-based healthcare plan that combines a high deductible health plan with a Personal Care Account (PCA) that is partially-funded by the Company as claims are incurred. The HRA is similar to the Health Savings Account (HSA) but with several key differences.

Feature
HRA
HSA
Combined w/ a High Deductible Health Plan (HDHP)? Yes Yes
     
Funding Status? Unfunded (book reserve only) Fully Funded Bank Accounts
     
Employer or Employee Funded? Employer (as claims are incurred) Employer, Employee or Both (funded each pay period)
     
Plan Design Flexibility? Flexible; may include features not permitted in HSA Must use HSA-compatible health plan
     
Prescription Drugs (Rx)? May have separate Rx card or may be paid as part of HDHP Must be paid as part of HDHP
     
Trustee/Bank Required? No Yes

How Does it Work?

If you’ve ever worked in a large company, most of them self-insure their healthcare expenses.  This simply means that the Company pays the incurred claims.  In most cases, they continue to use a health plan provider or a third-party administrator to process the claims but the “risk” is borne by the Company.  In other words, the Company realizes both favorable and unfavorable claims experience.  In order to limit their risk, most of these large employers purchase some form of Stop Loss insurance which transfers some of the “risk” to a re-insurance carrier for high dollar claims.  This Stop Loss Limit can be set at an individual level (such as any single claim exceeding $100,000), an aggregate level (such as total claims exceeding $1 million) or a combination of the two.  Why do they do this?  Simple…to save money.  In most cases, the Company spends less money by self-insuring rather than by paying a fixed premium to a health plan provider.

The HRA is a “mini” form of this approach.  Instead of using a plan with a low deductible (such as $250/$500), the Company moves to a HDHP (such as $2,000/$4,000).  Immediately, there is a premium savings due to the change to the HDHP.  The Company then uses a third party administrator to establish a Personal Care Account (PCA) for each participant to “self-insure” the initial claims up to the PCA limit (similar to the Stop Loss Limit above).  From an accounting perspective, the Company sets up a liability account for the maximum potential liability but doesn’t have any cash flow impact until claims are incurred.  At the end of the year, this liability is adjusted as actual claims are recorded.

For example, the 55-employee company noted below moved from a $250/$500 deductible plan to a $2,000/$4,000 HDHP and immediately reduced their annual premium by $109,000 (from $354,000 to $245,000).  A Personal Care Account was established for each participant equal to $1,750 (individual) / $3,500 (family).  In this particular case, the Company paid the first $1,750 or $3,500 in claims; then the employee paid the next $250 or $500.  Once the deductible was met, the healthcare plan paid 80% of all eligible claims until the Out-of-Pocket limit was reached at which point all eligible claims were paid at 100%.  The actuarial projection of the HRA utilization was $65,000.  However, the actual incurred claims were less than $30,000.  This meant that the Company had a “net” annual savings of $79,000 ($109,000 premium savings minus $30,000 incurred claims).

A 90-employee company in Northeast, OH will begin to use the HRA on 1/1/2008.  The projected annual savings is between $125,000 and $210,000.

A 55-employee company in Salt Lake City, UT has just completed their first year of HRA usage.  They saved $79,000 in healthcare costs AND received a renewal increase of ONLY ONE-PERCENT (1%) on the HDHP for 2008.

A 20-employee company in Northeast, OH is completing their third year of HRA usage.  They have saved over $45,000 per year in each year since inception.

(Mr. Hughes is the Founder, President and CEO of MagnaHR, Inc.—a company that specializes in human resources outsourcing, administration and consulting solutions.  MagnaHR, Inc. is headquartered in Cleveland, OH with offices in Columbus, OH; Naperville, IL and Lyndhurst, NJ.)

If you’d like to learn more, please contact MagnaHR at (440) 248-9048 or at rick.hughes@magnahr.com.

 

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