Firms Realize HSA, HRA Savings
Facing yet another double-digit increase in health premiums, 18 percent this time, management at the small Kalamazoo maker of audio cables ultimately decided in 2000 that a major change was needed — something more than simply shifting rising costs to employees through higher co-pays and deductibles.
Now, three years after implementing what remains a novel product for employee health benefits, company Vice President Debbe Stephenson can point to the bottom-line benefit generated through Pro Co Sound’s use of health reimbursement accounts (HRAs).
Pro Co Sound has since not had to pass along any additional costs to employees and, at a time of rapidly rising costs nationally, saw its health-care expenses for 61 participating employees increase just $5,000, from $213,000 in 2001 to $218,000 in 2003. Stephenson estimates that, based on prior trends, the company has saved $128,000 over the three-year span.
While representing a “little bit more” of an administrative task internally, the move to an HRA-based health plan “was definitely worth it,” Stephenson said.
“It’s made a big difference for us in savings and in trying to hit the bottom line,” Stephenson said during a seminar in Grand Rapids last week on HRAs and a similar new product, health savings accounts, or HSAs.
Designed to help employers control runaway health-care costs, both products are used in concert with lower-cost, high-deductible health plans and provide a mechanism for employees to pay for out-of-pocket or uncovered medical costs.
More importantly, proponents say, they begin to get employees far more engaged in their health-care decisions, which in turn affects utilization rates that are a key driver of escalating health premiums.
Benefit managers and providers say HSAs and HRAs make people more aware of the true cost of care, their choices and how the money is spent, as well as provide incentives for good behavior, like living a healthy lifestyle, and wise decisions in accessing care. An essential component of getting escalating costs under control is introducing fundamental aspects of consumerism into the mix and better educating people to become smart buyers of health care, benefit providers say.
“This whole issue of consumerism goes to the core of what has to change,” said Kim Horn, president and chief executive officer of Grand Rapids-based health plan Priority Health. “We need to make (people) more value-conscious purchasers of health care.”
Priority Health, with a subscriber base of more than 426,000 people in a 32-county service territory that stretches from south of Grand Rapids to Traverse City in western Michigan, plans to introduce an HSA product in January 2005, Horn said.
“We will be an organization that supports testing and trying this concept, HSAs or HRAs or anything in between, as we try to control health-care costs,” she said.
Created under the Medicare reform bill Congress enacted and President Bush signed late last year, HSAs allow employers and employees to contribute to an account that generates tax-free interest. Participants can use the money in their health savings accounts to pay for primary health care expenses such as doctor and dentist visits, prescription and over-the-counter medications, and medical products, as well as for long-term care insurance, the deductible or co-pay on a health plan, and to continue coverage under COBRA when they leave a job.
Under the new law, anyone under 65 years old and covered under a lower-cost, higher-deductible health plan or insurance policy — with a minimum $1,000 deductible for individuals, or $2,000 deductible for families — is eligible to form an HSA.
Employees or their employer, or both, can contribute up to the amount of the accompanying health plan’s deductible, to a maximum $2,600 a year tax-free for individuals, or $5,150 annually for families. HSAs balances roll over from year to year and accounts are portable, meaning employees can take them with them when they leave jobs.
HRAs, first created in 2000, are an arrangement where an employer reimburses an employee for certain medical expenses. A non-taxable benefit, HRAs also are typically linked with a high-deductible health plan and enable employers to better control their health-care costs.
As employers continue to cope with steep annual premium increases that are driving them to explore new options beyond curtailing benefits or shifting more cost to employees, benefit managers say they are seeing a growing interest in HRAs and HSAs.
“Employers are desperate for a new idea out there,” said Robert Hughes of Advantage Benefits Group, a Grand Rapids benefits consultant that sponsored last week’s seminar at DeVos Place.
“It’s gotten to the point they’ve got to do something different and they’re willing to do that,” Hughes said. “It’s really a paradigm shift. This is a way to get these outrageous health-care costs under control in the future.”
Results of a National Small Business Association survey issued last week found that 73 percent of respondents are interested in HSAs as a way to reduce the cost of providing employee health benefits.
In the Grand Rapids area, employers last year experienced an average 10.4 percent increase in their health premiums after plan alterations, according to the 2003 cost survey conducted by the Alliance for Health. That’s on top of a 12.4 percent average increase in 2002, 11.7 percent in 2001 and 12.8 percent in 2000.
Forecasts going into 2004 were for similar increases.
Many believe new products like HSAs will eventually bring profound changes in the years ahead in how employers provide employee health benefits, although speakers at last week’s seminars see that shift coming in increments.
Much of what will occur depends on two critical issues: product offerings from benefit providers and how well employers articulate the new-style benefit to employees.
In terms of product design, HSAs and HRAs are highly flexible. A benefit provider can fashion a plan specifically to an employer’s goals and ability to pay for health coverage, Hughes said.
“There is no standard plan right now,” he said. “It’s almost the sky is the limit in terms of designing a plan.”
Because they are so new and because of the major shift they represent, HSAs and HRAs may take a while to catch on with employers and employees.
Chris Panyard, of Rogers Benefit Group in Grand Rapids, which sells HSAs for Fortis Health, sees interest growing gradually over the next two years, and then accelerating, as new products emerge and employers become increasingly aware of what’s available.
“It’s a learning curve,” Panyard said. “People are going to take baby steps.”
And as they take those steps, they need to make sure they engage their employees in the discussion. Education, according to benefit managers and providers, is essential to an effective HRA- or HSA-based health plan.
“None of these plans are going to work unless you can do that,” said Carol Jensen, director of product implementation for Fortis Health, a national benefit provider that introduced HSAs on Jan. 1, when the Medicare reform law took effect.
At Pro Co Sound Inc., managers began by talking to employees about rising premiums and what to do. The biggest concern among employees was that their out-of-pocket health expenditures would increase and the apprehension such a change causes, Stephenson said.
In working through the process, managers explained that the company had to cover the 18 percent increase in health premiums by either passing it along to employees or raising deductibles, Stephenson said.
It all came down to taking one of those options, or making a major benefit change that, as it turned out, ended up not costing employees any more. By switching to an HRA, the company was able to generate enough savings to cover employees’ deductibles and still come out ahead.
“They bit into it quite easily,” Stephenson said of employees’ acceptance of the change.