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Choosing the Right Consumer-Driven Health Plan

With health care costs continually climbing, employers are looking to consumer-driven plans to help soften the blow. Depending on the model, these plans typically include a tax-advantaged account and a high deductible health plan.  But what are the differences between these varyingchoose types of accounts?

Health Savings Accounts (HSA)

Any individual that is (a) covered by a qualified high-deductible health plan, (b) doesn’t have other health insurance coverage (with some exceptions), and (c) is not claimed as a dependent on another person’s tax return may establish an HSA on their own or with employer sponsorship.  The employer and employee can both contribute pre-tax dollars to the HSA, subject to annual limits.

The high-deductible health plan that is a prerequisite for an HSA is designed to protect the individual against catastrophic loss, but for most routine medical expenses that fall under the deductible, the individual pays out of pocket.  While preventative services are covered in full by most high-deductible plans, all other services – including prescription drugs and primary care – must be paid for out of the HSA.  Unspent funds roll over each year, and the employee takes the remaining balance of an employer-sponsored account with them upon termination or retirement. 

Flexible Spending Accounts (FSA)

Flexible Spending Accounts (FSAs) provide a means for employees to considerably reduce their income tax liability by contributing a portion of their own salary to an account designated for healthcare expenses. These pre-tax contributions are exempt from all income and payroll taxes.

Several inherent design flaws have resulted in modest participation in FSAs. Only employers can set up these accounts, leaving self-employed individuals and millions of other employees unable to set up their own accounts. The most serious drawback is that unlike HSAs and other accounts, FSA dollars do not roll over from year to year. Employees decide annually what amount of their salary they want to contribute and must “use it or lose” it by the end of the calendar year.  In 2005, rules were amended to allow a 2.5 month grace period after the end of the plan year, but this rule still discourages many from opening FSAs.

Because annual medical expenses are hard to predict, employees may overfund the accounts and then spend unnecessarily at the end of the year to avoid forfeiting the extra money.  Critics of FSAs also note they are confusing to set up and administer, causing many small and midsize employers without adequate resources to forego their use. In addition, filing claims for reimbursement can sometimes be difficult and time consuming for the employee.

Health Reimbursement Arrangements (HRA)

HRAs allow employees to use employer contributions for medical expenses or to pay health insurance premiums.  Funds can roll over year to year, which helps hold the consumer accountable for their healthcare decisions. 

Because HRAs are group health plans, they are subject to HIPAA and COBRA. If an employee leaves an employer, he/she may continue to access unused funds by electing COBRA. Under COBRA, the employer may also be required to continue its contributions during the coverage period. The requirement to continue contributing and comply with HIPAA is sometimes a deterrent for employers to implementing an HRA.

An Engaging Hybrid Approach

A new model has emerged that has proven successful for many employers at combining the best of existing tax code into an engaging program of care.  It recognizes the delicate definition of insurance “consumers,” which lies somewhere between the individual using the health care and the employer that is helping fund it.   

In this “hybrid” approach called GetMOR, employees and employers put tax-free money on a debit card for use either now or in the future.  The costs of today are covered with an FSA, while the costs of tomorrow are managed through an HRA.  While most other plans limit eligible expenses to a short list to simplify administration, this mixing of accounts allows participants to use funds for all tax deductible health care expenses, including wellness services.

Unlike traditional consumer plans, this model is purposefully detached from the insurance plan to highlight its true value.  An employer retains complete control over its health insurance purchasing (carrier, design, etc.), but the vast majority of employers pair the program with a strong insurance plan that fills the voids that HSA-style plans leave, especially in the area of prescriptions and primary care.

Deciding on the Right Approach

Choosing the right health plan for your company requires careful consideration of the benefits and disadvantages of the various options.  No one solution is right for every employer.

It’s also worth noting even the best designed plan will fail unless it is supported with strong messaging and support. Committed education and advocacy programs give whatever plan you choose the greatest chance of success among your employees.


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