Transcript HRA vs. HSA Explanation

What is the difference
between an HRA, HSA, and
an FSA?
What Is Consumer Choice
Health Care?
The Renewal Meeting
• Why have my rates
doubled in five years?
• What type of health plan
can stop the bleeding?
• My employees have no
understanding of the cost
of health care.
“Consumerism” is Coming Late to the
Healthcare Industry …It’s Out of Step
With Our Emerging Economy
• U.S. inflation in 2004 was 3%, while healthcare
inflation was 12%.
• “Employee health care costs will wipe out the
equivalent of every penny of 2003 profitability for the
company’s Consumer Products Division”, without
major changes according to GE’s Chairman Jeffrey
Immelt.
Annual Prescription Drug Utilization
Factors affecting prescription $
3.0 billion
2.7 billion
2.6 billion
2.0 billion
4.0 billion*
Prescriptions dispensed
21%
Price
inflation
50%
Increased
utilization**
29%
* Projected
Source: (National Association of Chain Drug Stores, Inc., “Industry Facts,”
1999: 1999 Retail Rx Sales Projected to Rise 18%, Surpass $121B on Volume
of Nearly 3 Billion Prescriptions. Aug. 29, 1999.
New
medicators
**Increased utilization: Number of prescriptions dispensed
annually in the United States rose from 2 billion in 1992 to 3
billion in 1999 and is projected to reach 4 billion by 2004.
Source: IMS Health, Pharmaceutical Pricing Update, March 2000.
Healthcare Consumerism
•
Healthcare Consumerism is about transforming a health
benefit plan into one that puts economic purchasing
power—and decision-making—in the hands of participants
•
It’s about supplying the information and decision support
tools they need, along with financial incentives, rewards,
and other benefits that encourage personal involvement in
altering personal behavior and healthcare purchasing
behaviors.
Two Basic Principles for
Successful Consumerism
1. Must work for the Sickest Members, as
well as the healthy
2. Must work for those not wanting to get
involved in decision-making, as well as
the “techies”
Divergent / Convergent Futures?
HRAs – Best for Larger Groups?
HSAs – Best for Individuals and Small Groups?
Current State
Combination
Accounts
1. Employerbased healthcare
2. Special
Purpose Accounts
3. Incentive Matching
HRAs
Employerbased healthcare
With Individual
Accountability
HSAs
1. Individual-based
Healthcare
2. Employer-based
3. Defined Contribution
Developments
FSAs
1. Employer-based
Healthcare
2. Traditional (Ltd
Carry-over?)
3. Special Purpose
Non-Plan
Incentive Awards –
Three Very Different Personal Care Accounts
•
FSAs – Traditional Group Plans
•
Health Reimbursements Arrangements (HRAs)
•
Employers’ choice for cash flow flexible incentive based medical plan
benefit designs
•
Health Savings Accounts (HSAs)
•
Employees’ choice for funded portable triple tax advantaged with
“High Deductible Health Plans”
•
Combination Accounts – creative but confusing
“Traditional”
Approach
FSA
Flexible Spending
Account
Feature
New
Approach
HRA
Health Reimbursement
Account
Newest
Approach
HSA
Health Savings Account
Plan Design
Any type
Any type
Qualified HDHP
Employee Contributions
Pre-Tax
N/A
Pre-Tax
Employer Contributions
Yes, but typically
employee-funded
Yes
Yes
Funds Available Day One
Yes
Yes
As Deposited
Withdrawal
Tax-free for qualified
expenses
Tax-free approved by
sponsor
Tax-free for qualified
expenses
Qualified Expenses
Section 213d
Section 213d or sponsor
specific
Section 213d
Forfeiture
Yes, at end of year
Yes, upon termination
No
Portability
No
No, but some exceptions
Yes
Interest Bearing
No
No
Yes
Balance at Risk from
Investment
N/A
N/A
Yes
Expense Substantiation
Yes
Yes
No
Above-the-line Tax
Deduction
N/A
N/A
Yes – no itemization
required
Full Replacement HSAs and
HRAs Are Very Different
• HSA – A law, with specific requirements
and benefit design requirements
Most TAX ADVANTAGED vehicle ever created
*************************************************************
• HRAs – No Law, this is a regulatory
creation based upon an IRS ruling.
Most FLEXIBLE vehicle ever created
HRA’s Consist Of…
 The Reimbursement Account
 Individual Responsibility Gap
 Health Insurance Policy
Health Reimbursement Account…
Claim
Employer Sponsored $$
Pays 1st in our example
1. Health Reimbursement Account
The Health Reimbursement Account (HRA) is
a specific allocation of employer dollars which
are pledged to each plan member. The
employee uses these funds to pay for all
services covered by the plan until they reach
their Individual Responsibility Gap. At the end
of the plan year, the employer may allow the
remaining balance to roll-over to the following
year.
Individual Responsibility Gap…
2. Individual Responsibility Gap
Should an employee exhaust their
individual HRA, the employee would
then be responsible for paying the
difference between the HRA and the
point where the insured portion of the
plan begins.
Claim
IMPORTANT! The Individual
Responsibility Gap can be anywhere
in the out of pocket area of the plan!
$$$
Health Insurance…
Claim
3. Health Insurance
Should an employee exhaust their
individual HRA and go through
their Individual Responsibility Gap,
a traditional Health Insurance plan
would then take effect and provide
the remaining benefits.
$$$
Compatible Products…
The typical Healthcare HRA is compatible with virtually
any insurance plan but is most effective when combined with a
plan that features the following three elements:
1) A deductible in excess of $1,500/$3,000 (Family).
2) No office visit Copay—Office visits applied to deductible.
3) No Rx Card—Applied to deductible.
Remember, Consumer Choice!
HSA vs. HRA
High deductible medical plan generates premium savings.
Employer may finance account/reimbursement.
Employee may finance account/reimbursement.
Money in reimbursement account is pre-funded
Unused funds roll over for future use.
Emp. receives tax deduction for medical reimbursements.
Emp/employee receive tax deduction for account funding.
HSA HRA
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An Introduction to Health
Savings Accounts Agenda
•
•
•
•
What is a Health Savings Account (HSA)?
HSA Eligibility and Contributions
HSA Distributions
Other Matters
What is a Health Savings
Account (HSA)?
• A Health Savings Account, or HSA, is an
account that can receive contributions on a
tax-favored basis on behalf of an eligible
individual and allows tax-free distributions
used to pay for qualified medical expenses
Eligibility
• An eligible individual is:
• Covered under a high-deductible
health plan (HDHP);
– Not covered by another health plan that is
not an HDHP
– Not enrolled in Medicare
(generally, younger than age 65) and
– Not claimed as a dependent
Contribution Limits1
Standard Limit 2
Tax
Year
Self-Only
Family
2005
$2,650
$5,250
2006
$2,700
$5,450
1May
Catch-Up
Contribution
Amount
Total Contribution Limit
Including
Catch-Up Amount
Self-Only
Family
$ 600
$3,250
$5,850
$ 700
$3,350
$5,950
be reduced by smaller HDHP deductibles, partial year eligibility, Archer MSA
contributions, and special rules for married couples.
2Subject to cost-of-living adjustments (COLAs).
Who May Contribute to an HSA?
Eligible
Individual*
John
Any Other
Individual
or Entity
John’s HSA
John’s
Employer
*includes self employed or certain unemployed individuals
Contribution Deductibility
• HSA contributions made by the owner, any other
individual, or an entity other than the HSA
owner’s employer, are deductible on the HSA
owner’s tax return.
John
(HSA Owner)
Any Other
Individual
or Entity
(other than
John’s
employer)
John’s HSA
John’s Form 1040
Employer Contributions
• Reported on employee’s Form W-2
– Not subject to FICA, FUTA, or RRTA
– Not deductible on employee’s Form 1040
• Comparable contributions to “comparable
participating employees”
– Same amount, or
– Same percentage
Employer Contributions
Form W-2
Box 12 (W)
ABC Engineering
John’s Form 1040
John
Contribution Deadline
• HSA owner’s tax-filing due date, excluding
extensions
2006
2007
4/15
HSA Distributions
• An HSA owner can take distributions any time
• Financial organizations and employers are not
required to verify any HSA distribution
• An HSA owner may use checks, or debit, credit, or
stored value cards to take qualified HSA
distributions
• A financial organization may contractually restrict
distribution frequency and minimum amounts
HSA Distributions
• Tax free if used to pay for qualified
medical expenses
• Tax and 10 percent penalty tax apply to
nonqualified distributions
• Some exceptions to the penalty tax
Exceptions to the Penalty Tax
• Distributions for the following reasons will
avoid the 10 percent penalty tax:
– Death
– Disability
– Attainment of age 65*
*A financial organization is responsible for tracking the ages of its HSA owners
and can rely on the birth date as provided by the HSA owner.
Eligible Individuals
• Distributions used to pay for the following
individuals’ qualified medical expenses
are tax free:
– HSA owner
– His/her spouse
– Dependents
Qualified Medical Expenses
• Same as IRC 213(d) definition for itemized
deductions*
• Must be incurred after an HSA is established, earlier
expenses are nonqualified
• No age restriction
• Cannot be used to pay health insurance
premiums, some exceptions apply
*Qualified medical expenses paid for with an HSA distribution are not
eligible for a tax deduction.
Unanswered Questions
• HSA contributions may not be deductible
on certain state income tax returns
15 Minute HSA Overview
1. Health Savings Accounts – Legislative and Regulatory
Basics
2. Consumerism in Healthcare – Why are We Doing This?
3. Carrier Experience – Does It Work?
Consumerism in
Healthcare – Why are
We Doing This?
Why a Consumer StrategyConsumers’ View
Growing understanding of personal exposure and unreadiness
Healthcare costs more
 Employee share of health costs increased for 2003, at 49% of large employers
(1)
Plus, I spend my own money
 Typical insured spends $675/yr on uncovered health services, not including
deductibles and copays
(2)
But I’m not preparing wisely
 72% did not put money in a Flexible Spending Account, but report spending
significant dollars out of pocket.
(3)
 Employees underestimate health costs/their health spending by more than 50%
 Nearly half of participating employees put $100 – 500 in their Flexible Spending
Account
(3)
(1) Source: Mercer National Study of Employer-Sponsored Health Plans 2002 (2) Source:
Lieberman Research study of Out-of-Pocket Spending by Health Care Consumers 1999, adjusted
for annual increases in the Health Care Consumer Price Index (3) Source: Digital Research study,
February 2002 (4) Source: Watson Wyatt survey
Healthcare Cost Landscape
(4)
Why a Consumer StrategyConsumers’ View
I need help
 85% of employees expect their employer to provide prenegotiated savings on non-covered services.
 88% would like to know their physician’s background when
purchasing a non-covered service
 94% would like to know in advance what their costs will be when
purchasing a non-covered service. (3)
HSAs are Not Just Accounts- They Help
Fundamentally Change Healthcare
Consumerism in health care is simple and yet fundamentally
different: engaging consumers in a decision-making process regarding
wellness and the management of sickness.
Accessible, actionable health information is paired with personal financial
choice to facilitate effective outcomes.
Engaging
Consumers
Health
Financial
Planning
Health
Advocacy
A Consumer StrategyThe Power of Engagement
Q: Consumerism in Healthcare – Why
are We Doing This?
Answer:
HSAs are not about changing how
we finance healthcare…
HSAs are about improving
healthcare.
Do Consumers Engage More?
Yes (and quickly – this measures
only the first year change)
Consumers are more engaged:
 33% higher registration
 From 300 to 1000 online
inquiries/week for account
balances
 85% of 2003 enrollees carried a
balance into 2004
 8% Increase in Preventive
Services
Two-thirds of Consumers
report increased
awareness of health
choices and costs
Does Engagement Change Behavior?
Yes.
30% Reduction compared to most carrier’s book of business
 Use of preventative
care services
increased by 8%
 Preferred, in-network
professionals, utilized
over 90% of the time
 ER utilization
decreased by 18% people used the ER
for true emergencies
Do Plan Sponsors Save Money?
Yes, when offered as an option.
(But please be wary of hype…)
Real Answers
Hype Answer
$6500 “Hey! 0% Trend”
A) Short Term: Traditional View of Employer Costs
$6500
Left Unsaid:
•Positive Selection
•Benefit Buy-Downs
Covered
Units
X
• One-Time Savings
possible via plan
changes
Cost
Per
Unit
• Network Cost Matters
X
# Of
Units
• Ongoing Savings
•At least a 25% decrease in
trend due to utilization change
•One-time Rx gain
B) Longer Term: Consumerism View of Employer Costs
Pre-CDHP
Average Cost All
Employees
CDHP-Only Employees
Average Cost
Quality
Care
Efficient Care
Plan has strong
ability to increase
quality and drive
down costs using
Premier Networks
Are Customers Satisfied?
Yes … and satisfaction grows as consumers engage more
• Enrollment and satisfaction cuts across employee type, industry
– Plan 2004 slice enrollment averages are highest among CDHP players
– High Plan adoption seen in manufacturing, financial services, retail and
more
• Consumers report increased awareness of health choices and costs
– Two-thirds said that they are more aware of costs, more actively involved
in choices
Satisfaction is high
– 90%+ satisfaction ratings of customer service, enrollment materials
– 87% overall satisfaction is at or above industry benchmarks
– Follows inverse sine distribution relative to length of time from enrollment
period, which means that follow-up post-enrollment communication needs
to be carefully utilized
• … and the consistent, persistent negative feedback is…
– …that most consumers prefer to be called ‘members’ and not ‘consumers’

Questions &
Answers