What is the difference
between an HRA, HSA, and
What Is Consumer Choice
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
Annual Prescription Drug Utilization
Prescriptions dispensed Factors affecting prescription $
2.7 billion 50% Increased
* Projected **Increased utilization: Number of prescriptions dispensed
annually in the United States rose from 2 billion in 1992 to 3
Source: (National Association of Chain Drug Stores, Inc., “Industry Facts,” billion in 1999 and is projected to reach 4 billion by 2004.
1999: 1999 Retail Rx Sales Projected to Rise 18%, Surpass $121B on Volume
of Nearly 3 Billion Prescriptions. Aug. 29, 1999. Source: IMS Health, Pharmaceutical Pricing Update, March 2000.
• 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
Two Basic Principles for
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
Divergent / Convergent Futures?
HRAs – Best for Larger Groups?
HSAs – Best for Individuals and Small Groups?
HRAs HSAs FSAs
1. Employer- 1. Individual-based
based healthcare Healthcare
based healthcare 2. Traditional (Ltd
2. Special 2. Employer-based
With Individual Carry-over?)
Purpose Accounts 3. Defined Contribution
Accountability 3. Special Purpose
3. Incentive Matching Developments
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
• Health Savings Accounts (HSAs)
• Employees’ choice for funded portable triple tax advantaged with
“High Deductible Health Plans”
• Combination Accounts – creative but confusing
―Traditional‖ New Newest
Approach Approach Approach
Feature Flexible Spending Health Reimbursement
Health Savings Account
Plan Design Any type Any type Qualified HDHP
Employee Contributions Pre-Tax N/A Pre-Tax
Yes, but typically
Employer Contributions Yes Yes
Funds Available Day One Yes Yes As Deposited
Tax-free for qualified Tax-free approved by Tax-free for qualified
expenses sponsor expenses
Section 213d or sponsor
Qualified Expenses Section 213d 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
N/A N/A Yes
Expense Substantiation Yes Yes No
Above-the-line Tax Yes – no itemization
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…
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
Employer Sponsored $$ year.
Pays 1st in our example
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
IMPORTANT! The Individual
Responsibility Gap can be anywhere
in the out of pocket area of the plan!
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.
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.
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
• 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
• 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
Total Contribution Limit
Standard Limit 2 Catch-Up Including
Contribution Catch-Up Amount
Self-Only Family Self-Only Family
2005 $2,650 $5,250 $ 600 $3,250 $5,850
2006 $2,700 $5,450 $ 700 $3,350 $5,950
1May 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?
*includes self employed or certain unemployed individuals
• 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.
(other than John’s HSA John’s Form 1040
• 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
– Same amount, or
– Same percentage
Box 12 (W)
John’s Form 1040
• HSA owner‘s tax-filing due date, excluding
• 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
• A financial organization may contractually restrict
distribution frequency and minimum amounts
• Tax free if used to pay for qualified
• Tax and 10 percent penalty tax apply to
• Some exceptions to the penalty tax
Exceptions to the Penalty Tax
• Distributions for the following reasons will
avoid the 10 percent penalty tax:
– 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.
• Distributions used to pay for the following
individuals‘ qualified medical expenses
are tax free:
– HSA owner
– His/her spouse
Qualified Medical Expenses
• Same as IRC 213(d) definition for itemized
• 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.
• HSA contributions may not be deductible
on certain state income tax returns
15 Minute HSA Overview
1. Health Savings Accounts – Legislative and Regulatory
2. Consumerism in Healthcare – Why are We Doing This?
3. Carrier Experience – Does It Work?
Healthcare – Why are
We Doing This?
Why a Consumer Strategy-
Growing understanding of personal exposure and unreadiness
Healthcare costs more
Employee share of health costs increased for 2003, at 49% of large employers
Plus, I spend my own money
Typical insured spends $675/yr on uncovered health services, not including
deductibles and copays
But I’m not preparing wisely
72% did not put money in a Flexible Spending Account, but report spending
significant dollars out of pocket.
Employees underestimate health costs/their health spending by more than 50%
Nearly half of participating employees put $100 – 500 in their Flexible Spending
(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
Why a Consumer Strategy-
I need help
85% of employees expect their employer to provide pre-
negotiated 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.
A Consumer Strategy-
The Power of Engagement
Q: Consumerism in Healthcare – Why
are We Doing This?
HSAs are not about changing how
we finance healthcare…
HSAs are about improving
Do Consumers Engage More?
Yes (and quickly – this measures
only the first year change) Two-thirds of Consumers
Consumers are more engaged: awareness of health
choices and costs
33% higher registration
From 300 to 1000 online
inquiries/week for account
85% of 2003 enrollees carried a
balance into 2004
8% Increase in Preventive
Does Engagement Change Behavior?
30% Reduction compared to most carrier‘s book of business
Use of preventative
increased by 8%
over 90% of the time
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…)
A) Short Term: Traditional View of Employer Costs
$6500 “Hey! 0% Trend” $6500 Covered
X Per X Units
• One-Time Savings • Network Cost Matters • Ongoing Savings
•Positive Selection possible via plan
changes •At least a 25% decrease in
•Benefit Buy-Downs trend due to utilization change
•One-time Rx gain
B) Longer Term: Consumerism View of Employer Costs
Pre-CDHP Plan has strong
Average Cost All Quality ability to increase
Employees Care quality and drive
down costs using
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
• Consumers report increased awareness of health choices and costs
– Two-thirds said that they are more aware of costs, more actively involved
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‘