Consumer-Driven Decision: Weighing HSAs vs. HRAs

Despite their similar and sometimes confusing acronyms and their overall purpose of allowing tax-free reimbursement of various types of medical expenses, health savings accounts (HSAs) and health reimbursement arrangements (HRAs) are quite different when you get down to the details. And it's these details that help an employer choose which approach is most appropriate for its goals and its employee population.

Health Care Consumerism

Consumer-directed health plans (CDHPs) typically combine health insurance plan with a tax-advantaged account that enrollees can use to pay for medical expenses—most commonly an HSA or HRA, although the term is sometimes used for insurance offered with a health care flexible spending account (health FSA).

Enrollees in CDHPs, whether linked to an HSA or HRA, must keep track of funds in their accounts. If the account's funds are exhausted before the deductible is met in a given year, enrollees are responsible for paying for the difference out of pocket until they meet the plan deductible.

After an enrollee meets the deductible, the plan operates much like a traditional preferred-provider organization (PPO) plan. That is, generally the plan pays for most of the cost of covered services and the enrollee contributes a cost-sharing amount—which varies by plan—until meeting the maximum out-of-pocket spending limit, at which point the plan pays 100 percent of the cost of covered services.

There are some exceptions to the requirement to satisfy the plan deductible before the plan will pay for health services received. Under the Affordable Health Care Act (ACA), for example, coverage of preventative health care (including annual physicals, vaccines and cancer screenings under specified guidelines) must be provided on a first-dollar basis, outside of the deductible, including for those enrolled in HSA- or HRA-linked plans.

Prescription Drug Coverage

Funds contributed into an HSA on a pretax basis—whether by employees or their employer—can be used to pay for most prescription drug costs paid out-of-pocket by employees, but not for over-the-counter medications except for diabetes supplies and some other eligible expenses.

Prescription drugs for chronic health conditions are often not considered preventative care by insurers, and therefore treated as only reimbursable in an HSA-linked plan after the deductible is met. However a growing number of HSA-compliant high-deductible plans have begun treating prescription drugs that seek to avert disease for at-risk enrollees as preventative treatment covered outside the deductible and without cost-sharing (for instance, see this HSA-compatible preventative drug list from CVS Caremark and this preventative drug list for Premera Blue Cross HSA-compliant plans).

A report by health insurer Aetna reveals that, based on a multiyear study of 2.3 million Aetna plan enrollees:

• Plan sponsors that replaced their previous plan options with an HRA- or HSA-linked plan experienced lower annual cost trends over five years, producing savings of nearly $21.5 million per 10,000 enrolled members.

• The average plan sponsor saved nearly $9 million per 10,000 enrollees when an HRA or HSA was offered as a plan option.

• Those with HRA- or HSA-linked plans had 5 percent lower non-urgent emergency room use than those with traditional plans.

Different Value Propositions

In general, HRAs provide employers with the most flexibility, while HSAs provide more control to employees. Both are an important part of the value proposition an employer offers to its employees. Therefore, the type of account should be chosen with care.

“It is important to think about what elements of each choice might appeal to the employee base,” said Alexander Domaszewicz, a principal and senior consultant with Mercer HR Consulting's Health & Benefits Services. For example, one company’s employees might appreciate the portability of an HSA, while others might be interested in an HRA if the employer is more willing to make larger contributions on employees’ behalf relative to potential out-of-pocket health care expenses (because employees cannot take their account balances with them).

Therefore, "when communicating the value of the account to employees, it is important to emphasize what it brings to the table," said Domaszewicz.

What follows is a discussion of the key elements employers can consider when choosing between an HRA and an HSA.

HSA: Giving Employees 'Skin in the Game'

An HSA is one of the cornerstones of consumer-directed health plans and is designed to give individuals an incentive to be smarter and more conscientious health care consumers. Not only does an HSA allow employers and employees to contribute to the account, it allows employees to keep any unused funds for use in future years and to roll over those funds when they leave the company.

“In my experience, 75 to 80 percent of employers are choosing an HSA over an HRA,” said Domaszewicz. “HSAs can create a sense of shared accountability among employees that is more visible and tangible because any money saved stays in the HSA. An HSA can also be used to foster behavior change by giving employees some skin in the game for practicing better consumerism.”

The most compelling attribute of an HSA is its ability to provide individuals with a stake in managing their own health care purchasing. If an individual or the employer make contributions to an HSA, any money the employee doesn’t use for qualified medical expenses remains in the account and available for use in subsequent years. Because employees retain ownership of the funds in the accounts, employees can roll over the HSA into another account when they leave a job, just as they would a retirement account. Then, when the individual becomes eligible for Medicare, the individual can continue to use HSA funds to pay for medical expenses or withdraw the money for any other reason (in which case, it would be taxed as regular income).

The Aetna study found that HSAs yielded more dramatic cost savings than HRAs. HSA enrollees had 15 percent lower primary care physician utilization for nonroutine visits, such as for a cold or sore throat; 11 percent lower specialist utilization; and 9 percent lower overall medical costs compared with those in a traditional preferred-provider organization (PPO) plan.

"While Aetna's research does show savings on HRA plans, we saw more dramatic results with HSA plans in terms of greater reduction in nonroutine visits and nonurgent emergency room visits, and employees being more engaged in their health care and continuing to save," said Chris Riedl, head of enterprise medical products at Aetna. "We believe the HSA members are even better consumers than HRA members. However, our HRA plans still show more favorable results than what we saw in a comparison PPO group."

HRA: The Employer’s Tool

Although—or even because—they lack portability, the case for HRAs can be compelling in some circumstances, given that HRAs, which come with few requirements, provide a great deal more flexibility to employers than HSAs.

“Employers have more control over the money in an HRA,” said Domaszewicz. Because HRA funds do not belong to an employee, the employer retains any funds left in an HRA when an employee leaves the company. This is a particularly attractive feature for employers in industries, such as retail or fast food, with traditionally high turnover.

Moreover, an HRA can be an attractive option from a cash flow perspective because the "funds" attributed to the HRA "account" are notional in nature (tracked within the accounting system) but actually funded only when a claim is presented.

“Employers that choose an HRA tend to be more paternalistic and they find that adopting an HRA is easier,” said Domaszewicz. “Because only the employer is putting money in the HRA, the employer gets to make all the rules for the benefit plan.” For example, if an employer does not want to adopt the minimum deductible required for an HSA, it can adopt an HRA plan with a lower deductible. Alternatively, HRAs can be linked to plans with out-of-pocket maximums that are higher than the limit the government sets for HSAs.

“With an HRA, employers have more flexibility in terms of the deductibles they choose for the health benefit plan, and even whether they carve out pharmacy benefits,” said Elizabeth Wolff, a principal at Aon Hewitt in Chicago.

"There are places where HRAs are still a good choice," added Aetna's Riedl. "Implementing a plan with a deductible that's not as high as you might see in an HSA-compatible plan might be an easier transition, initially, from richer designs."

HSAs allow only preventive care to be outside the deductible and covered 100 percent on a first-dollar basis, whereas "If the employer wants to have certain benefits not subject to the deductible, if they want to steer people to designated high-value health care centers of excellence or have particular types of care covered at 100 percent, HRAs allow them to do so," Riedl observed.

Similarly, under HSAs in most cases members must pay the full cost of prescription drugs until the deductible is satisfied, whereas HRAs generally allow co-pays for drugs.

Real Consumerism?

On the other hand, Riedl pointed out, a key reason for a high deductible (for nonpreventive services) is to make employees more cost-conscious when selecting medical services providers and weighing treatment and procedure options. But even if an HRA is not linked to a high-deductible plan, the employer still funds co-insurance and other out-of-pocket costs through the nominal account—and should educate employees that once the accumulated employer contributions are exhausted, it's the employee's responsibility to pay for services received until the out-of-pocket maximum is met.

Riedl warns, however, that some HRA plans are so generous that very little consumerism is left. "If an employer funds an HRA at an amount equivalent of the full deductible, there's no consumerism there," she noted. "Or if they provide a 100 percent co-insurance plan once the deductible is met, again, there's no portion of member responsibility that gives employees an incentive to get engaged in understanding the cost of care. Those plans, despite using HRAs, are not in the spirit of what we think consumer-directed plans should be."

Either or Both?

In 2014, the Eighth Annual Cigna Choice Fund Experience Study compared the claims experience of more than 3.6 million Cigna customers enrolled in a CDHP using either an HSA or HRA, versus those enrolled in a traditional PPO or HMO plan through the same insurer. The study indicated that individuals covered by CDHPs were more likely to use health improvement programs, comply with evidence-based medicine best practices, and lower their health risks, resulting in improved total medical expenses by 12 percent. The study also found that employers that fully transitioned to offering only a CDHP option had 14 percent more low-risk individuals and 28 percent fewer high-risk individuals compared to customers in a traditional plan.

In the end, workforces vary widely and what might work best for one organization (high-deductible, employee-owned HSAs) may not be the ticket for others (employer-controlled HRAs). "We have companies that offer one or the other, and in some instances they offer both," said Riedl.

Health Care Reform:

HSA penalties for nonqualified expenses. Effective Jan. 1, 2011, the penalty for using HSA funds for nonqualified (that is, non-medical) expenses for those under the age of 65 (unless totally and permanently disabled) increased from 10 percent to 20 percent of the funds used for nonqualified expenses. Funds spent for nonqualified purposes also are subject to income tax.

HSAs and coverage of adult children up to age 26. While the ACA allows parents to add their adult children (up to age 26) to their health plans, the IRS has not changed its definition of a dependent for health savings accounts. This means that an employee whose 24-year-old child is covered on their HSA-qualified high-deductible health plan is not eligible to use HSA funds to pay for medical bills for that 24-year-old.

If account holders can't claim a child as a dependent on their tax returns, then they can't spend HSA dollars on services provided to that child. According to the IRS definition, a dependent is a qualifying child (daughter, son, stepchild, sibling or stepsibling or any descendant of these) who:

• Has same principal place of abode as the covered employee for more than one-half of taxable year.
• Has not provided over one-half of their own support during taxable year.
• Is not yet age 19 (or not yet age 24 if a student) at the end of the tax year, or is permanently and totally disabled.  

Joanne Sammer is a New Jersey-based business and financial writer. Her articles have appeared in a number of publications, including HR Magazine, Business Finance, Consulting, Compliance Week and Treasury & Risk Management. Stephen Miller, CEBS, is an online editor/manager for SHRM.
 

Related SHRM Articles:

IRS Announces 2021 Limits for HSAs and High-Deductible Health Plans, SHRM Online, May 2020

Employees Still Perplexed by HSA Plans During Open Enrollment, SHRM Online, October 2019

Employees Not Using HSAs to Invest for Retirement Is a Problem, SHRM Online, July 2019

Additional Resources:

HSAs vs. HRAs: Things Employers Should Consider, United Benefit Advisors, May 2017

Why Some Companies Offer an HRA, United Benefit Advisors, May 2017