The HRA is authorized and defined in year 2002 by IRS in Revenue Ruling 2002-41 and notice 2002-45. 

The fact that health insurance is designed to protect against 3 different areas of exposure: 

Predictable costs are most efficiently funded and paid by the employer and consumer.  Purchasing insurance to cover predictable claims is not cost effective due to the additional expense associated with overhead, taxes, profit, and reserves. 

Unpredictable costs, such as shock claims or catastrophic losses, are justifiably insured through an excess-loss contract with an insurance carrier.  Expenses are much lower for this type of coverage. Likewise, premiums are correspondingly less. 

Financing: Premium costs are going up faster than at any other time in 10 years. According to the William M. Mercer consulting firm, employers are looking at premium increases averaging double digits in the next few years. Even the federal government's health coverage is facing rate increases on the average of 13.3% with some of the more popular plans going up 20% or more. 

According to Forrester Research, consumer-driven health plans (CDHPs) will attract 2.7 million members and capture $16 billion in premiums by 2005. Preliminary reports from carriers and consultants offering CDHPs show that medical cost increases are less under a CDHP compared to other health plans. A recent nine-month study by a national carrier demonstrates that medical costs under a CDHP rose by just 1.5 percent, compared to double digit increases under other types of plans

By using the HRA concept with a consumer driven high deductible plan, employers and employees will enjoy the savings in lower premium and lower utilization cost, contrary to the current trends of double digit rate increases.

Health Care Utilization:

    13% of consumers have no utilization of health care dollars

    53.3% of consumers are  low utilizers using 10% of health care dollars

  • Preventive Care

  • Acute illness or injury

    25% of consumers are medium utilizers  using 15% - 20% of health care dollars

  • Multiple acute visits

  • Chronic illness

    8.7% of consumers are high utilizers using 70%+ of health care dollars

  • 15 priority diseases / conditions - poorly controlled

  • Unpredictable catastrophic condition

 

What do employees like about CDHPs?

  • Employees find the cost savings associated with CDHPs attractive.

  • Employees enjoy the choices and control they have over their health care dollars.

  • When a CDHP is designed with an HSA or an HRA with a rollover option, employees can save unused funds to pay for future health care expenses.

  • Employees with HRAs also have a first dollar benefit allowing them to use their account funds to pay for their eligible medical expenses, which reduces their out-of-pocket expenses for the year.

Source: Ceniceros, Roberto, “Consumer-driven Plans May Keep Medical Costs Low,” Business Insurance, Feb. 2004.

"In the first year since going live with a full-replacement CDH plan in January 2003, per-member, per-month (PMPM) medical claim costs at St. Luke's Hospital in Maumee, Ohio, dropped 12.7%, according to recently tabulated first-year results. The hospital also saw pharmacy PMPM expenses plummet 20.4%"

"Fletcher-Thompson's Pellerin, who switched to an HRA plan about a year ago. "It seems only natural that if you want to get a handle on costs, you need to involve the people using the product--employees," she says. Fletcher-Thompson now puts between $600 and $1,200 a year into employees' HRAs, depending on the number of people in the person's household. Employees use the funds for copayments, prescriptions, and any other expenses; after the HRA is used up, the copays come from their own pockets. Only a handful of employees have spent the entire amount, Pellerin says, and the company's total costs have dropped 10%."

Why HRA Will Work For Your Firm