What Is All The Fuss about Health Reimbursement Arrangements (HRA)

I would like to delve a little bit into health reimbursement arrangements (HRA), not to be confused at all with health savings accounts (HSA). These two terms are sometimes thrown around interchangeably but they are totally different strategies.


OK just a little heads up that this article may make some people a little uncomfortable, or even a bit mad. It’s not my intention. I’m just giving you my perspective on different insurance strategies that I have seen implemented in the past 18 years of being in the employee benefits industry.


OK so first off let’s talk about what an HRA is all about.
This is a funding strategy employed by an employer to offset out-of-pocket medical expenses for the employees. The money is owned and controlled by the employer. This is very different from a health savings account where the money is owned by the employee.


OK, so why do some employers and why do many employee benefits brokers recommend this strategy? As deductibles have doubled over the past 10 years this strategy was introduced in an effort to protect the out-of-pocket risk for the employee.
Rather than paying upfront for a lower deductible health plan employers RAISE the deductible and layered an HRA on the backend.
This was an admirable attempt by employers to help protect the employees. Money was set aside from the employer to pay out-of-pocket expenses that were deemed worthy of being reimbursed.

In this manner, I applaud the effort in the idea to help protect employees while mitigating the rising cost of healthcare.


In the spirit of trying to improve things, what a lot of employers and brokers didn't realize is that this strategy can be confusing for the typical employee. Most employees don’t even understand what a deductible means or coinsurance means. Layering on a different funding mechanism tended to add more confusion to the mix.
If you have this funding mechanism now, try this. Walk around the office and ask three employees to describe it that is NOT in the benefits department. You might be surprised at how little your staff understands this strategy.
Employee engagement and understanding of how benefits work is crucial to making sure strategies are implemented.


In an effort to help protect out-of-pocket exposure, one significant error was made in my opinion. These plans tend to cover the back end of the deductible risk exposure. This strategy will not kick in until the employee has experienced significant out-of-pocket expense.
Rule of Thumb: less than 10% of employees will ever reach the typical deductible in place today. Less than 5% will ever reach the out-of-pocket maximum.
So, this strategy is effectively going to only help less than 10% of the employees. I don’t know how you feel about this but to me, this is not an effective strategy.


In order to get the reimbursement funding, the employee typically has to go through a multi-step claims process. On numerous occasions, I have talked to employers where they openly acknowledge that many employees are NOT submitting the claims to get reimbursed. So this creates a Win/Lose situation...

For the employer, this saves them money. For the employee, this costs them money.


The final nail for me using the strategy for most situations is that it does not help protect the employee with first-dollar coverage. The fact that the funding doesn’t kick in until the backend of the deductible is NOT addressing the root cause of delayed treatments.
Many studies are showing that over 30% of employees are delaying care because of the cost. And deductibles exceeding $3,000 are now normal.
A health reimbursement arrangement does nothing to encourage that employee to get early intervention and take care of small issues before they become larger issues.

This fact, along with a stat that less than 10% of employees will ever benefit from it, leads me to make the conclusions I am in this article.

Let me be clear, I am not saying this is a bad strategy in every situation. But, I have seen it employed in far too many scenarios where my gut instinct says it’s not a good strategy because of the demographics of the group. There are scenarios however where this strategy would make sense.

But, my role is to look at the majority of companies and what’s going on in the industry and try to provide solutions that apply to many of them, not just less than 10% of them.


So there’s one significant point that I typically share with employers about using this type of strategy. An HRA strategy uses $1 of funding to pay for $1 of expense.
This is what I call 1 to 1 leverage. Or essentially there’s no leverage.
The point of insurance is to use $1 of premium to pay for $6 or $8 or $10 of claims. Now you employ 1:8 leverage or 1:10 leverage. That is much smarter than 1:1 don't you think?

The other point I don’t like is that it is an unknown liability waiting on the budget. Many studies will show only 30% of the funding balance will be used every year. But that is absolutely no guarantee for future performance.


In order to calculate the maximum liability, you should add up the entire HRA funding balance required if all employees use the funding in a calendar year. If you had to come up with that money would you be able to as a business?
In closing, I know this article was pretty tough on this type of funding arrangement. I have this experience because in the many years we have seen employee benefit programs rolled out we have seen many times where this strategy simply makes no sense at all.

Just know that there are other options out there for you to consider and that is one of the things that we as Benefit Hackers provide every day for our clients.
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