Can HRAs Reform the Employer-Based Insurance System?


How HRAs can empower employees to choose the coverage that meets their needs while empowering employers to offer competitive health choices.

Eugene Sayan  and  Ken Janda

One creative way for employers to attract and retain top talent is by providing innovative health benefits. Interesting and even intriguing wellness incentives include awarding employees gift cards for completing a virtual wellness test, offering adoption assistance, or investing in childcare services. But, these benefits are provided in an expensive healthcare market. How expensive? The average premium paid by the employer and the employee for a family plan now tops $20,000, a five percent increase from 2018. 

It’s safe to say this upward trajectory will likely continue. For one thing, according to data from last October, employers expect healthcare cost increases of 4.9 percent in 2020 (up from four percent in 2019). For another, reducing healthcare costs and increasing affordability is a top three-year priority for 93 percent of employers.

Employer Benefits Are Likely Here to Stay

Ninety-five percent of employers are very confident their company will still sponsor healthcare benefits to active employees five years from now. Indeed, health accounts offer various solutions that help make healthcare more affordable for employers. With new policies on health reimbursement arrangements, even micro-employers can take advantage, too. Offering and financing coverage can be more flexible for employers of all sizes, providing opportunities for employers to remain competitive when trying to attract top-notch talent.

When it comes to health saving and spending accounts, Health Saving Accounts (HSAs) are more popular than ever, with total estimated 2020 assets at $75 billion in investments and deposits (up from $1.7 billion in 2006). More than half (fifty-six percent) of employers offer an HSA, according to 2019 data. This is up 45 percent from 2014. The number of companies doing so has more than doubled since 2010. And, annual enrollment has grown 15 percent since 2011. 

The Power of the HRA

A Health Reimbursement Arrangement (HRA) is an employer-owned arrangement employers use to reimburse employees for their medical care expenses on a pre-tax basis. Unlike an HSA, only an employer can fund an HRA. HRAs traditionally were coupled with an Affordable Care Act-compliant group health plan to be sheltered from taxation. The Departments of Health and Human Services, Labor and Treasury’s recent final rule on HRAs, however, expanded the use of HRAs to allow funding of premiums and out-of-pocket costs of employees in the individual health insurance market. This addition should help small businesses facing cost difficulties offer a traditional group health plan, or reimburse one. The rule also created a new excepted benefits HRA which could pay premiums for excepted benefits, short-term plans, and COBRA. Excepted benefits include limited-scope vision and dental benefits.

The number of employers offering HRAs has remained relatively steady over the past five years, growing in prevalence by two percent between 2014 and 2018. The Trump administration, however, estimates that roughly 800,000 employers will offer new individual coverage HRAs to pay for health insurance for more than eleven million employees and their family members.

Given how helpful HRAs have been to smaller employers and how the current administration has encouraged their use via its new policies, we analyzed the optional new HRA-centered employer-based health system. The market is ripe for the HRA with 30 million small businesses and 59 million small business employees, according to the US Small Business Administration. There are also 27 million part-time employees and over 542,000 minimum wage workers.

Many smaller employers, and even larger employers with many part-time or low-wage workers, still struggle with the costs and minutia of providing a group plan for employees. Even if employers can provide a group plan, they must contend with premium rate increases in the market. Employees suffer under this system, too. Once they leave a job, they must worry about acquiring a new source of coverage, which essentially makes them “job-locked.”

What if instead of purchasing a specific plan from an insurer, employers established a defined contribution health plan via an HRA for each employee? Each employee would use their HRA funds to purchase an individual policy of their choice from the Affordable Care Act marketplace. These policies would have no pre-existing conditions and would provide all essential health benefits, mitigating risk of discrimination, as long as the HRA is consistent for each class of employees, which is a way for employers to separate employees into groups by legitimate job-based criteria. 

Potential Challenges with HRAs  

Despite optimistic projects from the Trump administration regarding employers and employees who will participate in the HRA system, the new HRA provisions are largely untested. An initial shortage of small businesses willing to partake in this system is likely due to new and unforeseen challenges. The first potential issue is initiating HRA plans properly. Due to the complexity of the matter, a third-party administrator might be required to handle claims and document setup. Depending on the size and revenue of the small business, extra start-up costs may counteract any potential savings. Additionally, allocating enough money to fill up and maintain the account serves as a challenge to employers who have already faced an unforeseen financial burden in the face of the COVID-19 pandemic.  

Considering the binding elements associated with HRAs, it has its downsides. Unlike HSAs, there is zero portability associated with HRA funds. Workers cannot transfer any outstanding balances over to a new job. This serves to limit employee options and prevent upward mobility in the job market.  

Additionally, HRAs carry the unfortunate potential for manipulation by an employer. The ability to fully customize an HRA creates the possibility for employers to stray away from their intended roles. Varying reimbursement amounts, network approval rules, and restrictions on which employees receive HRAs versus traditional group insurance are causes for potential exploitation. Despite the Health Insurance Portability and Accountability Act (also known as HIPAA) nondiscrimination requirements protecting employees with high-risk healthcare needs from being pushed into the individual market, as opposed to employer’s group health plans, concerns remain. The decision of which types of employees can receive an HRA or traditional group insurance can only be based on different “classes” (such as full-time or part-time employment) that exclude healthcare needs; however, it is still possible, especially in smaller businesses, to discriminate against workers with more severe health issues under the guise of legitimate distinctions. Due to the desire to reduce group health plan costs, the potential return of high-risk employees into the individual market through HRAs could increase premiums and uninsured rates. 

Four Primary Benefits of an HRA-Based System

1. Gone would be the days of employees being forced to choose an ill-fitting plan from their employer’s typically one or two options. Employees would instead be given free rein to choose the plan best suited for their health needs and financial constraints. The control gained by the employee also means fewer administrative burdens for the employer — no more hassling with picking networks, deductibles, and copayments, or calculating premium rate increases.

2. The HRA system would also help address the issue of insurance churn. Employees would be free to leave a job without fear of giving up their health insurance since their coverage would travel with them. Reduced churn leads to lower costs and improved health outcomes.

3. As more people leave the employee market for the Affordable Care Act market, the coverage growth could strengthen the Affordable Care Act ecosystem overall. The risk pool could improve, and premiums could decrease.

4. Having employees in the driver’s seat might revitalize the health insurance industry. Competition between insurers for consumers could increase innovation and higher-quality plans while decreasing premium costs.

HRAs hold the potential to transform the health insurance industry by empowering employees to choose the coverage that meets their needs while empowering employers to offer competitive health choices, control health-related costs, and reduce complexity and overhead. While small businesses are a natural audience for HRAs, large employers may be attracted to the same value proposition. A more consumer-focused insurance industry could bring positive change to a complex healthcare system in need of transformation.