Passing the Buck
As human resources director for Fletcher-Thompson Inc., a 160-employee architecture and engineering firm in Shelton, Conn., Susan Pellerin is always looking for ways to hold the line on health care costs, which have been soaring 15% to 20% a year. Last year, she found one: health reimbursement accounts, or HRAs.
Such plans aim to reduce premiums by transferring more of the responsibility for managing health care costs to employees. In an HRA, a health insurance provider creates an account for each of your employees. You contribute a certain amount to each account--typically, about $1,500 to $2,500 a year. Your employees have access to a network of physicians and hospitals, as in any managed-care arrangement. But when they incur a medical expense, they pay for it out of their HRA. When the money is gone, subsequent payments come out of their own pockets. HRAs are typically offered in conjunction with a high-deductible medical plan, which kicks in when an employee's HRA has been tapped. For example, if you put $1,500 into an HRA, and offer a plan with a $5,000 deductible, your employees would be out $3,500 before the medical plan took effect.
Think of it this way: Most current health insurance arrangements resemble an all-you-can-eat buffet in Las Vegas. Cough up the copay and take what you want, whether an MRI or an office visit. HRAs, on the other hand, create an incentive for employees to "treat each doctor's visit or prescription with more scrutiny," says Devon Herrick, a health care economist with the National Center for Policy Analysis in Dallas. To avoid dipping into their own pockets, the theory goes, employees will opt for cheaper, generic drugs, or think twice before a frivolous trip to the doctor.
That made sense to 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%.
Not everyone is impressed. Mila Kofman, a professor at Georgetown University's Health Policy Institute, finds it hard to believe that employees will actually cut back on their health care spending. What's more, she points out, thriftiness today could be catastrophically expensive tomorrow. The money saved by skipping, say, a cholesterol screen would be more than outweighed by the costs of treating a heart attack down the road. "There's no question that this is a lesser benefit," says Robert Natt, CEO of MBI, a Waltham, Mass., software company that administers debit cards for HRAs.
But HRAs are an alternative to cutting coverage altogether, Natt adds. Unused money rolls over from year to year, so if you don't need much care for a few years, there should be enough to cover the costs when health woes finally strike. Of course, as with many health insurance fixes, HRAs do little to help those who actually need care. "None of this goes to the core reasons why health care prices are going up," says Kofman.
Still, HRAs appear to be catching on. Many major health insurance providers--including Oxford and Aetna--began offering them last year. Some 1.5 million people are now covered under "consumer-directed health plans," according to a study in the journal Health Affairs. By 2005, such plans will account for 20% of the market, the survey found; by 2007, the number could hit 50%. So employees should eat up now. The days of the "copay buffet" may be numbered.
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