Health Action in Depth

January 2003

Some Employers Turn to Troubling New Insurance Plans

In our last issue, we talked about skyrocketing health care costs, why such costs are increasing, and how employers are passing many of those costs on to their employees. Now some employers are looking to Health Reimbursement Arrangement (HRA) plans, potentially disturbing new developments in the private market, to keep a lid on health care costs.

Employers say they offer HRA plans to their employees to contain costs, and it is true that these plans do limit the costs shouldered by employers. But as Ron Pollack, Families USA's executive director, observed, an HRA plan is "a wolf in sheep's clothing. The greatest motivation for this has come from employers who want to shift costs" to employees. What is more, such plans may serve to further segment the health insurance market; place far greater burdens on those who require more medical care, such as seniors and those with chronic or serious illnesses; and lead to health care rationing.

Restructuring Employee Health Benefits: HRAs
To put a damper on cost increases, some employers are re-structuring employee health benefits in ways that are different from traditional HMO or PPO arrangements. This move is what some term a "shifting of responsibility" to employees, whose employer-sponsored insurance, commentators claim, has insulated them from the true costs of their care. Such health plans are also (mistakenly) called "consumer-driven" plans, although they aren't likely to give consumers better options or more extensive coverage.

One relatively new development in this area is known as HRA plans, which were known in their previous incarnations as MSAs (Medical Savings Accounts) or PCAs (Personal Care Accounts). HRAs have two main components.

• First, an employer gives an employee an account with a certain amount of money in it with which to pay for health care services, such as doctor visits, prescription drugs, and perhaps even visits to alternative practitioners.
• The second component is a high-deductible-also called catastrophic-health insurance plan that the employee is enrolled in at the same time.
• Between these two components is the gap between the money deposited in an employee's HRA account and the threshold when the deductible for the catastrophic insurance plan is met and the insurance plan kicks in. If an employee spends all of the money in her HRA account, she must pay any remaining medical expenses out-of-pocket until she has met her deductible.

The premiums employers pay for such policies are usually cheaper than those they pay for more traditional forms of insurance, even after the expense of depositing money into the employee's HRA account. Such policies may end up being cheaper for some employees too-it all depends on how big the gap is between an employee's HRA account and her deductible and whether the employee incurs high medical bills. How would these plans work for real people? Below we present a couple of hypothetical examples to illustrate this point (using medical cost estimates from a company that is currently administering HRA plans for several groups, including the Postal Workers Union).

Employee A has type 2 diabetes, a chronic health problem requiring regular care. Let's say A has a HRA account with $1,000 in it and a deductible of $3,000. A must be monitored by a physician on a regular basis, requires lab work, and must pay for home testing supplies, insulin, and other provisions for his extensive self-care. The company estimates the cost of this kind of care for type 2 diabetes at $2,160. So, A would draw down all of the $1,000 placed in his HRA account and would then have to pay $1,160 out-of-pocket (in addition to any premiums he must pay) because he hasn't yet reached his deductible. Of course, this calculation doesn't take into account any complications arising from his illness, or any other kinds of medical services, such as basic preventive care, prescription drugs, etc. Such care might push him past the threshold for his deductible, at which point his high-deductible insurance policy would start picking up the tab.

Employee B has a heart attack, an acute event requiring both intensive medical treatment and ongoing care afterward. B has a HRA account with $1,500 in it and a deductible of $4,000. The estimated cost of covering just her heart attack is about $3,500. So, B would pay for the first $1,500 of her care out of her account and would then have to pay $2,000 out-of-pocket. Again, this calculation doesn't take into account the costs of follow-up care, prescription drugs, etc., which could push her medical costs past the threshold for her high-deductible health plan.

As the marketing manager for the Postal Workers Union said, "People at serious risk for a medical problem or a medical catastrophe might better protect themselves with another plan." But this begs a very basic question: Aren't all of us at risk for a medical catastrophe? Such catastrophes are, by their very nature, unpredictable, something that could befall a young, healthy person as well as an older, sicker person (even if the odds are greater for the latter). The whole point of health insurance is to protect people from the costs they might have if faced with such a catastrophe.

Concerns about HRAs
Both A and B had to pay more than $1,000 out-of-pocket to cover the costs of their essential care. It's important to note that these amounts could prove to be prohibitive for low-income workers or their family members. In other words, the impact of this kind of cost-sharing is more dramatic for low-income people than it is for higher-income people.

Another concern regarding HRA plans is that employees may forgo needed medical care to preserve the money in their accounts. An employee, concerned about some medical expense that might pop up without warning in the future, might avoid seeking other health care to save the money in her HRA account. This might be especially true for lower-income workers, who don't have as much money to spend out-of-pocket after they have spent the money in their accounts. But if such plans result in workers skimping on preventive care or screening and diagnosis, those workers may end up with even worse medical conditions requiring more expensive care than was originally needed, thus defeating the stated purpose of such programs-cost control.

Whether an employee saves or loses money under such a plan, however, there is one major downside to HRAs-something known as adverse selection. Adverse selection occurs when healthier people are siphoned away from a health plan, leaving sicker people behind. This drives up premiums for the sicker group. Offered a choice between a HRA and a traditional plan, healthier people would likely gravitate towards the HRA, figuring they won't have to worry about medical costs and meeting a high deductible, while older, sicker employees would likely stay with traditional insurance. Premiums would then go up for the insurance plan that covered the sicker group, adding upward pressure on already rising prices, which could result in employers dropping coverage. If this happened on a large enough scale, it's possible it could drive traditional coverage out of the market (what some commentators call a death spiral). There is also concern that increasing use of HRA plans could eventually lead to a health insurance marketplace with only high-deductible plans as low-deductible coverage disappeared.

How Many People Are Covered by HRAs?
Many employers are skeptical about HRA plans because it's unclear whether they will produce the cost savings employers are seeking.

The data regarding how many firms are using or considering this option vary. One survey completed in the summer of 2001 found that nearly 58 percent of responding employers said they were considering introducing consumer-driven plans to their health coverage options within the next five years.  A survey released in the fall of 2002 found that 29 percent of large employers said they would be offering employees HRA plans by next year. A more recent study estimates that 1.5 million employees are currently covered by HRA-type plans. The ranks of those using HRA plans include several larger companies, including the insurance companies Aetna, drugstore chain CVS, drug manufacturer Novartis Inc., and Budget Rent a Car. Many more, including Allfirst Financial Inc., Levi Strauss & Co., Toys R Us,  and even the U.S. Postal Service also plan to add such plans to their employee benefit menus.

The Bottom Line
While many in the health care policy field believe we are headed toward a crisis when it comes to the escalation of health care costs (if we're not already there), there is no consensus on how to put a stop to these burgeoning costs. Perhaps Kaiser Family Foundation president Drew Altman summed it up best when he said, "We've had no meaningful way to control health care costs. There's no big new idea for controlling costs, so the result is a free-for-all. Working people will pay more, benefits will be cut back, and we're likely to see an increase in the ranks of the uninsured."

This situation has implications for the state of health insurance overall, as well. The basic premise of insurance is the sharing of risk; the changes taking place in the private health insurance market undermine that premise. The overriding sense among conservatives is that consumers are insulated from the costs of their care and they should be forced to face those costs. (We addressed this issue in the November edition of Health Action in the box titled "Are Consumers to Blame for Rising Health Care Costs?") As for HRAs, once employees see the money coming out of their accounts, the theory goes, they will make different choices, i.e., decide to skip some care. But this creates a situation where each person is her own little health care island, where no risk is shared, and each person must deal on her own with whatever good or bad luck befalls her in the health arena. This is really a step down the slippery slope in the direction of the individual market where risk isn't shared and there is no social responsibility, where health insurance policies are either not available or are prohibitively expensive unless you are young and healthy, and where low-income workers would likely be unable to purchase any coverage whatsoever.

What Can Advocates Do?
Advocates need to help their constituents understand that HRAs pose risks on two different levels: 1) On an individual level, someone with a health problem will likely have to pay a substantial amount of money out-of-pocket before meeting the deductible for her catastrophic insurance plan, and even a young, healthy person may lose the bet that her good health will continue. 2) In the larger sense, regardless of how such a plan would work for an individual, such plans pose a threat to the whole system of shared risk that underlies insurance, whether private or public.

What should an employee do if his employer offers him a choice between an HRA plan and more conventional health insurance? On the next page, we list the kinds of questions a consumer should ask to find out if an HRA plan is right for him or her. Keep in mind that the main reason that this type of coverage has developed is that it enables employers to reduce their costs. However, insurance costs for employers are lower only if 1) fewer services are covered; 2) employees use less of the covered services; and/or, 3) employees pay more out of their own pockets for the coverage.

Key Questions to Ask about Health Reimbursement Arrangement Plans

The Terms of Your Account
Don't be fooled into thinking the money in your health care account is really your money. Check out the limitations on how and when you can use the dollars in your account.

1. What is the dollar amount in the account?
2. Do the dollars in the account roll over so you can spend them the next year? Is there a ceiling on the amount of money you can roll over?
3. Is there a limit on the number of years you can continue to roll over the money in your account?
4. Will your spending on preventive services (annual check-ups and related lab work, diagnostic tests, etc.) be counted against the account? If not, will the full cost of these services be covered through another reimbursement mechanism or an accompanying insurance plan? If so, this will help your account dollars go farther and help ensure that you won't need to skip important preventive care to stretch dollars.
5. Are there limitations on the health care services you can purchase with your account dollars? Don't assume that you have total freedom to decide what qualifies as a medical treatment or legitimate health care service. "Alternative therapies" may not be covered, for example.
6. Are you limited to using account dollars to purchase services from an approved list of providers (sometimes called "in-network providers")? If you are able to go to any provider, remember that the cost of care for services will surely be higher than a rate negotiated between an insurer and a provider.

The Gap Between Your Health Care Account and Your High-Deductible Insurance Plan
If you are young and healthy, you may be betting that you won't spend more on your health care in the next year than the amount in your health care account. If you win the bet, this type of plan will save you money because you won't have to pay any out-of-pocket costs that fall in the gap between the amount in your account and your deductible. As you consider this gap, think about how this type of coverage would work for you if you did develop an expensive illness.

1. How large is the gap you will have to cover between the amount of money in your account and the size of the deductible of the accompanying insurance coverage? For example, you could have $1,000 in your account but your insurance coverage could have a $2,000 deductible (a $1,000 gap) or a $5,000 deductible (a $4,000 gap). 
2. Do the dollars you spend from your health account apply towards the deductible? Don't assume they do. If they don't, then a $2,000 or $5,000 deductible means just that - a $2,000 or $5,000 gap you must pay out-of-pocket before your health insurance plan kicks in.
3. When you have used up your account dollars and have not yet satisfied your deductible, will preventive services be covered or will you now have to pay for them out-of-pocket? Can these costs be applied towards your deductible? Don't assume that preventive services covered while you were spending money from your health account will continue to be covered while you are still satisfying your deductible.

The Terms of the High Deductible Insurance Plan
Once you have used up all the dollars in your health account, not only do you face the gap between your account and your deductible, but the insurance that now covers you may have many limitations. Check out the terms of your high-deductible plan carefully.

1. What are the covered services? Are the kinds of services you need covered?
   Is the coverage through a type of managed care plan? If so, does the network include providers reasonably close to your home? Are your current doctors and closest hospital in the network?
2. Are the providers in the network accepting new patients?
3. Can you go to providers outside the network if you need to?
4. How big are the copayments for in-network and out-of-network providers?
5. What are the maximum out-of pocket costs that you are responsible for in one year? In other words, at some point, will the insurance plan pay 100 percent of the cost of care and not require you to make any additional copayments?
6. What is the maximum lifetime benefit that will be paid out to cover health care services that you may need? That amount may sound large, but keep in mind the high cost of health care.
7. What is the plan's policy for payment or denial of claims? Will the plan pay for all services that your doctor says are medically necessary? If not, what is the basis for denying claims?
8. What is the procedure for appealing denials? How quickly does this process tend to work?