How does an HRA reduce employers' healthcare costs?

Do you know how to use an HRA to keep your company's health insurance costs down? When used right, a health reimbursement accounts (HRAs) can lower the cost of healthcare for both the company and your team.

There are several kinds of HRAs, so it’s worth saying that we’re talking about the “regular” kind for medical expenses like copays, coinsurance, and doctor’s bills. Not premiums. 

It's also worth pointing out that an HRA is different from an HSA. We're talking about the one with an R for "reimbursement." 

A quick heuristic: 

The company keeps unused money in an HRA (👈 I'm talking about this one)

The employee 𝘀aves unused money in an HSA

Employers have discretion about what's covered in their HRA plan, which is what makes them so useful. The company decides the annual limit, as well as specifications like whether to cover deductible expenses, post-deductible expenses, and/or over-the-counter expenses and services.

By using an HRA, an the company can offer cheaper plans without employees necessarily having to pay the higher out-of-pocket costs. 

Here's how it works: Many employees won’t max out their HRAs each year, so the company can offer a higher limit without necessarily having to pay it out for all employees.

For example, imagine you’re going from a $1000 deductible plan that costs $700 per employee per month to a $2000 deductible plan that costs $550 per employee per month. 

You have 100 employees on the plan: 

• 20% will have more than $2,000 in healthcare costs

• 30% will have between $1,000 and $2,000 in healthcare costs

• 50% will have less than $1,000 in healthcare costs

If you set up an HRA with a limit of $1,000 to be paid after the employee has paid the first $1,000 of the deductible, then both the employee and the company save money. 

The employees will still pay the first $1,000 out of pocket as they did before. 

The 50% who exceed the old $1,000 deductible won’t pay anything on the next $1,000 dollars of medical expenses covered by the HRA. On the old plan, they would have still been subject to the copays and coinsurance for that next $1,000 of care, so it's a good deal for them.

Those who don’t meet the deductible see no change.

Meanwhile, rather than paying $70,000 per month in premiums, the company is now only paying $55,000 per month. A cost-savings of about $180,000 per year.

For the HRA, the company would pay about $35,000 in reimbursements. 

Even with the cost of administering the HRA plan, the company would still save about $140,000 per year in this scenario.

Finally! Health insurance math that works! 

If you’re looking for creative ways to get control over your company’s health insurance costs, hit me up. I’d love to hear about what you’re struggling with and how I can help.

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