HRA vs. HSA: Decoding Health Insurance (Part 1)
The language used in health insurance is probably most similar to that old Disney movie Rocketman, where the unsuspecting genius Fred Randall is called upon to become an overnight-astronaut. Because of the urgency of the mission, he didn’t have time to learn the acronyms, so to fit in he started just making up his own. But maybe it doesn’t have to be that complicated? Maybe we can get a little bit of help? Today, let’s take a few bites out of this code by looking at one of the most confusing insurance elements: HRA vs. HSA.
Copays vs. High Deductibles (HSAs)
Recent studies have found that around 50 percent of all insurance in the U.S. is a high deductible plan, also known as High Deductible Health Plan (HDHP). These plans qualify for the criteria set by the IRS to allow for a special savings account known as a Health Savings Account (HSA). These plans can accept a certain amount of pre-tax dollars and they only work alongside a qualified HDHP.
Basically, an individual who is enrolled in an HDHP opens up an HSA alongside their plan. They are then able to deposit money into that account that can be saved and used at a later time for qualified medical expenses. This money is not use-it-or-lose-it and can be saved up to its HSA limit ($3,500 for single and $7,000 for family) each year.
This sort of plan can be advantageous over the traditional copay plan because the premium is lower. The individual saves each month on the actual product expense, which can then be turned back into HSA dollars. Copay plans can be good for people who have medium usage, such as a family with school-age kids, who statistically are more prone to sickness and injury. The issue with copay plans is that they will always be more expensive and often have higher max-out-of-pocket costs.
HSAs are usually good for people who have very little usage, or people who have very high usage. Why? If you know you’re going to hit your max-out-of-pocket every year, then you might as well lower your premium and get pre-tax dollars to cover medical expenses up to your max amount anyway. Or, if you’re a minimal user of health insurance, then you can keep saving those medical dollars for the day when you do need it.
I’ve seen this work countless times, and have even enjoyed it myself─I didn’t have any medical needs for a long time, and by the time I needed it, I had saved up enough HSA dollars that I didn’t even feel the expense. Many people have saved upwards of $10,000 in HSA accounts for future use. And those dollars are portable, which means if you leave your current employer, you can take those dollars with you.
The H(RA)istory of Reimbursements
So what is an HRA then? Health Reimbursement Arrangements are “plans” that have an agreement by the employer to cover a certain amount of incurred medical costs. These costs are run through a Third Party Administrator (TPA) to maintain HIPAA compliance and ease the administrative burden of paying back expenses. The expenses must be proven with receipts and there is a limit on how much can be spent from the HRA.
Generally speaking, an HRA uses some sort of debit card so the employee doesn’t have to shell out money up-front. While HSAs and HRAs are similar in name, and they are similar in that they are used to pay for medical bills, they are actually pretty different.
For years, employers were able to use standalone HRAs to pay for health insurance plans or expenses. One of the major changes that was brought about by the Affordable Care Act (ACA) was the removal of annual and lifetime limits on any insurance plan. Before the ACA, insurance companies were allowed to set a limit (say $1 million) for the life of a plan.
If you have any experience around expenses to fight cancer, you know that $1 million is very easily reached. What was happening is that people would reach their insurance lifetime limit, but still have expensive treatments to pay for. The ACA removed those limits in an effort to help those situations.
Even though HRA’s are just an “arrangement”, they are still considered a “plan” in and of themselves. Therefore, they may only be integrated alongside another ACA-compliant insurance plan, and they may not be used for premiums (excluding some special exceptions). HRAs are generally used as an added benefit alongside an already-fairly-rich benefit package.
The biggest difference, however, is that HRAs are use-it-or-lose-it. If you have a $2,000 allotment to spend on medical expenses but you don’t use it, then you do not get to keep it. This also means that HRA dollars are not portable. While an organization is still absorbing a certain amount of unpredictable “risk” by offering an HRA to their team, there is always the possibility that few of their HRA dollars will be used each year.
So Which is Better?
Most often, HSAs are better for the employee, and HRAs are better for the employer. If applied correctly, both can be really strong options for the team depending on their specific needs. And both, when done poorly, can feel like a choke-hold on coverage and medical cost support. That’s why it’s very important to have someone you can trust who can objectively look at your situation to suggest the best route to take care of your team and steward your resources as best as possible.