The following is a guest post by John Butler. This article originally appeared in New Business Minnesota. John is owner and president of True Choice Services, an employee benefits brokerage firm that works with businesses of all sizes to meet their benefits needs, including health, dental, life and disability. He can be reached at (952) 892-8450 or john@truechoiceservices.com.
Protecting Employees Can Be Affordable with an HRA Strategy
Quick quiz: In the next year, do you expect health insurance costs for your company to increase substantially or decrease substantially? If you’re like most small business owners, you reflexively answered “increase.”
It’s not your fault you got it wrong. You have been conditioned over the years to think that the employer is the source of health insurance and the group plan is the only option.
So how can health care costs go down substantially in defiance of common business sense? It’s kind of a trick question because I knew you would be thinking about group plans. If you think individual plan, the whole cost equation is turned on its aural canal (ear) and price decreases enter the picture.
Now that you are running your own show you really need to learn the advantages of going the individual policy route, whether you already have employees or expect to in the future. When you have employees, protecting their health insurance will become an issue you need to address.
New Approach
The old model is a group policy with individual employees as members. With the new model I’m talking about here, a group of individuals own their policies. The employer simply provides tax free dollars each month into an HRA or Health Reimbursement Arrangement that helps their employees with the costs.
The group plan concept is so embedded that most employers aren’t even looking at HRAs as an alternative. They don’t even know they exist. That is starting to change. I’ve been in this business since 1993 and I’m absolutely amazed that HRAs have not been used this way before. It’s finally catching on.
For the employer, there are no more annual contract renewals and no more bottom-line-rattling rate hikes. What I try and do is to shift the owner’s mindset and help them see how they can give employees tax free dollars each month to meet their needs for a health insurance policy that fits them.
With this approach, employers don’t own or manage the policies. They just help out with the expenses in similar form to a business expense account.
Aside from saving money, an important feature is that employees will own their contracts. That means they are portable. When they leave the company, the policy goes with them. It’s theirs.
Escape the Rules
The key to the cost-saving approach is to get outside the rules and regulations of the group system. In Minnesota, there are 64 rules for group plans. That’s the third highest in the nation. Those rules define what every group plan must provide, and cost consideration is not important to the state.
As soon as you break away and go with an individual policy, you get a double positive whammy that results in savings for employer and employee alike. For employers, costs go down because you eliminate nearly all regulations controlling employers.
When the individual’s coverage isn’t mandated by the Legislature, for instance, a single male doesn’t have to pay for maternity coverage. Or he can save 6 percent to 8 percent by forgoing mental health coverage. Your employees can customize their own insurance program. This seems to me the way it really should be.
The HRA model allows health insurance companies to do what they do best: manage risks and expenses. It allows the employer to operate under a set budget, and allows the employees a freedom of choice.
The individual health plans are customized and are underwritten based on the employee’s health history, not the collective group of employees.
HRA Savings
By adopting the HRA model, it’s not unusual for a 20-employee company’s costs to fall from $100,000 to $60,000 a year. And that’s with the company continuing to pay a good portion of the cost of the employee-owned plan.
If an employer wants to be a generous, they can still pay a great deal of the costs, and still save a ton.
The savings are such that employees start thinking about what to add back into the plan: dental, critical-illness coverage, long-term care, additional life insurance and more. With choices, they feel they control their destiny.
Employers love the HRA approach because they never have to go through another renewal process again and they avoid the hefty costs of COBRA administration. When the employee
leaves, they take the policy with them and continue to pay the policy themselves. The company avoids the expensive COBRA administration hassles and costs altogether.
Real World Example
Since insurance providers weigh individual risks, the savings will vary from employee to employee. I have worked with a company of 33 employees that included a young employee
with no health issues on the one extreme (big savings) and the 63-year-old worker with diabetes and a heart condition on the other (minimal savings).
It’s instructive to see how the employer handled the transition to the HRA model. First, the company’s monthly expense went from $11,200 in the group plan to $6,400 with the
HRA model. They promised their employees that with the switch, employee costs would decline for most, or at least not increase for others.
As it turns out, everyone at that company, except the 63-year-old man, was able to get individual coverage at a substantial savings. Since coverage for him was declined, he was automatically accepted into a Medica-administered plan called the Minnesota Comprehensive Health Association (MCHA), which offers individual plans to those turned down in the marketplace.
He was the exception in that his monthly premium increased from $750 to $800 with the MCHA coverage. The employer, however, was more than happy to use some of his dramatic savings to contribute more to that worker to keep his rates below what they had been under the group plan.
Get HRA Help
The move to the HRA model has to be carefully managed to avoid confusion and needless fear. You need to work with a health insurance professional to provide the needed education and handholding during the transition.
When I take a company through the change, I plan on a 60-day transition period. We have to meet with employees to announce the HRA plan and start managing some of the eventual fear that comes with change.
The reaction of employees varies widely. Some will “get it” right away. Some still won’t know what a “deductible” is. Others will have complicated health issues and many more questions. And some will need hand holding when they end up in the MCHA plan. Maybe one out of 20 will need additional employer support to make sure he or she doesn’t pay more than before.
Obamacare
Obamacare will arrive in 2014. In anticipation of the state health insurance exchanges, major insurers like Blue Cross, Medica, Health Partners, Preferred One and others, are coming out with a variety of new products to address the changing market.
Where does that leave the HRA strategy? Well, employers will be thinking more and more about supporting the individual policies of their employees with a monthly tax-deductible contribution.
The savings from the HRA approach can be dramatic and substantial – the cost per employee can sometime drop from $9,000 a year to $3,000. Even with a possible $2,000 per employee penalty under Obamacare for companies with more than 50 employees (come 2014 and beyond) it still provides a dramatic savings over a traditional company-owned group plan.
Conclusion
The HRA model provides a unique example of how a free market system can really work inside a health insurance design! HRAs have been around a long time, but deployed as a wholesale replacement for the group plan is something new. Every employer and new business owner should be aware of this incredible health insurance option.
