How an HRA can work with your group insurance plan

August 3, 2009

I spend a lot of time on this blog talking about how great HRAs are, but a lot of people don't really understand how they work.  The great thing about HRAs is that they can work pretty much however you want them too.  No other health benefits option offers as much flexibility.

I'm going to use this post to talk about one specific type of HRA: HRAs that work along with a group insurance plan.

First, let's make sure everyone understands the basics.  HRA stands for "Health Reimbursement Arrangement".  It's basically a type of health benefits plan that allows employers to reimburse their employees for virtually any type of medical expense.  For example, the employee buys some prescription medicine, submits a claim to the HRA and then receives a tax-free reimbursement from the employer.  

So how does this help improve a group insurance plan?  Many insurance plans have a low deductible (around $500).  This means that everything above $500 is insured.  As I discussed earlier, you shouldn't insure things that you can afford on your own and most companies can afford more than a $500 deductible.  The company can raise the deductible to $5,000 which would significantly lower the insurance premium, but then the employees will be upset with their increased liability.

So how can the company raise the deductible on the insurance policy without passing the additional out-of-pocket expenses on to the employees?

By setting up a group coverage HRA to cover expenses under the deductible, the company can safely raise the deductible without costing the employees a penny.  This effectively means that the employer is self-insuring the first $5,000 instead of the first $500 so they aren't paying the insurance company significant overhead on that amount.  The company saves money and the employees save money.

To help visualize this, take a look at the image below.  Many people on insurance plans don't ever hit their $500 deductible, much less a $5,000 deductible.  That's where you see the "Employer Savings".  The employer is agreeing to cover all employee expenses up to the change in deductibles ($4,500 in this case) but the vast majority of employees won't spend this much which means everyone ends up paying less.

hra vs traditional coverage resized 600

If it still doesn't make sense why this saves money, think about it this way:  Right now, insurance companies are making a profit on everything you are paying them to insure.  By self-insuring more of the policy, you're taking those profits from the insurance companies and keeping them for yourselves (or passing them on to employees).

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