With the move toward consumer-driven health care, organizations are seeing their employees become more aware of the cost of medical care. While the approach has proven effective in reducing spending for some, others are still leery of changing their benefit structure.
“Normally, people will pay a set amount in annual premiums,” says Veronica Hawkins, Medical Mutual vice president of Government Accounts. “But when your employees spend more on premiums each year than they do on medical care, consumer-driven health care may be something to consider.”
Smart Business spoke with Hawkins about what defines consumer-driven health care, how the options generally work and under what circumstances it might be right for your organization.
What is consumer-driven health care?
It refers to health plans that give employees greater control over their health care spending and helps them be better consumers.
Typically, consumer-driven health care involves a combination of a tax-free savings account, such as a health savings account (HSA) or a health reimbursement arrangement (HRA), and a high-deductible health plan. Flexible spending accounts (FSAs) are another option, which employees can use along with an HSA or HRA as an added benefit.
The high-deductible plan covers some costs upfront. Employees pay for other medical expenses using money that’s been set aside before taxes. This encourages them to manage and keep track of their own health care — and take responsibility for how those dollars are spent.
How does an HSA generally work?
With a compatible high-deductible health plan, eligible employees can open and start funding an HSA. These accounts are usually funded through payroll deductions and employees and employers can both contribute. With an HSA, there are no taxes on deposits or interest, or on withdrawals employees make for approved medical expenses.
Employees just have to make sure they use the money in their account to pay their portion of the costs. Any remaining balance at the end of the year rolls over automatically, with no penalty.
How does an HRA work?
An HRA is a tax-free arrangement that is owned and funded by the employer. HRAs are classified as ‘notional’ accounts, meaning the organization only contributes money to the account when they receive claims for approved medical expenses. The most popular HRAs are the ones that fund a portion of an employee’s deductible, but employers also have a say on which medical expenses they will reimburse.
Generally speaking, any money that’s left at the end of the benefit year won’t roll over to be used in later years.
What about FSAs?
There are several different types of FSAs. There is a health FSA, limited-purpose FSA that is usually for dental or vision care, one for dependent care expenses, one for adoption assistance, and one for parking and transit expenses. Similar to HSAs, employees fund FSAs through pre-tax payroll deductions.
While any money left in the account at the end of the year is forfeited, organizations have the option to offer a grace period of 2½ months or let employees carry over up to $500 into the following year.
What else should organizations know?
There are a lot of variables involved in consumer-driven health care, but it all boils down to empowering employees. When employees understand the cost of an office visit, a lab test or a monthly prescription, they are able to become better consumers of health care and are more likely to engage in healthy behaviors.
But just like any change in your organization, education is critical. Because once employees are responsible for funding their own health care, they need to feel confident that they can pay for what they need.
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