Bibliography they desire. Lower-incom health benefits. In contrast, while em for em again have “first-dollar” (no deductible) coverage. At the point where an em ployees who use network providers, but pay only 70 percent or 80 percent if Health plans that use HRAs typically use preferred provider organization (PPO) The most common m e em odel currently em ployees with health conditions m Statem ployees can use an HRA to pay for prem ent for the erging combines a high-deductible health ay be at the biggest ployee has iums or Working Group on Health Care Security of the Advisory Committee on Employee i m an HRA that is valued as high as their deductible, additional contributions to the HRA disadvantage under a plan with an HRA, as m em health care services in retirem benefit with a health reim Fronstin, Paul. “Defined Contribution Health Benefits.” aployees use an out-of-network provider. Em naged-care arrangements where fees are already negotiated between providers and the bursem We ent, em lfare and Pension Benefit Plans ent arrangem ployees are also using the account for current a eny sim nt (HRA). ployers m ply cannot afford higher out-of- EBRI Issue Brief a As an exam y also design the health benefit ple, an em no. 231 ployer (Employee Benefit Research Institute, March 2001). by plan sponsor. As a result, em pocket expenses. m such that any charge above the usual, custom consum ma ay provide a com y be viewed by the em ption of health care services while they are working. As a result, m prehensive health benefit that has a high deductible for em ployee as “free” to use without dipping into the part of the HRA ployees benefit from Paul Fronstin, Ph.D. ary and reasonable (UCR) rate does not these discounted fees. oney m ployee-only ay not ________. “Can ‘Consum Employee Benef erism’ Slow the Rate of Health Benefit Cost Increases? it Research Institute (EBRI) ” EBRI Issue Brief that can be used to m coverage of, say, $2,000 a year. In order to help em be available in the HRA upon retirem count toward the deductible when out-of-network providers are used. To the degree that no. 247 (Em eet the deductible. The ability to access real dollars upon job ployee Benefit Research Institute, July 2002). ent for retiree health benefits, especially for 25 June 2003 ployees pay for expenses incurred T-140 McDevitt, Roland D., Janem before the deductible is reached, the em Retiree Health Benefits and Accounts Benefits and Draw term em historically unhealthy em ployers allow em ination will tembacks From the Standpoint of the Employer ployees to use the HRA for health care services that do not count per the induced dem ployees. arie Mulvey, and Sylvester J. Schieber. ployer would also give em and effect. ployees access to an Retiree Health Benefits: Time to Resuscitate? Chairman Szczur and members of the working group, I am Catalog # W-559. W ashington, DC: W pleased to appear before you atson Wyatt W towards the deductible, and to the degree that em HRA with, say, $1,000 a year. The em orldwide, 2002. The m HRAs are attracting attention as a potential way to address the rising cost of Defined contribution health accounts are being used for retiree health benefits. ain advantage of using an RMA or HRA for retiree health benefits is that ployee would use the $1,000 in the HRA to pay ployees use those health care services, today to discuss defined contribution health car Statement for the e plans. My name is Paul Fronstin. I am Nichols, Len. “Can Defined Contribution Health Insurance Reduce Cost Growth? for the first $1,000 of health care services. W Benefits and Draw the gap between the HRA and the deductible will increase. Som the expenses are predictable for the em providing health benefits to em e employers have established retiree m backs From the Standpoint of the Employee ployees. The idea behind the HRA plan design is to give ployer. The em edical accounts (RMAs) for retirees to use to hile the actual deductible is $2,000, in this ployer is responsible only for pre- ” EBRI Working Group on Health Care Security Issue Brief a senior research associate and director of no. 246 (Employee Benefit Research Institute, June 2002). the Health Research and Education Program at of the Advisory Committee on Employee Welfare and Pension Benefit Plans em funding a specific dollar am purchase health benefits during retirem exam ployees greater responsibility for how they spend their health care dollars, providing a ple, because the em HRAs can be set up as funded accounts or notional arrangem Most employees are healthy. On average, 50 percent of the population with ployer provides an HRA with $1,000, em ount. Employees/retirees bear the burden if the am ent. RMAs are typically notional accounts. In an ployees are subject ents. With notional ount Tollen, Laura, and Robert M. Crane. “A Tem the Employee Benefit Research Institute (EBRI), a private, nonprofit, nonpartisan, public porary Fix? Implications of the Move Away Employee Benefits Security Administration, U.S. Department of Labor From arrangem only to a $1,000 “deductible gap” or “corridor” that is sandwiched between the HRA on accum greater incentive to seek cost-ef RMA, participants typically are credited a fixed-dollar am employm Com ulated in the RMA or HRA is not large enough to fully cover expenses for health ent-based health benefits accounts for only 5 percent of the spending. As a ents, the accounts only exist on paper. Em prehensive Health Benefits.” fective, quality providers and a greater incentive to EBRI Issue Brief ployers would pay claim no. 244 (Em ount for each year of plan ployee Benefit s out of Research Institute, April 2002). policy research organization based in Washington, DC. EBRI has been committed, since result, in any given year m participation. Credits can also vary based on a com pocket as they are incurred and adjust the so-called fund balance in the em m the front end and com insurance or health care services in retirem inimize the use of discretionary health care services. In the long run, this should reduce prehensive coverage on the back end. ost employees will not use a substantial am ent. bination of age and service. Credits ount of health care ployee’s on its founding in 1978, to the accurate statistical analysis of economic security issues. Defined Contribution Health Care Plans overall health spending. in the account m account accordingly. Under an HRA, em services. These em Generally, em ay accum ployees are likely to benef ployers have a trem ulate interest and the value of the credits could grow over tim endous am ployees are allowed to rollover unused funds it the m ount of flexibility in designing health ost from HRAs and they will likely e i In Revenue Ruling 2002 -41 and Notice 2002-45 (published in Internal Revenue Bulletin 2002 -28, dated Through our research we strive to contribute to the formulation of effective and July 15, 2002) the Internal Revenue Service (IRS) provided guidance clarifying the general tax treatment of be able to rollover unused funds in the HRA nearly each year. They will also be likely to or could vary with age or years of service, but it is possible that the value of the account into the following year. W Conclusion benefits that incorporate an HRA. The am However, there is concern over incentives that are being built into health plans hile there are no legal lim ount of money credited to the HRA, the level its as to how much employees can HRAs, the benefits offered under an HRA, the interaction between HRAs and cafeteria plans, FSAs, responsible health and retirement policies. Consistent with our mission, we do not lobby COBRA, and other matters. by of the deductible, the com with HRAs. One drawback from switch to even higher deductible health plans, assum would not grow as fast as the anticipated cost of providing retiree health benefits. accumuThere is strong interest am late in an HRA, em pployers can place restrictions on the am rehensiveness of th the standpoint of the em ong employers in redesigning health benefit program e insurance, the health care services that ing they are available, as their HRA ployer is that em ount that can be ployees may s Paul Fronstin, Ph.D. or advocate specific policy solutions. carried over, and can put a ceiling on the value of the HRA. Funds in the HRA can Essentially, in this type of m increases in value, thereby reducing their m in response to rising costs. A few em not view the HRA as their own m count toward the deductible, and the health care services that can be reim odel the risk of oney. Em ployers have turned to, and m onthly prem unpredictable health benefit cost increases is ployees that view the HRA as their ium. When they do suffer a any others are bursed by the Senior Research Associate and Director, Health Research and Education Program catastrophic event, they will presum borne by em accum HRA are all subject to how the em considering, high-deductible health benefits coupled with HRAs. A m employer’s m ulate tax-free as long as they rem ployees. oney may be more likely to spend it unnecessarily, especially healthy ployer designs the plan. Em ably have enough m ain employer-provided funds paid out only for oney in their HRA to cover m ployers can offer ovement to these ost Employee Benefit Research Institute Overview 2121 K Street, NW, Suite 600 com if not all of their out-of-pocket expenses. qualified m em plans has im ployees (the 50 percent of the population that accounts for only 5 percent of spending) prehensive insurance that covers 100 percent of health care costs after the deductible When a worker retires, he or she could then use the m eplications f dical expenses. HRAs can also earn interest tax-free as long as the interest is or health benefit costs, utilization of health care services, quality oney in the account to Washington, DC 20037 The term “defined contribution” has been used interchangeably with the term Voice: 202–775–6352 has been m purchase health insurance, although the m who would expect to roll over a significant portion of the account each year. For used for qualified m of health care, the health status of the population, risk selection, and efforts to expand Less healthy em et, or they m edical expenses. ployees m ay offer coverage with 80 percent coinsurance, or som ay or maoney in the account m y not benefit from the HRA. Twenty percent ay or may not be enough e other Fax: 202–775–6312 “consumer-driven” health benefits to describe a wide range of possible approaches to E–mail: fronstin@ebri.org portion of costs. If em to pay for health insurance in retirem health insurance coverage. Ultim of the population accounts for 80 percent of all health-care spending. Many of the people example, a healthy em Employers can allow em ployee m ployers choose to pay less than 100 percent of health care aployees to use the funds in the HRA even after the y not hesitate to spend $200 on an office visit when that ately, the success or failure of these plans will be ent. A recent study found that 2 percent of large Internet: www.ebri.org give employees more incentive to control the cost of either their health benefits or health expenses after the deductible has been m em in the top 20 percent would likely use their entire HRA each year. Out-of-pocket costs em em measured by their effect on the cost of providing health benefits and its effect on the ployee has changed jobs, retired, or becom ployers adopted RMAs for current retirees, while 7 percent adopted them ployee also expects to rollover the rem ea t, they then have the option of designing the ining $800 into year two. That em e unemployed. As long as the HRA is used for future ployee may care and to reduce the size and volatility of employer spending. Options for increasing 25 June 2003 actually view the office visit as a “free” visit, since a co-paym for qualified m for this group m retirees and 13 percent adopted them plan with or without a m number of people with and without health benefits. edical expenses, distributions fr ay be substantially higher than they would otherwise be if they were on a aximum out-of-pocket lim for new hires (McDevitt, et al., 2002). om the HRA are not counted as part of the it. ent from the employee’s “consumerism” in health benefits and health care include the traditional large-employer em first-dollar com own pocket would not be required. ployees’ taxable incom HRAs can also be used for retiree health benefits. They can be used to pay for Employers can vary em prehensive plan. Higher-incom e, even if distributions are from ployee cost sharing based on whether health care services e employees m a form ay welcom er employer. e the new plan health plan choice model, the out-of-pocket choice model, tiered provider networks, prem are provided by in-network or out-of-network health care providers. Em structure because affordability of out-of-pocket expenses m ium Over tim s, health care services, or both. There is one key difference between an HRA e, as some employees build an account balance, em ay not be an issue, and the ployee cost sharing ployers may The views expressed in this statement are solely those of the author and should not be health spending accounts, and vouchers. attributed to the Employee Benefit Research Institute, its officers, trustees, sponsors, or choose to pay 100 percent of the health care consum responsibility will be reduced to zero, which will effectively m that can be used for retiree health benefits and an RMA: An RMA is dedicated to retiree HRA may give them the flexibility and control over spending and treatm ed after the deductible has been m ean that em ent choices that ployees once et other staff. The Employee Benefit Research Institute is a nonprofit, nonpartisan, public policy research organization. 3 7 6 2 5 4 9 8