What are alternative options that may offer reduced employer costs or more control over health spending?
Two alternatives to traditional insurance are HSAs (health savings accounts) and HRAs (health reimbursement arrangements). They let employees and/or employers set aside pre-tax income to cover medical expenses. (These tax-free contributions—by the employer or employee—are limited by law to no more than 65 percent of the deductible.) HSAs—sometimes alternately referred to as MSAs (medical savings accounts)—are similar to FSAs (flexible spending accounts), which also allow the use of pre-tax income for medical expenses. FSAs are typically used as a supplement to traditional insurance rather than an alternative.
HSAs must and HRAs typically combine with high-deductible policies to provide a two-part health plan. Businesses may deduct contributions to HSAs and HRAs and their accompanying high-deductible plans, just like with traditional insurance. HSAs and HRAs also provide a tax advantage for employee out-of-pocket spending for health care expenses, including coinsurance, co-payments, and the deductible of the accompanying high-deductible policy.
HSA and HRA funds can be rolled over to the following year so that employees can accumulate savings for unexpected health problems. In contrast, FSAs cannot be rolled over and unused funds must revert to the employer. Contributions to an HSA can be funded by the employer and/or employees. An employer with limited funds could purchase a high-deductible plan and encourage employees to make regular tax-free contributions to an HSA to fund their medical expenses up to the deductible. An HRA can be funded only by employers.
HSAs and HRAs are fairly new to the health insurance market. They can help reduce spending by giving employees more direct control over funds spent on their coverage. Detractors argue that they discourage people from getting preventive and routine care because it may deplete their account. They tend to have high deductibles, though the tax-free account may cover much of the deductible. See the Comparisions of Other Health Benefit Options Chart for a comparison of HSAs, HRAs, and FSAs.
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Part 1: Insurance Basics