What is the difference between an HRA, HSA, and an FSA?

1
What is the difference between an HRA, HSA, and
an FSA?
2
What Is Consumer Choice Health Care?
3
The Renewal Meeting

• Why have my rates doubled in five years?
• What type of health plan can stop the bleeding?
• My employees have no understanding of the cost of
  health care.

4
Consumerism is Coming Late to the Healthcare
Industry Its Out of Step With Our Emerging
Economy

• U.S. inflation in 2004 was 3, while healthcare
  inflation was 12.
• Employee health care costs will wipe out the
  equivalent of every penny of 2003 profitability
  for the companys Consumer Products Division,
  without major changes according to GEs Chairman
  Jeffrey Immelt.

5
Annual Prescription Drug Utilization
6
Healthcare Consumerism

• Healthcare Consumerism is about transforming a
  health benefit plan into one that puts economic
  purchasing powerand decision-makingin the hands
  of participants
• Its about supplying the information and decision
  support tools they need, along with financial
  incentives, rewards, and other benefits that
  encourage personal involvement in altering
  personal behavior and healthcare purchasing
  behaviors.

7
Two Basic Principles for Successful Consumerism

1. Must work for the Sickest Members, as well as the
   healthy
2. Must work for those not wanting to get involved
   in decision-making, as well as the techies

8
Divergent / Convergent Futures?HRAs Best for
Larger Groups?HSAs Best for Individuals and
Small Groups?
9
Incentive Awards Three Very Different Personal
Care Accounts

• FSAs Traditional Group Plans
• Health Reimbursements Arrangements (HRAs)
• Employers choice for cash flow flexible
  incentive based medical plan benefit designs
• Health Savings Accounts (HSAs)
• Employees choice for funded portable triple tax
  advantaged with High Deductible Health Plans
• Combination Accounts creative but confusing

10
TraditionalApproach
NewApproach
NewestApproach
Feature FSA Flexible Spending Account HRA Health Reimbursement Account HSA Health Savings Account
Plan Design Any type Any type Qualified HDHP
Employee Contributions Pre-Tax N/A Pre-Tax
Employer Contributions Yes, but typically employee-funded Yes Yes
Funds Available Day One Yes Yes As Deposited
Withdrawal Tax-free for qualified expenses Tax-free approved by sponsor Tax-free for qualified expenses
Qualified Expenses Section 213d Section 213d or sponsor specific Section 213d
Forfeiture Yes, at end of year Yes, upon termination No
Portability No No, but some exceptions Yes
Interest Bearing No No Yes
Balance at Risk from Investment N/A N/A Yes
Expense Substantiation Yes Yes No
Above-the-line Tax Deduction N/A N/A Yes no itemization required
11
Full Replacement HSAs and HRAs Are Very Different

• HSA A law, with specific requirements and
  benefit design requirements
• Most TAX ADVANTAGED vehicle ever
  created
  
• HRAs No Law, this is a regulatory creation
  based upon an IRS ruling.
• Most FLEXIBLE vehicle ever created

12
HRAs Consist Of

• The Reimbursement Account
• Individual Responsibility Gap
• Health Insurance Policy

13
Health Reimbursement Account
Claim
1. Health Reimbursement Account The Health
Reimbursement Account (HRA) is a specific
allocation of employer dollars which are pledged
to each plan member. The employee uses these
funds to pay for all services covered by the plan
until they reach their Individual Responsibility
Gap. At the end of the plan year, the employer
may allow the remaining balance to roll-over to
the following year.
Employer Sponsored Pays 1st in our example
14
Individual Responsibility Gap
Claim
2. Individual Responsibility Gap Should an
employee exhaust their individual HRA, the
employee would then be responsible for paying the
difference between the HRA and the point where
the insured portion of the plan begins.
IMPORTANT! The Individual Responsibility Gap can
be anywhere in the out of pocket area of the plan!

15
Health Insurance
Claim
3. Health Insurance Should an employee exhaust
their individual HRA and go through their
Individual Responsibility Gap, a traditional
Health Insurance plan would then take effect and
provide the remaining benefits.

16
Compatible Products

• The typical Healthcare HRA is compatible with
  virtually
• any insurance plan but is most effective when
  combined with a
• plan that features the following three elements
• A deductible in excess of 1,500/3,000 (Family).
• No office visit CopayOffice visits applied to
  deductible.
• No Rx CardApplied to deductible.

Remember, Consumer Choice!
17
HSA vs. HRA
HSA HRA
High deductible medical plan generates premium savings. v v
Employer may finance account/reimbursement. v v
Employee may finance account/reimbursement. v
Money in reimbursement account is pre-funded v
Unused funds roll over for future use. v v
Emp. receives tax deduction for medical reimbursements. v
Emp/employee receive tax deduction for account funding. v
18
An Introduction to Health Savings Accounts Agenda

• What is a Health Savings Account (HSA)?
• HSA Eligibility and Contributions
• HSA Distributions
• Other Matters

19
What is a Health Savings Account (HSA)?

• A Health Savings Account, or HSA, is an account
  that can receive contributions on a tax-favored
  basis on behalf of an eligible individual and
  allows tax-free distributions used to pay for
  qualified medical expenses

20
Eligibility

• An eligible individual is
• Covered under a high-deductible health plan
  (HDHP)
• Not covered by another health plan that is not
  an HDHP
• Not enrolled in Medicare (generally, younger
  than age 65) and
• Not claimed as a dependent

21
Contribution Limits1 Contribution Limits1 Contribution Limits1 Contribution Limits1 Contribution Limits1 Contribution Limits1
Tax Year Standard Limit 2 Standard Limit 2 Catch-Up ContributionAmount Total Contribution Limit Including Catch-Up Amount Total Contribution Limit Including Catch-Up Amount
Tax Year Self-Only Family Catch-Up ContributionAmount Self-Only Family
2005 2,650 5,250 600 3,250 5,850
2006 2,700 5,450 700 3,350 5,950
1May be reduced by smaller HDHP deductibles,
partial year eligibility, Archer MSA
contributions, and special rules for married
couples. 2Subject to cost-of-living adjustments
(COLAs).
22
Who May Contribute to an HSA?
John
Any OtherIndividualor Entity
Johns HSA
JohnsEmployer
includes self employed or certain unemployed
individuals
23
Contribution Deductibility

• HSA contributions made by the owner, any other
  individual, or an entity other than the HSA
  owners employer, are deductible on the HSA
  owners tax return.

Any Other Individual or Entity (other than
Johns employer)
Johns HSA
24
Employer Contributions

• Reported on employees Form W-2
• Not subject to FICA, FUTA, or RRTA
• Not deductible on employees Form 1040
• Comparable contributions to comparable
  participating employees
• Same amount, or
• Same percentage

25
Employer Contributions
John
26
Contribution Deadline

• HSA owners tax-filing due date, excluding
  extensions

2006
2007
4/15
27
HSA Distributions

• An HSA owner can take distributions any time
• Financial organizations and employers are not
  required to verify any HSA distribution
• An HSA owner may use checks, or debit, credit, or
  stored value cards to take qualified HSA
  distributions
• A financial organization may contractually
  restrict distribution frequency and minimum
  amounts

28
HSA Distributions

• Tax free if used to pay for qualified medical
  expenses
• Tax and 10 percent penalty tax apply to
  nonqualified distributions
• Some exceptions to the penalty tax

29
Exceptions to the Penalty Tax

• Distributions for the following reasons will
  avoid the 10 percent penalty tax
• Death
• Disability
• Attainment of age 65

A financial organization is responsible for
tracking the ages of its HSA owners and can rely
on the birth date as provided by the HSA owner.
30
Eligible Individuals

• Distributions used to pay for the following
  individuals qualified medical expenses are tax
  free
• HSA owner
• His/her spouse
• Dependents

31
Qualified Medical Expenses

• Same as IRC 213(d) definition for itemized
  deductions
• Must be incurred after an HSA is established,
  earlier expenses are nonqualified
• No age restriction
• Cannot be used to pay health insurance premiums,
  some exceptions apply

Qualified medical expenses paid for with an HSA
distribution are not eligible for a tax
deduction.
32
Unanswered Questions

• HSA contributions may not be deductible on
  certain state income tax returns

33
15 Minute HSA Overview

• Health Savings Accounts Legislative and
  Regulatory Basics
• Consumerism in Healthcare Why are We Doing
  This?
• Carrier Experience Does It Work?

34
Consumerism in Healthcare Why are We Doing
This?
35
Why a Consumer Strategy- Consumers View
Growing understanding of personal exposure and
unreadiness

• Healthcare costs more
• Employee share of health costs increased for
  2003, at 49 of large employers (1)
• Plus, I spend my own money
• Typical insured spends 675/yr on uncovered
  health services, not including deductibles and
  copays (2)
• But Im not preparing wisely
• 72 did not put money in a Flexible Spending
  Account, but report spending significant dollars
  out of pocket. (3)
• Employees underestimate health costs/their health
  spending by more than 50 (4)
• Nearly half of participating employees put 100
  500 in their Flexible Spending Account (3)

(1) Source Mercer National Study of
Employer-Sponsored Health Plans 2002 (2) Source
Lieberman Research study of Out-of-Pocket
Spending by Health Care Consumers 1999, adjusted
for annual increases in the Health Care Consumer
Price Index (3) Source Digital Research study,
February 2002 (4) Source Watson Wyatt survey
Healthcare Cost Landscape
36
Why a Consumer Strategy- Consumers View

• I need help
• 85 of employees expect their employer to provide
  pre-negotiated savings on non-covered services.
• 88 would like to know their physicians
  background when purchasing a non-covered service
• 94 would like to know in advance what their
  costs will be when purchasing a non-covered
  service. (3)

37
HSAs are Not Just Accounts- They Help
Fundamentally Change Healthcare
Consumerism in health care is simple and yet
fundamentally different engaging consumers in a
decision-making process regarding wellness and
the management of sickness. Accessible,
actionable health information is paired with
personal financial choice to facilitate effective
outcomes.
Health Financial Planning
Engaging Consumers
Health Advocacy
38
A Consumer Strategy- The Power of Engagement
Q Consumerism in Healthcare Why are We Doing
This?
AnswerHSAs are not about changing how we
finance healthcareHSAs are about improving
healthcare.
39
Do Consumers Engage More?
Yes (and quickly this measures only the first
year change)
Two-thirds of Consumers report increased
awareness of health choices and costs

• Consumers are more engaged
• 33 higher registration
• From 300 to 1000 online inquiries/week for
  account balances
• 85 of 2003 enrollees carried a balance into 2004
• 8 Increase in Preventive Services

40
Does Engagement Change Behavior?
Yes. 30 Reduction compared to most carriers
book of business

• Use of preventative care services increased by
  8
• Preferred, in-network professionals, utilized
  over 90 of the time
• ER utilization decreased by 18 - people used the
  ER for true emergencies

41
Do Plan Sponsors Save Money?
Yes, when offered as an option. (But please be
wary of hype)
Real Answers
Hype Answer
A) Short Term Traditional View of Employer Costs
6500
6500
Hey! 0 Trend
Covered Units
CostPer Unit
OfUnits
X
X

• Left Unsaid
• Positive Selection
• Benefit Buy-Downs
• One-time Rx gain

• One-Time Savings possible via plan changes

• Network Cost Matters

• Ongoing Savings
• At least a 25 decrease in trend due to
  utilization change

B) Longer Term Consumerism View of Employer Costs

• Plan has strong ability to increase quality and
  drive down costs using Premier Networks

Pre-CDHP Average Cost All Employees
CDHP-Only EmployeesAverage Cost
Quality Care
Efficient Care
42
Are Customers Satisfied?
Yes and satisfaction grows as consumers engage
more

• Enrollment and satisfaction cuts across employee
  type, industry
• Plan 2004 slice enrollment averages are highest
  among CDHP players
• High Plan adoption seen in manufacturing,
  financial services, retail and more
• Consumers report increased awareness of health
  choices and costs
• Two-thirds said that they are more aware of
  costs, more actively involved in choices
• Satisfaction is high
• 90 satisfaction ratings of customer service,
  enrollment materials
• 87 overall satisfaction is at or above industry
  benchmarks
• Follows inverse sine distribution relative to
  length of time from enrollment period, which
  means that follow-up post-enrollment
  communication needs to be carefully utilized
• and the consistent, persistent negative
  feedback is
• that most consumers prefer to be called
  members and not consumers

43
Questions Answers