HSAs vs. HRAs: Which is Better?
I had a conference call this week with the commissioners of a county who are considering adopting Health Savings Accounts for their employees. They said their current broker has been discouraging them from doing so in favor of a Health Reimbursement Accounts instead. They wanted to pick the brain of someone who has no axe to grind.
I told them that HRAs are fine, but not as effective as HSAs in most situations. I explained that the American Academy of Actuaries (AAA) has long held that the economizing behaviors depend largely on to what extent employees view the money as their own. HSA funds clearly belong to the employee and to no one else. HRA funds are always the employer’s money and may be spent solely on services that are covered by the employer’s health plan.
The main argument in favor of the HRA is that some employers are wedded to a triple tier co-pay approach to Rx coverage, and that is not allowed with an HSA.
The other advantage, at least for employers, is that they don’t have to spend any money up-front. The HRA is a “notional account,” so is carried on the books as a liability without any cash being spent until a claim is actually incurred.
But this “advantage” is a mirage because it underscores the AAA concern about how employees view the money. Since it is so clearly employer money, employees do not engage in the same economizing behavior as they do with an HSA.
I walked them through the evidence on how behavior changes under each type of plan and how these changes lower costs.
They then asked me what are the criticisms of these plans, and I explained that in the early days opponents said HSAs may be good for the “healthy and wealthy” but not for other people. I said this has been proven wrong and we don’t hear it much anymore. The realization that high utilizers reach 100% coverage faster is very attractive to the non-healthy, and the non-wealthy see much more value in the cash deposit in the HSA that “the wealthy” do. $2,000 in an HSA is far more attractive to someone making $25K than it is to someone making $150K.
I added that early on, some people were concerned that people would need to be educated to become knowledgeable buyers before such a plan is adopted. I said that was putting the cart before the horse. Such education will fall on deaf ears unless people have a reason to pay attention. First, let people have the money and then they will demand the information they need. This argument, too, has been discredited with experience.
The sole remaining argument against HSAs is that some people will fail to spend the money appropriately — they may forego drugs for blood pressure or cholesterol because they don’t currently feel a need for them. I said this is a legitimate concern, but one that should be resolved as the program matures. It may take a few years, but as people become better informed and invested in their own treatment programs, they are actually more likely to comply with recommended treatments and less likely to skimp on these preventive services.
In fact, that is the whole point of these “consumer-driven” approaches — to finally get the users of health care services to become active participants in their own care.
Elite policy makers have a hard time wrapping their minds around this concept. They see the end-using patient as a passive lump of flesh to whom things are done, not as fully realized adult human beings who are capable of making decisions.
Good explanation. Well done.
Right on the mark, Greg. The best thing about my HSA is that it is my money. I decide how to spend it.
Just because we are all potential patients doesn’t mean we’re comatose!
We need an account that combines the advantages of both and gets rid of the disadvantages. Such an account would allow employees access to the money they don’t spend (like HSAs), but have the flexibility to wrap around any third party payer plan (like HRAs).
Good overview of both options. I like Ken’s suggestion. We need options, not restrictions.
Years ago CFOs tended to favor HRAs because they liked the idea of retaining the cash. Human Resources managers liked having more control over how the money is spent. But I share Greg’s opinion that HSAs are preferable to HRAs. If I had an HRA I would view it as an employee benefit that I could only enjoy by using it. On the other hand, I view my HSA as a benefit that is worth more in the account.
I agree with Ken, though I am not fond of co-pay plans of any kind. They always insulate people from know the price of the services. I much prefer a coinsurance approach where the consumer pays a percentage of the price. Oddly, one of the first drafts of ObamaCare outlawed coinsurance in favor of co-pays. I’ve never found out if that survived in the end.
I agree with Ken. I have a HRA and previously I had a HSA. My wife and I both liked using a specialized debit card account for our HSA expenses. The HSA account was convenient and it coordinated our health care bills. The HRA is nice because the company pays for our itemized health care bills such as our health insurance. The problem with a HRA is filling out the paperwork and the cash flow. Since my bills are relatively small, I submit bills every six months. People with a chronic condition might have to submit bills monthly. If we could combine the two ideas, we could reduce the paperwork and minimize the cash flow problems. My idea for this hybrid account is to use the debit card account for both a limited amount of out of pocket expenses and for authorized health care payments such as health care insurance, refillable prescriptions, etc. It would be nice if we could make additional tax deductible contributions to the account and that the cash amount would roll over to following years. This is the key HSA concept. In this way the person/family could save enough cash in the account after a couple of years to cover the deductible if they had a major medical expense.
Talk to dentists, orthodontists, ophthalmologists, optometrists and eyewear vendors in Nov and Dec and they will tell you that their appointment books are full of HRA and FSA owners trying to use up their alloted funds at the end of the year. These funds are sometimes spent on unnecessary purchases, such as another pair of prescription sunglasses. You don’t hear of that from HSA owners since their funds grow with interest and roll over from year to year and are truly their money. The higher deductible and first dollar expenses paid by the consumer (at the carrier discount with no co-pays) affect behavior, educate the consumer on real prices, and reduce premiums.
HSAs, HRAs and employer-paid premiums have this in common: they all bestow greater public subsidies toward health care on high income people than they do on low income people.
Put another way, they make health care cheaper in absolute, after-tax terms for high income people than for low income people.
There may be religions — Calvinism perhaps? — according to which that is a moral approach to health care financing. Perhaps St. Thomas Acquinas ok’ed it.
Bit to a pagan like me it comes across as dubious.
Uwe, any price-based market treats wealthy people better than the unwealthy. Is it “fair” that a loaf of bread costs the same for someone making $20K as someone making $200K? The only way to get around that would be with income-based “prices.” But as an economist, you surely know the problems with that approach.
Employers provide the same $6,000 policy to all employees. That is a much bigger advantage to lower income workers than to higher income ones. The tax advantage is small potatoes compared to the value of the coverage. This is even more true with an HSA where the employer is contributing (say) $2,000 cash money to each worker. That’s a 10% boost to a $20K worker, but only 1% to a $200K worker.
Greg