HSAs vs. HRAs: Which is Better?

May 19, 2011
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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 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.

   

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