HRAs: A Tool for Public Sector Retirees Too

Employers can provide retirees with Health Reimbursement Arrangements to purchase affordable and customized individual health care coverage.

Reported by Emily Boyle

Government employers are battling unfunded retiree health care obligations, but they may have a solution right in front of them.

The “long-term price tag” of public sector employee benefits continues to grow, wrote Steve Schatt, senior director of WTW’s health, wealth and career business segment, and Christian Goodman, retiree health care strategist at WTW, in their recent article, “Reinventing Healthcare for Public Sector Retirees.”

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At the same time, the level of assets set aside to pre-fund obligations remains low, Schatt and Goodman note. In 2022, the most recent year for which will data is available, states and large municipalities collectively reported $789 billion in unfunded Other Post-Employment Benefits liabilities, which include retiree health benefits.

“However, a viable solution already exists,” Scatt and Goodman wrote. “The individual marketplace leverages the greater population to provide high quality benefits at lower costs. Employers provide retirees with Health Reimbursement Arrangements (HRAs) to purchase affordable and customized individual health care coverage.”

Used predominantly by private sector employers over the past 20 years, HRAs can be an option for public sector employers, too, the authors argue.

How it Works

An HRA is an employer-funded group plan to which the employer contributes a set amount, that reimburses employees for qualified medical expenses, up to a fixed dollar amount per year, and insurance premiums. When a plan sponsor transitions to the individual marketplace, the retiree medical benefit is usually set as a defined contribution allocation to an HRA, Schatt and Goodman wrote. An individual selects a Medicare plan, which is paired with an HRA. The participant can then use the HRA to reimburse themselves for their premiums and out-of-pocket expenses incurred during the year, up to the maximum amount determined by the employer.

Unlike with a health savings account, in which participants choose how much pre-tax money to contribute to their account—subject to Internal Revenue Service limits—HRAs are fully funded by a retiree’s former employer. Like those with HSAs, HRA participants take responsibility for managing their benefits and the spending from their account.

However, when a retiree pays their premium, some systems automatically trigger reimbursement, explains Schatt. He oversees Via Benefits, WTW’s service offering guidance and access to a wide selection of Medicare and individual and family insurance plans. While it is not an insurance carrier, Via Benefits offerings include an HRA that provides retirees automatic reimbursement for their premiums.

“We have arrangements with virtually all the insurance carriers on our marketplace to provide for automatic reimbursement of premiums,” says Schatt. “It really becomes a very simple process; retirees pay their premium and oftentimes set up recurring premiums, so they don’t have to do anything after that first month.”

According to Schatt and Goodman’s research, premiums for individual coverage available through the federal insurance marketplace historically have grown at a slower rate than traditional group plan premiums because of the sheer size of the covered population (more than 40 million Medicare-eligible lives and 24 million pre-Medicare lives). The larger “risk pools” have stable claims experiences year to year, which reduces premium volatility. And the rate of growth in marketplace plan premiums is also slower because the risk pools are perpetually replenished with “young, healthy (i.e., lower cost) lives,” the co-authors wrote.

More stable premiums can help plan sponsors limit yearly increases in HRA allocations, possibly reducing the cost of future medical inflation from their OPEB liabilities, as well. The study found that this factor alone can reduce OPEB obligations by 25% or more, and eliminate exposure to unpredictable cost volatility since the plan sponsor’s financial commitment is limited to the money allocated to the HRA.

Who Benefits?

“We work with retirees from all backgrounds,” Schatt says. “That’s why it’s so important to have benefit advisers work with retirees one-on-one. We spend a lot of time with each retiree individually, to make sure we understand what their specific health care needs are.”

Schatt that HRAs, as funding vehicles, redefine the delivery or retiree benefits. He says HRAs are about “choice.”

“The value of the marketplace is the value of choice,” says Schatt. “The way that choice works is by ensuring that the plans you’re choosing from are high quality, highly rated plans.”

When asked about how collective bargaining agreements in certain states—such as Illinois and California—might make it difficult to implement HRAs, Schatt says the first question to ask is whether the benefits are subject to collective bargaining.

“Most employers and plan sponsors have taken a position, and it has been supported through the courts, that collective bargaining agreements only apply to retirees who retired during the collective bargaining contract period,” says Schatt. “With that said, [employees and plan sponsors] that have moved retirees to the marketplace, almost without exception, [have a goal] to do the right thing for retirees.”

Schatt says that WTW’s workflow is centered around getting unions involved early in the process so they can gain comfort with the idea of HRAs as benefits to their retirees.

“Without moving to the marketplace, there’s more risk to the plan, more cost to the plan, and a greater probably that the benefit will become unsustainable,” Schatt says.

“Anytime there is change, you’re going to get questions,” Schatt adds.

He says that in response, it is important to get the right information to retirees at the right time.

“There’s some trepidation going into [a change], but once they’ve talked to their benefit adviser and gotten that one-on-one support … they get to take advantage of that choice model.”

Source:

https://www.plansponsor.com/hras-a-tool-for-public-sector-retirees-too/