Even with health insurance coverage, employees often face out-of-pocket medical expenses that can add up quickly. These are costs that insurance doesn’t fully cover and are the responsibility of the individual. For many, navigating these additional expenses can be confusing and stressful, especially when unexpected medical bills arise. However, offering a Health Reimbursement Arrangement (HRA) as part of your benefits package can significantly ease this burden for employees by reimbursing them for qualified medical expenses.
In this blog post, we’ll break down common out-of-pocket medical expenses, explain why it’s important for employees to understand these costs, and show how an HRA can help manage and offset some of these financial challenges.
What Are Out-of-Pocket Medical Expenses?
Out-of-pocket medical expenses refer to the costs that an individual is responsible for paying when they receive healthcare services, even when they have insurance. While health insurance helps cover the bulk of medical costs, it rarely covers everything. Employees may still need to pay certain fees before their insurance kicks in or for services that aren’t fully covered by their plan. Understanding these costs is essential for employees so they can make informed decisions about their healthcare coverage and budget for potential medical expenses.
Here are the most common types of out-of-pocket medical expenses:
1. Deductibles
A deductible is the amount an employee must pay for healthcare services before their insurance begins to cover the costs. For example, if an employee’s insurance plan has a $1,500 deductible, they will need to pay $1,500 out-of-pocket for eligible healthcare services before the insurance company starts to contribute.
- Why it matters: Deductibles can vary widely between plans, and employees should understand how much they are expected to pay upfront for their medical care. Choosing a plan with a lower deductible typically means higher monthly premiums, while a plan with a higher deductible often comes with lower premiums but greater out-of-pocket costs when healthcare services are needed.
2. Co-payments
A co-payment, or co-pay, is a fixed fee that an employee pays each time they receive a specific healthcare service, such as visiting a doctor, filling a prescription, or going to an emergency room. Co-pays are typically small, ranging from $10 to $50, but can add up if an employee requires frequent medical care.
- Why it matters: Employees should be aware of their co-pays so they can factor these regular payments into their overall healthcare budget. A plan with low co-pays can reduce the burden of frequent doctor visits or prescription refills.
3. Co-insurance
Co-insurance is a cost-sharing arrangement between the employee and the insurance company. After the employee meets their deductible, they are responsible for a percentage of the remaining costs, while the insurance company covers the rest. For example, an insurance plan may cover 80% of a hospital bill, leaving the employee responsible for the remaining 20%.
- Why it matters: Co-insurance percentages can vary between plans, and the total out-of-pocket cost can be substantial, especially for major medical events like surgeries or hospital stays. Understanding co-insurance rates can help employees prepare for large, unexpected healthcare expenses.
Why Employees Need to Understand Out-of-Pocket Expenses
Educating employees about out-of-pocket medical expenses is crucial for several reasons. First, it empowers them to choose the right healthcare plan based on their needs and financial situation. For example, an employee with a chronic condition that requires frequent doctor visits might opt for a plan with lower co-pays and a higher premium, while a generally healthy employee might prefer a plan with a lower premium and a higher deductible.
Second, understanding out-of-pocket costs allows employees to better manage their healthcare expenses throughout the year. Knowing what to expect can help them budget for routine care and prepare for unexpected medical events, reducing the likelihood of financial stress.
Finally, awareness of out-of-pocket costs enables employees to take full advantage of the benefits offered by their employer, such as an HRA.
How HRAs Can Help Offset Out-of-Pocket Costs
A Health Reimbursement Arrangement (HRA) is an employer-funded benefit that reimburses employees for qualified medical expenses. By offering an HRA, employers can help employees offset some of their out-of-pocket medical expenses, making healthcare more affordable and reducing the financial burden of unexpected costs.
How an HRA Works
Employers set aside a specific amount of money for each employee in the HRA, which can be used to cover out-of-pocket expenses like deductibles, co-pays, and co-insurance. Unlike a health savings account (HSA) or flexible spending account (FSA), the employer controls the contributions, and unused funds typically do not roll over to the next year unless the employer allows it.
HRAs are particularly beneficial because they provide flexibility in terms of what medical expenses are covered. Employees can submit claims for a variety of healthcare services, including routine checkups, prescription medications, specialist visits, and even some dental and vision care. The employer reimburses the employee tax-free for these expenses, easing the overall cost burden.
Benefits of Offering an HRA
- Reduced Financial Stress: By helping employees cover out-of-pocket expenses, an HRA reduces financial stress and ensures that healthcare costs do not become a major burden. This improves employee satisfaction and retention.
- Flexible Coverage: HRAs offer more flexibility compared to traditional health insurance plans. Employees can use the funds for the medical services they need most, making it easier to manage different healthcare requirements.
- Cost Control for Employers: Employers control the amount contributed to the HRA, allowing them to manage healthcare costs more effectively without being tied to increasing health insurance premiums.
Conclusion
Out-of-pocket medical expenses, such as deductibles, co-pays, and co-insurance, are a reality for many employees, even with health insurance. Understanding these expenses is crucial for employees as it helps them choose the right coverage and manage their healthcare costs more effectively. For employers, offering an HRA can make a significant difference in helping employees cover these expenses, ensuring they receive the care they need without facing financial hardship.
By reimbursing employees for qualified medical expenses, HRAs not only reduce out-of-pocket costs but also provide employees with more flexibility and control over their healthcare choices. This makes HRAs a valuable addition to any employer’s benefits package, improving employee satisfaction and offering a cost-effective way for businesses to support their workforce’s healthcare needs.