Health reimbursement arrangements: Practical approach to health spending

A landmark IRS ruling tells employers it's OK to offer a new-style health plan that promotes both choice and responsible spending.

Editorial. Aug. 12, 2002.

Pay for what you need from your budget. What you don't spend can be kept for later use. That's a simple and sensible strategy with big implications for one of health care's toughest balancing acts -- how to maximize patient choice while minimizing unnecessary increases in the nation's overall medical bill.

A ruling by the Internal Revenue Service marks an important step forward in making that a much more common approach to health care spending. In June, the IRS clarified its position on the tax treatment of a new type of employee health coverage option. It is called a "health reimbursement arrangement," and a few pioneering employers already had been offering it. The IRS action essentially reassured all other companies that it was OK to also move forward with HRAs.

Health reimbursement arrangements are essentially employer-funded versions of the tax-favored medical savings accounts that have long been promoted for individuals. Under HRAs, employers provide each employee with a personal yearly budget -- say, $750 for an individual -- that can be used for health-care-related services.

As with MSAs, the account is typically paired with high-deductible health plan coverage (for example, $1,500 a year for an individual, with perhaps some preventive services paid for at nearly first dollar). That deductible is partially offset by the HRA budget and partly from the employee's own pocketbook. [...]