The Health Reimbursement Arrangement Alternative to the Rising Health Care Cost of Employers.

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The Health Reimbursement Arrangement Alternative

to the

Rising Health Care Cost of Employers

 Donald E. Maier, II

MGT 331

2 April 2004

Health benefit costs have been rising faster than inflation for the past four years (Logan, 2003).  Employers' costs for their workers health benefits rose more than 10 percent per employee nationally during 2003, according to a report by Mercer Human Resource Consulting, as cited in Bizjournal.com (Durr, 2003), a total increase of more than 41 % since 1998.  In real numbers, a 10 percent increase on a $2,000 monthly premium will, over four years, raise that premium to nearly $3,000. If the rate of increase is 20 percent, the monthly premiums will more than double.  Faced with these increased health fees and a slow economy, businesses are finding different ways to meet these challenges.  

According to Mills (2003), today's employee benefit marketplace has made it increasingly more difficult for employers to get more for their employee benefit dollars than in years past.  Many factors have contributed to the rising cost of employee benefits, none more than group health coverage.  As the population and work force ages, the demand for medical services has also increased.  New treatments and technology do not come cheap, as both employers and employees want access to the very best health care available.  Advertising has pushed the demand for name-brand prescription drugs over generics to record levels.  Federal and state regulations, especially in the small group marketplace, have also put tremendous pressure on rates and the ability of insurance carriers to maintain expectable profit margins.

Following a seven-year dip in health insurance premiums, insurance prices have risen steadily since 1996.  According to the Kaiser Family Foundation (2003), healthcare costs will continue to rise over the next four years, far outpacing the rate of inflation.  The Kaiser survey as well as subsequent surveys has confirmed the fact that employers are making efforts to lesson their burden for healthcare while still providing what has become an expected workplace benefit.  

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Hogg (2003) cites some “quick-fixes”, including higher employee contributions, higher co-pays or deductibles, and higher out of pocket expenses.  Some employers have even reduced the matching benefits on 401(k) plans or adjusted profit sharing contributions.  All of these and more, however, have had little effect on the cost or quality of healthcare.

Caplan (2002) suggests several alternatives employers are considering to bring employees flexibility while still providing savings to the organizations.  Among those suggestions are: 

  • Consumer Driven Health Care (or Defined Contribution Medical Expense Plan): This is a medical expense plan under which an employer makes a fixed contribution ...

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