A rough patch: Pandemic slows growth in health benefit accounts
HRA and FSA growth may have slowed, but new models may hold promise for the future.
A new market forecast for health benefit accounts (HBAs) looks at the economic uncertainty created by the COVID-19 pandemic and finds that although growth trends have slowed for plans like HRAs and FSAs, there may be opportunities opening up with new models of HBAs.
“The COVID-19 pandemic and the ensuing wave of regulations and unemployment have hit the reset button on health insurance and HBAs,” the report said. “The abrupt change in the robust employment environment, now turned on its head, has put new accounts on ice and hastened the search for alternative benefits and health plan options.”
Related: How HSA and FSA use has changed amid the COVID-19 pandemic
The forecast, published by Aite Group, is based on 2020 Q2 and Q3 interviews of 58 U.S.-based executives from the benefits world, including senior-level executives with health plans, payments processors, technology platform providers, and TPAs. The study also drew on interviews with insurance brokers and human resources managers.
Unemployment, declining utilization slows growth of benefit models
Not surprisingly, HBAs have taken a hit from the economic slowdown created by the pandemic. The report noted that Flexible Savings Account (FSA) growth has slowed, and utilization has dropped, as many Americans have put off elective or non-critical health care treatments. Increased unemployment has also affected utilization.
“FSA payments will decline from $32.5 billion in 2019 to $27.6 billion in 2020 and not recover their pre-COVID-19 levels before the end of 2022,” the report said.
The report added that FSAs are also used frequently for dependent care; and with the pandemic, many more employees are working from home, with children no longer able to attend daycare facilities or after-school programs. This resulted in lower utilization of FSAs, however, some relief may come from federal agencies providing more flexibility for FSA programs.
“The Child Care and Economic Recovery Act of July 2020 provided a makeover for dependent FSAs, making them more relevant and compelling,” the report noted. “These changes raised the annual limit from $5,000 to $10,500 and offered flexibility to families to change their elections throughout the year tin response to changing needs. The ability to roll over funds, instead of forfeiting them, was an additional welcome and a long-overdue update.”
HRAs hold steady, new models offers promise
The report said that Health Reimbursement Accounts are “quietly chugging along” in the current market. The study found that American workers spent $17.4 billion from HRAs in 2018, but that spending will see a downturn this year. A modest increase to $22 billion in HRA spending is projected for 2022.
Employers contributed an average of $1,646 to employees’ plans in 2019; but spending averaged only $1,043 per employee, creating a good deal for plan sponsors as funds not used reverted back to the employer. Even less spending is expected in 2020, but spending should recover to pre-pandemic levels by 2022, the report said.
The report is bullish on two new HBA models, individual coverage HRAs (ICHRAs) and qualified small employer HRAs (QSEHRAs). These are relatively new arrangements (first introduced in 2019 due to regulatory changes) that are designed primarily for smaller employers. Although the report noted that employers are probably not likely to be experimenting with new models in a chaotic year such as 2020, it also pointed to a survey that found 50 percent of employer benefit decision makers expressed interest in an ICHRA-type arrangement in a 2019 survey.
The study said these new arrangements present a long-term opportunity. “2019 regulations opened the doors of health insurance and benefits for employers seeking to provide health insurance support to employees,” the analysis said. “While small employers that would benefit most from this regulation are now in a difficult period, ICHRAs and QSEHRAs have a potential to become the defined-contribution equivalent of the future for health benefits. These two account types will be part of the small employers’ recovery story.”
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