Before getting into the changing employee benefits landscape, it is important to clarify one point: a Canadian Health Spending Account is not the same thing as a Health Savings Account in the United States. Although the names and acronym HSA are often confused, they are different products that operate under different healthcare and tax frameworks.

In Canada, a Health Spending Account (HSA) is a type of Private Health Services Plan, allowing employers to provide employees with a defined amount to spend on eligible healthcare expenses under the terms of the plan. Unlike traditional insured benefits, an HSA gives employees greater flexibility in how they use their benefit dollars.

Today, we are looking specifically at the Canadian model of health benefits and why Canada’s publicly funded healthcare system may give employers a reason to rethink how supplementary healthcare is provided.

For decades, employee health benefits in Canada have followed a familiar formula. Employers purchase group insurance, pay monthly premiums, and employees receive a predetermined package of coverage. It is a model that has worked well for many businesses, but it is worth asking whether insurance needs to be the default solution for every healthcare expense.

Canada is fundamentally different from countries where individuals can face enormous bills for medically necessary hospital and physician care. Provincial and territorial health insurance plans cover medically necessary hospital and physician services, while many expenses that employers commonly cover through workplace benefits, such as dental care and prescription drugs outside hospitals, fall outside that core public coverage.

That creates an interesting question for Canadian employers: if the public system already covers much of the most significant medical risk, do employers really need to insure every supplementary healthcare expense?

Why Insure What You Can Budget For?

Insurance is designed to protect against uncertainty. That makes obvious sense when an expense is unpredictable and potentially large enough to create serious financial consequences. But many supplementary healthcare expenses are more routine and can be easier for an employer to plan for as part of an annual benefits budget.

Consider a company with 25 employees that wants to provide $3,000 in annual healthcare benefits per employee. Rather than purchasing a traditional package built around predetermined coverage, the employer could establish a defined benefit and reimburse eligible healthcare expenses as employees incur them.

With an HSA, the employer determines the level of benefit it is prepared to provide, while employees use that benefit toward eligible expenses as they arise. Instead of paying an insurer to assume the risk associated with every potential claim, the employer is using a defined budget to fund eligible healthcare spending under the plan. It’s simple, flexible and affordable.

Employees Do Not All Use Healthcare the Same Way

There is another reason the traditional model is being reconsidered: employees have very different healthcare needs.

One employee may have substantial dental expenses, while another may have significant prescription or vision costs. Someone else may place more value on other eligible healthcare services. A standardized package can be convenient to administer, but it does not necessarily provide the same practical value to every employee.

An HSA takes a different approach. The employer establishes the benefit, while employees have greater freedom to use it toward eligible expenses that are relevant to them. For employers, that can be a more straightforward way to make benefits personal without continually adding more coverage or complexity.

The Appeal of Self-Funding

This is where the self-funded model becomes particularly interesting. An employer that is comfortable budgeting a defined amount for employee healthcare may not need to transfer all of that spending risk to an insurer.

With an HSA, the employer can determine in advance how much it is willing to contribute toward employee healthcare and fund eligible claims as they are incurred, subject to the rules of the plan. This creates a clearer connection between the company’s benefits budget and the healthcare spending it is actually providing.

That does not mean an HSA is automatically cheaper than traditional group benefits. The economics depend on factors such as benefit levels, employee utilization, administration and plan design. However, the model can offer strong dollar-for-dollar value because it cuts out the insurance company. For businesses comparing their options, most will find HSAs much more cost-effective.

HSAs Are Not Just for Small Businesses

Health Spending Accounts are often associated with small businesses, particularly organizations that may find traditional group benefits difficult to justify for a smaller workforce. But the concept is not limited to companies with only a few employees.

Larger employers can also use HSAs to provide a defined benefit across a diverse workforce or to add flexibility to an existing benefits strategy. When employees have different circumstances and priorities, giving them more control over a defined benefit can be more useful than attempting to design one standardized package that works equally well for everyone.

Proper Structure Still Matters

An HSA is not simply an informal promise by an employer to reimburse employees for healthcare expenses. The plan needs to be properly structured to receive the intended tax treatment.

The Canada Revenue Agency states that medical expenses paid under the terms of a qualifying Private Health Services Plan are generally not taxable benefits to employees. That makes proper plan design and administration an important part of providing a Health Spending Account. Coastal HSA offers resources for employers looking to establish a properly structured Health Spending Account.

Employers should ensure their plan follows applicable Canadian requirements and work with an experienced HSA provider that understands the Canadian benefits environment.

Rethinking the Default

For a long time, the natural question for a Canadian employer has been, “Which group insurance plan should we buy?” A more interesting question may now be, “Which expenses actually need to be insured?”

The future of employee benefits may not be about insuring more. It may be about funding smarter.