This concept usually comes up in the context of group health insurance so I will assume that is what you are asking about. Wrap plans were developed as a strategy to help employers better manage their health insurance premium costs.
The approach generally works like this. Employer XYZ currently has a group health plan with a $1000 deductible, 80% co-insurance and office visit, urgent care, emergency room and prescription copayments. Employer XYZ receives a renewal rate increase of 20% or more and finds that their renewal is in line with what other insurance companies would offer. So, changing insurance carriers as a means to reduce the impact of the renewal action is not a viable option.
Employer XYZ has an alternate renewal from their current carrier that increases the plan's deductible from $1000 to $3500 dollars and the renewal rate for the $3500 deductible plan then avoids most or all of the renewal rate increase on the $1000 deductible plan. This change helps the employer control their costs but shifts much more financial risk onto their employees and the employee's dependents. The employer wants to manage their fixed premium costs as effectively as possible but is reluctant to shift so much more risk onto their employees.
The employer decides to employ a wrap plan strategy. This consists of moving to the insurance plan with the $3500 deductible. However, in addition, the employer at the same time implements a Health Reimbursement Arrangement (HRA) which is an IRS approved mechanism whereby an employer agrees to reimburse employees for specified medical expenses. The employer agrees that for any covered employee and dependent (this is a choice the employer makes, reimbursing only the employee and not dependents' exposure would also be allowed) who incurs medical expenses subject to the deductible in excess of $1000 will be reimbursed by the employer up to whatever level the employer determines. In this example let's say the employer agrees to cover the full additional $2500 of increased deductible expense exposure.
From the employee's perspective their deductible exposure remains at the $1000 level they had previously. With so many medical services covered by copayments under their plan design, the employer anticipates that very few of his covered employees and dependents will utilize services subject to the deductible (these would be hospitalizations and some outpatient services) and that will also exceed the $1000 in deductible responsibility the employee has long assumed. The employer makes no financial outlay under the HRA arrangement until an employee or dependent actually incurs an eligible expense. The employer is making an educated bet that their potential reimbursements for claims above the $1000 deductible level will be less, probably substantially less, than the higher premium they would have paid if they had maintained their old plan design with the $1000 deductible.
Essentially the employer has implemented a limited form of self-funding of some of their employee's potential medical expenses. Any HRA reimbursements the employer does end up making are a deductible business expense just like their contribution towards their employee's health insurance premiums. This approach can help the employer better manage their fixed cost for health insurance premiums, gain a cash flow advantage and still offer an attractive benefit package to their employees.
As a word of caution, it should be noted that not all insurance carriers are fans of this strategy. The purported reason being that as these arrangements don't truly change the employee's financial exposure to the higher deductible it does not have the same impact on employee behavior in consuming health care as they would expect for a plan with a $3500 deductible fully paid by the employees. For this reason, some insurance carriers require disclosure of such wrap arrangements and may adjust their premiums somewhat to account for less of a change in health care consumption than their higher deductible quote was originally based upon. An employer should verify their insurance carrier's position on this approach before they implement such a strategy.
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The approach generally works like this. Employer XYZ currently has a group health plan with a $1000 deductible, 80% co-insurance and office visit, urgent care, emergency room and prescription copayments. Employer XYZ receives a renewal rate increase of 20% or more and finds that their renewal is in line with what other insurance companies would offer. So, changing insurance carriers as a means to reduce the impact of the renewal action is not a viable option.
Employer XYZ has an alternate renewal from their current carrier that increases the plan's deductible from $1000 to $3500 dollars and the renewal rate for the $3500 deductible plan then avoids most or all of the renewal rate increase on the $1000 deductible plan. This change helps the employer control their costs but shifts much more financial risk onto their employees and the employee's dependents. The employer wants to manage their fixed premium costs as effectively as possible but is reluctant to shift so much more risk onto their employees.
The employer decides to employ a wrap plan strategy. This consists of moving to the insurance plan with the $3500 deductible. However, in addition, the employer at the same time implements a Health Reimbursement Arrangement (HRA) which is an IRS approved mechanism whereby an employer agrees to reimburse employees for specified medical expenses. The employer agrees that for any covered employee and dependent (this is a choice the employer makes, reimbursing only the employee and not dependents' exposure would also be allowed) who incurs medical expenses subject to the deductible in excess of $1000 will be reimbursed by the employer up to whatever level the employer determines. In this example let's say the employer agrees to cover the full additional $2500 of increased deductible expense exposure.
From the employee's perspective their deductible exposure remains at the $1000 level they had previously. With so many medical services covered by copayments under their plan design, the employer anticipates that very few of his covered employees and dependents will utilize services subject to the deductible (these would be hospitalizations and some outpatient services) and that will also exceed the $1000 in deductible responsibility the employee has long assumed. The employer makes no financial outlay under the HRA arrangement until an employee or dependent actually incurs an eligible expense. The employer is making an educated bet that their potential reimbursements for claims above the $1000 deductible level will be less, probably substantially less, than the higher premium they would have paid if they had maintained their old plan design with the $1000 deductible.
Essentially the employer has implemented a limited form of self-funding of some of their employee's potential medical expenses. Any HRA reimbursements the employer does end up making are a deductible business expense just like their contribution towards their employee's health insurance premiums. This approach can help the employer better manage their fixed cost for health insurance premiums, gain a cash flow advantage and still offer an attractive benefit package to their employees.
As a word of caution, it should be noted that not all insurance carriers are fans of this strategy. The purported reason being that as these arrangements don't truly change the employee's financial exposure to the higher deductible it does not have the same impact on employee behavior in consuming health care as they would expect for a plan with a $3500 deductible fully paid by the employees. For this reason, some insurance carriers require disclosure of such wrap arrangements and may adjust their premiums somewhat to account for less of a change in health care consumption than their higher deductible quote was originally based upon. An employer should verify their insurance carrier's position on this approach before they implement such a strategy.