Are ICHRAs the end of traditional group health coverage?
A closer look at ICHRA plans and their alternatives
Huge shout out to and for their input and edits. Disclaimer: I am the co-founder of Arlo, a level-funded health plan for employees with 15+ employees, and thus my views are biased. If you want to build the future of health plans, join us at Arlo - we are hiring!
The individual marketplace is experiencing a surge in popularity, with over 16 million people in the US securing coverage through the ACA individual marketplace in 2023 - a 38% increase from just five years ago. With this trend comes a growing concern among brokers, whose traditional business model may be disrupted by ICHRAs (Individual coverage health reimbursement arrangements).
ICHRAs allow employers to give their employees tax-free reimbursement for coverage they can obtain through the ACA individual marketplace. This arrangement often eliminates the need for brokers to scout the market for group health plans, negotiate with payers, and run RFPs for their clients. Many benefit advisors are worried about the future of their practice. But how much of this worry is warranted?
In this article, I’ll explore why employers are turning to ICHRAs, which companies will benefit most from ICHRAs, and evaluate whether ICHRAs will really take over the group benefits space.
Why ICHRAs are appealing!
There are several good reasons why employers are choosing to offer ICHRAs over of fully-insured or self-funded group health plans:
Stop worrying about rising health care costs: ICHRAs provide employers with a way to stop worrying about rising premiums and shopping around for carrier plans yearly. They allow employers to set a reimbursement amount for their employees, and it is up to the employees to shop for healthcare. Premium increases for individual marketplace insurance plans have been relatively modest in the last few years.
Ability to customize benefits & contributions: In an ICHRA, employees can choose a health plan that matches their specific situation. For example, a younger and healthier person may choose a high-deductible bronze plan with a lower premium, while a family with high medical needs can choose a richer, more expensive plan. Employers can also vary the amount they pay out to employees based on age (to some extent), which can make health benefits more fair, as older adults usually have higher healthcare costs.
Easy compliance: Employers with more than 50 employees are required to offer “affordable health coverage” to their employees - also called the employer mandate. For some companies, it is difficult to find reasonably priced group health plans, and they might opt to offer an ICHRA that helps them comply with this requirement.
What are the limitations of ICHRAs
At first sight, ICHRAs and individual marketplace plans seem very appealing to employers, and some people are predicting ICHRAs to be the end of group health plans as we know them. However, the success of ICHRAs greatly relies on the success of the individual marketplace. If the individual marketplace cannot offer attractive plans, ICHRAs will have limited adoption. Unfortunately, there are several fundamental flaws with the individual marketplace:
Adverse selection and high costs: Individual plans often offer unattractive rates due to adverse selection. Marketplace plans cannot consider pre-existing medical conditions when underwriting a quote. As a result, they must set rates at the average expected cost for the entire population - called community rating. This cost averaging means that groups with relatively healthy populations may choose to find coverage elsewhere (more on this below) and leave the marketplace population, making it, on average more unhealthy and thus driving up costs for those who remain.
Lack of Options: While ICHRAs theoretically provide employees with choices, in many locations, the options available on the ACA marketplace are pretty limited. In many geographies, there are only one or two insurance carriers to choose from, and the selection of plan types is typically limited. Most marketplace plans are HMO plans. ICHRA plans are thus not a great option for companies that rely on competitive benefits to attract employees.
Restrictive plans: ACA marketplace enrollees tend to come from lower-income households. A slight increase in premiums often induces people to switch their carrier to a better-priced one. While this is great to put pressure on insurance premiums overall, it also means that insurance carriers don’t benefit from longer-term population health initiatives. Instead of investing in the health of their members and reaping the benefits down the road, they choose to control costs by restricting benefits. Most marketplace plans are HMOs and narrow network plans. For most employers, marketplace plans don’t offer attractive benefits for retaining talent.
Driven by subsidies: The main reason for marketplace enrollment growth seems to be that households that make less than 400% of the federal poverty level, i.e., below $58,000 annual income, can get premium tax credits. 75% of people on ACA individual plans receive government subsidies for their premiums. However, employees cannot use tax credits and ICHRA reimbursements at the same time, and often, it makes more sense to use premium tax credits instead of making use of the ICHRA reimbursement. Given the current debate on government spending cuts, subsidy-driven growth of the individual marketplace does not seem to be sustainable.
Taking all these, it is clear that ICHRA plans won’t be a fit for many employers. However, they offer a great option for employers who cannot afford the rising healthcare costs of their group health plans. Usually, this is true for relatively unhealthy groups. ICHRAs can also be a great option for groups that don’t rely on health benefits to be a differentiator when it comes to attracting talent or who want to use ICHRAs as a cheaper and easy way to comply with the employer mandate.
What will actually disrupt group health plans?
Some people predict that ICHRAs will march through traditional group health plans, but there is another trend that is more likely to disrupt traditional fully-insured group plans: level-funded plans - a form of self-funded health plans. Here are a few reasons why level-funded plans are on the rise:
Medical underwriting: Unlike fully-insured and individual marketplace plans, level-funded plans can consider pre-existing medical conditions when setting premiums. Employers with relatively healthy populations can get dramatically lower rates compared to community-rated individual plans or fully-insured group plans (for companies with fewer than 50 employees).
ICHRAs as fall-back: Ironically, ICHRA plans may enable smaller groups to take on more risk and move to a level-funded arrangement. Individual marketplace plans and small group health plans are guaranteed issue, i.e., payers cannot refuse coverage based on prior medical conditions. This means employers always have the option to move to an ICHRA if their level-funded or fully-insured health plan becomes too expensive. It can act as a “fail-safe”. In a way, the guaranteed issue of community-rated plans allows employers to be more risk-taking and consider level-funded options.
Pooling risk: Insurance relies on the law of large numbers. When you pool individual risks together, they become predictable and manageable. Employers who pool risks from several employees into a group plan can often save significantly compared to insuring each individual separately. This is the main reason why PEOs and group plans can offer much lower rates than individual insurance. This is a true benefit a company can provide over just offering health insurance reimbursement for individual coverage.
Longer-term cost containment: This point is somewhat open to debate, but overall, group health plans have less turnover than individual marketplace plans! This incentivizes group health plans to invest in long-term cost-containment solutions, such as better primary and preventative care. Additionally, the regulatory framework for self-funded plans is generally more flexible than that of ACA plans, which allows for more creative cost-containment solutions that are not possible with ACA plans.
More innovation in the level-funded plan space: Many associate level-funding with products from large carriers like Cigna level-funding or United Allsavers, but there are more and more independent vendors (including Arlo) that offer level-funded health plans for small and medium-sized businesses. These smaller plans are often faster to adopt innovative cost-containment solutions and can often offer lower premiums. ACA marketplace plans suffer from a lot of regulation, making it hard to launch a marketplace plan. This reduces the competitiveness of these plans. For every startup launching a fully-insured/ACA-compliant plan, there are 5 startups launching innovative level-funded products.
Better benefits: Because self-funded plans often come at a lower cost, they can also offer richer benefits through lower deductibles or a broader network. Level-funded health plans are also more flexible in including additional benefits, such as virtual physical therapy and wellness benefits, that can be customized for a group. Marketplace plans need to be registered and reviewed by the regulators and are generally slower to adopt more innovative benefits.
The new role of brokers in ICHRA-times
ICHRAs are here to stay, and they continue to play an important role in groups to manage their healthcare costs. However, they don’t represent the unraveling of the group health plan.
Brokers and employers need to know how to operate in this new world. Here are a few of my thoughts:
Become an expert in ICHRAs AND level-funding: Knowing exactly which groups benefit from which arrangement will help benefit advisors differentiate themselves. Also, each arrangement will require different skills to serve their clients: In an ICHRA, the role of the broker will require helping employees select the most appropriate health plan based on the individual marketplace offers; for level-funded plans, brokers need to evaluate whether the plan will fit the needs of the group as a whole.
Advances in underwriting technology: Medical underwriting is becoming easier and easier, and it will be more and more effortless for brokers to evaluate whether a group would benefit from being in the community-rated risk pool or in their own underwritten arrangement. We will see more employers switch from fully insured to level-funded arrangements in the future once they realize they can get better quotes through medical underwriting. Brokers should be aware of this trend and find partners that allow them to do thorough risk assessments without needing individual health questionnaires and claims histories.
Switching as competitive advantage: Brokers traditionally don’t like to switch their clients from one plan to another. It requires a lot of effort, employee education, and process change. However, in this new world of ICHRA and level-funded plans, switching employer groups between arrangements can be a competitive advantage for brokers to win and retain business. Evaluating opportunities to switch from ICHRAs to level-funding and vice versa should be done every year, and the broker who can leverage technology to make the switch as easy as possible can realize incredible value for their clients.
ICHRAs will have their place in employee benefits, but they won’t be the unraveling of the group health plan. Unless regulations around the individual marketplace are altered, I don’t see this changing. However, brokers should know how to leverage ICHRAs and level-funded plans to offer the most cost-effective coverage to their clients. If you want to chat more about this topic - please reach out or leave a comment!