An Update on ICHRAs

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“Large employers (51 or more employees) who want to transition employees from group to nongroup coverage are discouraged to find that the nongroup plan designs are far less attractive than what they can purchase as a large group.”

William G. (Bill) Stuart

Director of Strategy and Compliance

April 2, 2020

Last summer, the Trump Administration issued guidance (read summary here and full notice here) on Individual-Coverage Health Reimbursement Arrangements, the new (actually, revived is a better word) program that allows employers to give employees tax-free stipends to purchase medical coverage in the nongroup market. When people have asked me how big the market might be for ICHRAs – the White House projected about 11 million participants when the program is fully implemented – I routinely projected that the figure would be much lower, with one caveat (read on).

This is especially true in Massachusetts, where I live and my company supports a large base of clients. The Bay State has a high-skill work force in a market dominated by higher education, healthcare, biotech, high tech and financial services. Companies in these sectors compete for top talent nationally and internationally, and employees’ intellectual capital is the primary input into the value-creation process of many of the state’s largest businesses.

In such a market, employers must design excellent compensation packages to attract and retain the best workers. ICHRAs are often viewed as inferior to employer-sponsored (group) coverage because employees typically don’t enjoy the same level of support that an employer provides with the group plan.

But now for my caveat. In every conversation, I’ve added, “But if the economy slackens and unemployment doubles to 7% of the work force, then I think all bets are off.” We could see more rapid adoption by employers who must make difficult choices between managing their benefits budgets and laying off employees.

That time appears to have come out of nowhere, with a record 3.28 million new unemployment claims filed last week. My 7% unemployment threshold may be the best-case scenario in the immediate future.

How Do ICHRAs Work?

Employers can offer a single ICHRA benefit to their entire work force. Or they can create different classes of employees and offer different classes different dollar amounts. They can even offer group coverage to some employee classes and an ICHRA to others – but no individual employee or class can choose between an ICHRA or group coverage.

The classes that employers can create are limited. The most common are full-time and part-time, and salary and hourly. Other classes include seasonal workers, new hires in a benefits waiting period, foreign workers working internationally, employees who live in different rating regions, and workers covered by a collective-bargaining agreement.

Employers can vary contributions within a class, but only to reflect factors that affect premiums. Those factors are family size and age. The age adjustment can’t vary by more than 1:3 from lowest to highest ICHRA value.

Please note this is only a summary of ICHRA compliance issues. For additional general information (not legal advice), see here, here, here, and here. And we recommend that you consult with appropriate legal counsel before implementing this or any change to your benefits program.

Who’s Choosing ICHRAs?

I’ve spoken to perhaps a dozen benefits advisors or employers during the past month about implementing ICHRAs. Most of them and the handful of ICHRAs that Benefits Strategies has installed share some common characteristics: They have one or two large claimants, they’re large enough to be experience rated but too small to absorb claims generated by a few high utilizers, and they’re dropping their group plan altogether and offering a single ICHRA to all employees (no classes). They are adjusting their ICHRA amounts based on employee age (within age bands) and contract size.

This is a worst-case scenario for policymakers. Concerned that an employer would surgically carve high claimants from the group coverage and dump them into the nongroup market, the Trump Administration limited the number of permitted classes. And it prescribed minimum ICHRA class sizes for all employers who offered group coverage to at least one class of workers. The intent of these rules was to make sure that if an employer wanted to transition a portion of the company’s population from the group plan to the nongroup market with an ICHRA, the company would have to move some healthy employees with the high-cost claimants.

But those guard rails don’t work when a company sends all employees to the nongroup market due to unaffordable premiums based on the group’s claims experience.

In terms of industry, the companies who’ve approached me to learn more about ICHRAs include businesses operating in the home health care, food distribution, entertainment, light manufacturer, private prep school, and general services sectors. Most employees in these businesses are considered blue collar. Most are paid hourly wages. Every company is sensitive to the cost of premiums (this acute sensitivity is prompting the shift to an ICHRA) and wants to keep its employees whole by funding the ICHRA enough so that employees don’t have to pay anything more out-of-pocket for nongroup coverage comparable to their terminated group plan.

What Plans Do Employees Choose?

Our first installed case was a group that ended up with 72 employees enrolled in ICHRA coverage in Massachusetts, with an additional handful in New Hampshire. Massachusetts residents are fortunate. In addition to shopping in the public marketplace (called the Connector in the Bay State), they can buy coverage directly from some insurers and also through HSA Insurance, a private marketplace that has sold coverage to individuals and very small groups for years.

The 72 Massachusetts residents all shopped for plans through HSA Insurance. They bought 18 distinct plans. About two-thirds of them chose a plan without ever speaking to an HSA Insurance employee. They used the site’s decision-support tools and other forms of communication – like live chat – to make their purchase decision. And in a post-purchase survey, they indicated that they felt confident that they’d chosen the right coverage for their families.

Most purchased Platinum and Gold coverage with $1,000 or $1,500 self-only deductibles. They found that they could purchase coverage similar to their old group plan at a lower premium cost to themselves, or buy a plan with a lower deductible for the same amount of money that had been deducted from their paychecks for the group plan. And since they bought plans in a private marketplace, they can pay their portion of premium pre-tax through the company’s Cafeteria Plan.

Interestingly, most enrolled in plans with high-performance (limited) networks. They chose plans with deductibles at or below their old group plans and managed their share of premium by selecting plans that excluded the most prominent academic teaching hospitals in the market.

This result is interesting because insurers have had little luck selling high-performance network plans to employers, who fear that employees will devalue coverage that excludes the market’s most prominent names – even though the network boasts many other nationally renowned Harvard Medical School-affiliated hospitals and providers.

Even when employers offer these plans side-by-side with a plan with similar benefits and a full network, companies often don’t experience real savings. Employees who want the full network are willing to pay a higher premium for that feature. Those who choose the limited-network plans are already using those less expensive providers, so claims experience doesn’t change. Under Massachusetts law, insures must maintain at least a 10% premium spread between the two plans, but rarely do employees who receive care at high-price providers enroll in limited-network plans and change  providers.

Challenges to the Nongroup Market

One of the foundational assumptions underlying ICHRAs was that they’d help stabilize the nongroup market. The argument goes like this: The group market, with 160 million to 170 million enrollees, is a balanced risk pool that reflects the overall population. In contrast, most states’ nongroup enrollees (a total of about 10 million nationwide) are older, poorer, and sicker than the general population. The Trump Administration projected that roughly 6 million to 7 million ICHRA enrollees would move to ICHRAs from group coverage (the others would be new to coverage or were already in the nongroup market and would receive employer funding for the first time).

If those 6 million to 7 million enrollees reflect the overall group pool, then that small number of transfers won’t affect the group market but will instantly make the nongroup population younger, richer, and healthier, thus reducing average claims costs.

But this line of thinking contains one serious caveat. It assumes that the transfers from the group to the nongroup pool are reflective of the overall group population. In each of the groups with which I’ve discussed ICHRAs, however, employers were or are contemplating transitioning employees from group to nongroup coverage because a few high-cost claimants led to very high premiums and high annual increases. Those high-cost claimants transitioning to the nongroup pool are not reflective of the group population.

Challenges to Employers Who Want to Offer ICHRAs

Large employers (51 or more employees) who want to transition employees from group to nongroup coverage are discouraged to find that the nongroup plan designs are far less attractive than what they can purchase as a large group. That’s a direct result of the Affordable Care Act, which prohibited insurers from factoring in experience and projected risk when setting individual applicant’s premiums.

Unable to price for risk – as auto, life, and homeowners insurers, for example, can – insurers have made their nongroup plans less attractive to sicker prospective enrollees. The easiest way to do so is to increase cost-sharing (high deductibles and in-network coinsurance after the deductible), network restrictions (eliminating many academic medical centers and limiting participating specialists), and formularies (limiting access to prescription drugs and applying high coinsurance on expensive drugs).

So, employees shopping for nongroup coverage find that they have limited options. This limitation is felt especially by senior staff members, who are accustomed to full networks and PPO plans that provide coverage for out-of-network services. Few state nongroup markets offer PPO plans.

Another limitation is that nongroup premiums are often higher than employer-sponsored coverage by 15% or more. That’s because, as noted above, the nongroup enrollees are older, poorer, and sicker than the overall population. Why? First, a market composed of employees who are actively working and their families is bound to be healthier than a market composed of policy owners who may or may not be healthy enough to work and their family members. Second, because of ACA-imposed restrictions on pricing, younger enrollees typically pay premiums higher than their expected claims and older ones generally pay less than their average premiums. These subsidies encourage older applicants to buy coverage and younger ones not to purchase a plan, thus skewing enrollment toward people with higher claims.

The exception is a state like Massachusetts, which merged its nongroup and small-group (companies with 50 or fewer employees). As a result, small groups pay higher premiums than their claims experience justifies, thereby subsidizing nongroup enrollees. In a merged market, nongroup products are priced more similarly to large-group plans and have benefit designs more similar to large-group offerings (because the nongroup and small-group markets consist of the same designs)

The range of plans available in the nongroup market has been a shock to leaders at the companies with which I’ve worked. But the need to manage medical spending has trumped these concerns. These companies have determined that they can’t continue to offer group plans at current premium levels. To them, a more limited menu of products is the necessary price to pay to rein in the cost of medical coverage.

Another concern is that ICHRAs were created by administrative (the executive branch), not statutory, action (legislation approved by Congress and signed by the president). The next president can rescind these regulations and eliminate using HRAs to fund employees’ nongroup premiums tax-free. In that case, a group with bad claims experience that drops group coverage for a year or two of an ICHRA, then must return to the group market, may have difficulty finding an insurer willing to extend coverage. That’s a reasonable fear that has some employers hoping that Congress will authorize ICHRAs to protect the program’s future.

What’s Next?

I suspect that the economic disruption stemming from the pandemic will generate a new round of interest in ICHRAs. The opportunities and the challenges won’t change, but many companies will be looking at ICHRAs for the first time or through a new lens. The Trump Administration’s projection of nearly 11 million Americans covered through ICHRAs may become reality sooner than many people (me included) projected.

What We’re Reading

We haven’t heard much from former Vice President Joe Biden, the presumptive Democrat nominee for president, during the pandemic. Forbes columnist Avik Roy summarizes Biden’s healthcare strategy here.

Are you eager to be tested for the coronavirus? Which presidential candidate do you think is most likely to oversee development and production of a vaccine for the virus? Check your answers against results of a national survey by The Commonwealth Fund here.

Do you read my HSA Wednesday Wisdom article on LinkedIn? This week’s article discusses how – and how not – to use your Health Savings Account during financial turbulence.

 

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