“But what happens when the company no longer sponsors insurance, but rather provides a stipend? Employees need to know where to go to find coverage.”
William G. (Bill) Stuart
Director of Strategy and Compliance
June 28, 2019
Earlier this month, the Trump administration issued guidance establishing two new HRAs – the Individual Coverage HRA (ICHRA) and the Excepted-Benefits HRA. In this column, we explore the history and provisions of the ICHRA, as well as some implications on the nongroup market, employers, and employees. In the July 11 column, we focus on how insurers, benefits advisors, and employers can either resist or embrace this new opportunity.
History of the ICHRA
Frustrated by the Senate’s failure to pass a comprehensive medical reform bill in 2017, President Trump directed three federal agencies to draft regulations that provide more coverage choices to employers and individuals. The ICHRA regs are the final piece of this effort, following the 2018 release of regulations that expanded short-term limited-duration coverage and Association Health Plans.
The administration estimates that when the program is fully implemented, up to 11 million Americans will purchase coverage funded through an ICHRA. Further, it projects that only 800,000 will not have been covered prior to their participation in the ICHRA program. That means that 10 million Americans will shift from the group to a nongroup market. It’s not clear what percentage of those 10 million who lost group coverage would have lost coverage but for the ICHRA and how many would have continued to receive group coverage if their employer hadn’t been offered this middle ground between sponsoring group coverage and offering no coverage.
How ICHRAs Work
ICHRAs provide employers with an opportunity to drop group coverage and the associated administrative burden while simultaneously paying a portion of employees’ premiums with pre-tax dollars. The ICHRA in effect replaces the Cafeteria Plan as the source of tax-free employer contributions.
Here are some key facts that you need to know about ICHRAs:
- Employers can begin offering them for an effective date of Jan. 1, 2020, or later.
- Any size group can offer an ICHRA.
- Employers can maintain group coverage for existing employees and transition new hires to the ICHRA program.
- Employers can create up to 11 classes of employees and offer different approaches (group coverage or ICHRA) to each class.
- Employers can offer different ICHRA terms to different classes of employees, though within each class, the terms and value of the ICHRA can’t vary (except due to the employee’s age or family size).
- Employers can allow unused funds to carry over to the following plan year.
- Employees can use their money to purchase coverage through ACA marketplaces (exchanges) or directly from insurers.
- Employers can set up a Cafeteria Plan to allow employees who purchase coverage outside an ACA marketplace to pay their portion of premiums with pre-tax payroll deductions.
- IC-HRAs satisfy the requirement that large groups offer coverage (the employer mandate), but employers must be sure that their ICHRA satisfies the affordability requirement to avoid penalties.
- Employers must establish reasonable procedures to substantiate that employees have purchased coverage with their ICHRA funds.
Effect on the Nongroup Market
As noted above, the administration estimates that 11 million Americans will purchase coverage through ICHRAs, but only 800,000 of them will be new to coverage.
The group market has a much larger and healthier population than the nongroup market today. And that gap has widened with the implementation of the ACA. If 10 million (less than 10%) of the roughly 180 million members of the healthier group market move to the much smaller, less healthy nongroup market (representing one-third or more of the nongroup market), the nongroup market will become healthier without a meaningful effect on the group market.
This argument rests on the assumption that those 10 million new entrants in the nongroup market are representative of the broader group market. That may not be the case. If ICHRAs attract lower-income employees and those working in low-margin industries, that socioeconomic profile is typically associated with lower overall health. It’s dangerous to use averages to make the argument that this shift will improve the nongroup pool. It might and it might not, depending not on averages, but the health of the people who actually move.
Even if this shift has a positive effect on state nongroup markets, the change benefit won’t apply universally. For example, Massachusetts merged its nongroup and small-group markets in the 1990s. As a result, the merged market is composed primarily of small-group workers. Their individual health status may vary, but as a general rule, working-age people who are healthy enough to work are, on average, healthier than the nongroup population. Massachusetts’ merged-market pool is healthier than a typical nongroup population and therefore will experience minimal – at best – benefit from a positive shift. But in other states, an infusion of better risk can help stabilize the nongroup market.
An Incentive to Dump Bad Risk?
Here’s an all-too-plausible scenario. A group of 100 has high group rates because it has one or two ongoing high-cost claimants (transplant patients who need lifetime anti-rejection medicine or a hemophiliac, for example) who drive up the group rate. The employer may be able to save money for itself and its employees by shifting them – and these high expenditures – to the nongroup market.
In this case, the employer (lower premiums, lower administrative burden) and employees (lower premiums) would both benefit. Adding this risk to the nongroup market would increase total nongroup claims (and therefore premiums).
Alternatively, the employer may be able to retain group coverage for some classes of employees and offer others (with the high-cost claimants) an HRA. This approach is fraught with potential discrimination risk, however.
Effect on Coverage
Because employers have provided coverage for most Americans under age 65 for the past three-quarters of a century, employees don’t know how to shop for medical coverage. In the employer-sponsored model, the company chooses one, two, or three plans. It provides information to employees during open enrollment. Benefit specialists, benefits advisors, and insurance company representatives often appear onsite to present information and answer questions. Employees know where to go (usually online today) and click a few boxes to purchase coverage.
But what happens when the company no longer sponsors insurance, but rather provides a stipend? Employees need to know where to go to find coverage. And without the employer’s choosing a single insurer, employees can search for coverage in many places – or become so confused that they don’t look anywhere. If they find a single source or multiple places to shop, they must then process the distinctions among plans – services covered, out-of-network coverage, cost-sharing, total premium – that their employer once hand-delivered to them.
As an analogy, imagine a lion who is released into the wild after growing up for a decade in a zoo. The lion may be as natural a predator as many Americans are natural shoppers, but the lion must learn a new set of skills to eat enough to survive without her former support system.
Yes, Americans can learn to shop for medical coverage. But it won’t be easy. They certainly haven’t learned to effectively shop for medical care (though, in their defense, the tools are rudimentary). And not everyone whose employer offers a 401(k) match or HSA contribution enrolls opens or contributes to those accounts – even when the employer facilitates the account set-up and promised funding.
Given that track record, it’s likely that more employees whose employers adopt an ICHRA will be without coverage than today under the employer-sponsored coverage model.
Disruption of the Current Distribution Model
The ICHRA program creates a major disruption in the way that medical coverage is sold today. About 180 million Americans – most of the population not enrolled in government programs – receive benefits through an employer. Insurers in effect sell coverage on a wholesale basis to employers, usually with the counsel of benefit advisors. The employer, supported by the benefit advisor, then do the retail work of educating employees and processing enrollments.
This system is efficient for insurers because they avoid the expenses associated with the last mile of delivery. Picture for a moment the distribution of bark mulch, a popular purchase by homeowners every spring. It costs the distributor little to load a large truck and dump a load at a local landscape supply store for perhaps $20 per cubic yard.
But it’s very expensive to ship small volumes from the store to the homeowner. The store may charge $30 per cubic yard for homeowners with trucks who pick up their order or $40 per yard to deliver a load to home two or three miles away.
Medical coverage doesn’t have the same margins as mulch, but the principle is the same: It’s far more efficient to deliver coverage to 100 people by selling the plan to one 100-employee company or even four 25-employee companies. How much will the shift of those 100 employees from the group to nongroup market change the economics of distribution? It remains to be seen.
The response to the short-term limited-duration plan and Association Health Plan changes reflected the red state-blue state divide in the debate over the design, delivery, and financing of medical care. The so-called red states, which are generally opposed to the ACA, have been receptive to these new opportunities. In contrast, the so-called blue states, generally loyal to the ACA, have used their regulatory powers and lawsuits to challenge these executive actions.
Because the short-term limited-duration plan and Association Health Plan regulations affect medical plans, states have wide latitude in issuing regulations to encourage or discourage these options within their borders. ICHRAs, though, are merely funding mechanisms – not coverage – and are tied to the federal tax code. States have much less latitude in trying to discourage adoption.
But it’s not clear that states have no jurisdiction. The ICHRA regs list 11 classes of employees that employers can establish, each of which can receive different treatment. Can states narrow that list? Employers can offer group coverage to some classes and an ICHRA to others. Is the definition of a small group for coverage purposes dependent on the number of employees eligible for benefits or the number in one or the other of these two distinct pools? More to come.
We’ll pass along more information as we receive it. Meantime, you can learn more by visiting the Department of Labor’s Web site.
Also, click here for a Q&A on each plan, plus model notices to provide to employees prior to implementation.
What We’re Reading
Sen. David Perdue (R-GA) has proposed legislation that expands the definition of qualified expenses to include certain fitness-related equipment and fees. FSA participants and HSA owners could make tax-free distributions to reimburse these services. Note: The House passed a similar provision in its HSA expansion bills in 2017, an effort that died in the Senate that year.
Here’s a good guide to how much you need to save, based on your age, in a 401(k) every month to accumulate a $1 million retirement nest-egg. The article fails to mention that HSAs contributions face lower taxes and buy more goods and services in retirement than either traditional or Roth 401(k) plans. That’s a six-figure omission!