“ICHRAs alter the distribution model from wholesale (employer-sponsored, or group, coverage) to retail (nongroup coverage). It’s far more efficient and less costly for insurers to make a sale to one group of 100 employees than to four groups of 25. Changing the ratio of group to nongroup sales alters not only cost structure, but also staffing, resources, and marketing strategy.”
William G. (Bill) Stuart
Director of Strategy and Compliance
July 11, 2019
A fortnight ago, we introduced the Individual-Coverage HRA (ICHRA) and the opportunity it presented for employers who want to help employees pay for medical coverage without sponsoring and administering group coverage. The ICHRA allows employers to provide a tax-free stipend to employees, who then purchase the best coverage for their situation in the nongroup market.
This program offers some distinct advantages to employers:
- They can still help employees manage the cost of medical coverage – a key to attract and retain talent – with a tax-free stipend.
- They can adjust this level of support independent of increases in premiums.
- They no longer have to decide which one or two (or in a few cases, perhaps three) plans work best for a five-generation workforce. Instead, each employee can make that decision.
- They can shed much – but by no means all – of the administrative responsibility that they assume in the current model. The ICHRAs themselves are group coverage, so employers still have some compliance responsibilities – just not as complex as under the current system.
This new approach to supporting coverage is disruptive – as it’s designed to be. It’s another attempt by the Trump Administration to offer expanded access to less expensive coverage options in a market in which, it believes, the Affordable Care Act (ACA) has severely curtailed the range of plans offered and driven out-of-pocket costs and premiums beyond levels that are affordable to most families.
The Employer Case for Offering an ICHRA
The attractiveness of ICHRAs depends on a number of factors, including:
The health of the state’s nongroup market. Insurers’ response to being forced to enroll all applicants regardless of their current medical conditions has been to increase out-of-pocket costs, often offer only select (not full) provider networks, and exclude many academic teaching hospitals to which sick patients are most likely to seek access. In markets in which products are unattractive and premiums are much higher than group premiums, ICHRAs probably won’t have much of an effect.
In contrast, in states with a nongroup market that contains products, risk, and premiums that are comparable to the small-group market, employers may be more inclined to substitute ICHRAs for employer-sponsored coverage. Massachusetts, which merged its nongroup and small-group markets in the mid 1990s, is a clear example of such a market.
The labor market in general. In many parts of the country, employers are having difficulty securing and retaining top talent. They are likely to continue to offer group coverage, which workers value and that increases employee stickiness. At the next general economic downturn, though, employers looking to manage their benefits budgets more closely and less fearful of losing talent may adopt an ICHRA approach for some or all of its employees.
Their current premiums. Companies whose claims experience is factored into renewal premiums (51 or more eligible employees) find that their claims are influenced by a disproportionate number of high claimants – an employee who underwent a successful organ transplant or a spouse with a high-cost drug (see a list here for medications costing $250,000 to $500,000 annually). Small-group (50 and fewer employees eligible for benefits) premiums don’t factor in claims, and larger companies (say 250 or more eligible employees) typically have a more normal distribution of illnesses, injuries, and conditions. But a group in the 51-249 range may have a handful of high claimants that push premiums above what employees would pay for nongroup coverage. An ICHRA may be a company’s antidote to high premiums.
Here are some of the relevant questions that the key players in the system – employers, benefits advisors, and insurers – must ask as they evaluate the ICHRA opportunity.
Employer: Can I achieve the same benefits as an ICHRA and maintain group coverage?
Quite possibly. They don’t need an ICHRA to control their employee contribution. They can instead adopt a defined-contribution policy, as some progressive employers already have. The concept is simple: Rather than paying a percentage (say 75%) of the premium for each plan offered, employers give employees a contribution equal to 75% of the premium of the lower plan. Employees who want to purchase the more expensive coverage must pay 100%, not 25%, of the difference in premium.
Employers are free to adjust this amount annually as they wish. They can continue to pay 75% of the premium of the lower plan, increase it by a fixed percentage (perhaps equal to the increase in the compensation budget), or any other figure.
Employers can reduce the administrative burden by offering a private marketplace – a concept that’s been around for nearly a decade but hasn’t become widely accepted. A private marketplace relieves the employer of many administrative burdens:
- It offers a fixed menu of usually between six and 10 medical plans, so the employer doesn’t have to go guess which two or three will meet employees’ needs. And the marketplace, not the employer, manages the menu.
- The marketplace offers a decision-support tool to guide each employee on the best allocation of her fixed employer contribution based on her projected risk and tolerance of that risk.
- It delivers a wide range of ancillary coverage through vendors who are managed by the marketplace sponsor.
- The marketplace creates eligibility files to share with all vendors, relieving the employer of this tedious responsibility.
- It creates reports that employers need to comply with many federal and state laws.
- The marketplace includes a library of information on all coverage, so the benefits department doesn’t need to organize open-enrollment presentations, explain the program to small groups of new employees, and answer questions from spouses.
- And because the coverage is employer-sponsored, the company doesn’t need to calculate different ICHRA values for each employee based on age and family size.
Employer: What do I lose if I offer an ICHRA rather than group coverage?
You may lose some employee loyalty (stickiness) that comes with the offer of group coverage. An ICHRA represents coverage, but it’s not the same as having a company benefits specialist who helps with a disputed claim or explains the plan to a spouse by telephone. This loss may be offset by employees’ being able to purchase coverage more tailored to their needs and risk tolerance without a net loss of benefit.
Employers lose the ability to control the actual cost of medical care – not merely their share of the cost of coverage – for their employees. The tools that some innovative employers are using – encouraging employees to enter into direct-primary care arrangements, contracting directly with medical providers, opening onsite clinics to offer inexpensive, convenient access to services that target the group’s specific cost drivers – have no effect on their future premiums.
But even employers who adopt ICHRAs need to give serious thought to terminating some of those efforts. The true cost of employee injuries and illnesses is measured not only in medical claims but also absence from work or inability to exert full effort. Activities go undone, other workers are overburdened or shifted to functions that they don’t do as well, and temporary workers require supervision and training. Employers are likely to derive a positive ROI – even if they can’t measure it with precision – when they offer supervised stretching to their warehouse staff, make behavioral-health counseling available onsite, and connect employees and family members with direct-primary care doctors who keep them healthy and help them navigate the medical-delivery system.
Benefits Advisor: Will I be disintermediated with the introduction of ICHRAs?
Yes. And no. It depends on you.
An astute trusted advisor who delivers genuine value to his client needn’t fear this new disruptor. She can attack it in one of two ways:
- Offer an alternative: This approach is as simple as introducing a private-marketplace solution or another approach that offers choice, convenience, more control over employer investment in coverage and reduced employer administrative burden.
- Provide a turnkey ICHRA solution: The alternative is to offer an ICHRA program that minimizes the administrative burden on employers. That means working directly with a third-party administrator that offers ICHRAs. It likely means introducing the employer to a private marketplace or similar tool that consolidates multiple benefits on a single platform with reporting, compliance, and educational functionality.
Under Option 1, the broker continues to receive compensation from the group insurer. Under Option 2, the broker negotiates a consulting fee with the employer. She may also receive compensation from the sale of medical and ancillary coverage.
An advisor who can’t address the opportunities and challenges of the ICHRA will suffer a loss of business. She won’t be able to compete with other brokers, private marketplaces, payroll companies, TPAs, and others who offer clients a broad perspective on and alternatives around ICHRAs.
Insurer: How can I respond to the ICHRA challenge?
As noted in my last column, ICHRAs alter the distribution model from wholesale (employer-sponsored, or group, coverage) to retail (nongroup coverage). It’s far more efficient and less costly for insurers to make a sale to one group of 100 employees than to four groups of 25, 10 groups of 10 or 20 groups of five. Changing the ratio of group to nongroup sales alters not only cost structure, but also staffing, resources, and marketing strategy.
But insurers aren’t helpless. They have the same options as benefits advisors:
- Promote the existing model with some strategic revisions. They can educate employers and brokers about the benefits of the group model, the administrative challenges of adopting an ICHRA, and the inherent benefits to recruitment and retention of talent by offering actual coverage rather than merely providing a stipend. And they can educate employers and benefits advisors about defined contribution.
- Provide a solution. Insurers can create a private marketplace and promote it to brokers and employers. The marketplace may be attractive to employees because it’s a one-stop solution to all their benefits-shopping needs. Insurers may be able to offer this tool at no cost and compensate brokers for group medical and ancillary sales.
A Big Concern: Slippage in Coverage
We know that too many employees don’t enroll in a 401(k) program, even when their employer offers to match contributions (though laws allowing employers to auto-enroll employees have limited non-adoption). We know that too many employees who are eligible to open and make or receive contributions to a Health Savings Account don’t open their accounts, even when their employer makes a contribution that doesn’t require a match (though employer’s or insurer’s forwarding eligibility files to the HSA provider have reduced non-adoption).
In a group-insurance model, an employer can auto-enroll employees who don’t act into the default option. When the employer adopts an ICHRA, however, there is no default option. The employer can inform, remind, prod, and urge the employee to enroll in coverage (although the employer actually has a financial incentive not to do so to save money, especially with less skilled workers). But it can’t auto-enroll employees in coverage.
What effect will moving from group to individual coverage affect enrollment? How many employees will be left without coverage?
The Bottom Line
ICHRAs are another tool to promote choice and manage costs. They’re not the only tool, and in many cases, they may not be the best tool. But they’re another option for employers who are frustrated that they’ve exhausted all other avenues – managed care, consumer-driven health, cost-shifting – to control costs.
What We’re Reading
Want to learn more about ICHRAs? I started a five-part series this past Monday on LinkedIn. You can view a sample here.
Which benefits are employers increasing or introducing to attract and retain talent in a tight labor market? Learn more here.
What is the antidote to Medicare for All? Former Sen. Rick Santorum, who remains very involved in the issue of design, delivery, and financing of medical care, offers some ideas here to his fellow Republicans.