“With an ICHRA, the company sheds its liability for those high claims. The claims don’t go away. They’re simply shifted from the employer to the nongroup claims pool. Imagine dumping a quart of bleach into a gallon of water and then watering your houseplants. They won’t survive. Dump that same quart of bleach in your local reservoir and then run the tap to fill your watering can? Your plants won’t feel the difference.”

William G. (Bill) Stuart

Director of Strategy and Compliance

October 1, 2020

I had an interesting – but not unusual – call with a benefits advisor earlier this week. Her client is considering dropping its employer-sponsored medical plan and moving to an Individual-Coverage Health Reimbursement Arrangement, or ICHRA. She called to learn more about not only ICHRA compliance issues, but strategy.

Her client’s difficult situation; The company, which has about 120 employees eligible for benefits but fewer than 50 enrolled, spends about $300,000 annually in premiums. The insurer delivered an increase exceeding 40%. A 40%-plus increase (more than $120,000 annually) may seem outrageous, but the benefits advisor noted that one employee incurred claims of more than $1 million last year.

Looked from that perspective, the $120,000 increase is modest. But her client can’t afford to pay an additional $120,000 in premiums and make the investments in its business and its employees (raises, skills enhancement, etc.). It’s stuck.

And the usual tools that employers use when premium increases strain their budgets won’t put a dent in this problem. Buy down by increasing the deductible by $1,000? That’ll apply pennies of relief to C-notes of premium. Increase employees’ share of premium? That’s just another way of reallocating money from employee paychecks to premiums.

What to do?

The ICHRA Opportunity

This is an ideal situation to consider ICHRAs. Most of the conversations that I have with benefits advisors or clients look like this group. The company has more than 50 employees eligible for benefits, so its claims are factored into premiums. It has one or two high-cost claimants. And because of low employee participation in the group plan, there aren’t enough lives across which to spread those high claims. The company either has sky-high premiums already or faces very high premium increases upon renewal.

With an ICHRA, the company sheds its liability for those high claims. The claims don’t go away. They’re simply shifted from the employer to the nongroup claims pool. Imagine dumping a quart of bleach into a gallon of water and then watering your houseplants. They won’t survive. Dump that same quart of bleach in your local reservoir and then run the tap to fill your watering can? Your plants won’t feel the difference.

In many cases, the employer pays less for coverage and employees can buy a comparable nongroup plan for less money out of their own pockets or a richer plan for the same amount of net premium. Both employer and employee win. And each employee can choose coverage that reflects their medical situation, their budget, and their tolerance of risk.

This degree of choice is important, and it’s one of the selling points of ICHRAs. To understand, look no farther than the employee parking lot. You’ll see a wide range of vehicles – from pick-up trucks and SUVs to minivans and hybrid sedans. Employees have different size families, different budgets, different hobbies, and different interests – all of which are reflected in the vehicles that they drive. Their medical needs and budgets are no different.

So, if the claims don’t go away but are merely shifted, who loses? The claims move to the nongroup market. This broker’s clients’ claims won’t make much difference in the state’s nongroup pool. But if enough companies take a similar approach, community rates in the nongroup market (and small-group, if the two markets are merged, as they are in Massachusetts, Vermont, and the District of Columbia – and Maine beginning in 2022). When nongroup claims increase, so do premiums. And since about five of six nongroup enrollees today receive advance-premium tax credits (premium subsidies) from the federal government, rising premiums will increase the federal premium subsidies in future years.

The ICHRA Challenge

Many ICHRA proponents cite reduced employer administrative responsibility as a key benefit of switching to an ICHRA. Although the employer is no longer sponsoring a group plan and assisting employees with benefits and claims, ICHRAs come with their own administrative responsibilities. Among them:

Set classes. Most employers don’t establish employees classes – other than full-time and part-time – when they offer group coverage. And they don’t have to do so with an ICHRA. But a key feature of an ICHRA is to divide employees into permitted classes. It’s an option that employers and their benefits advisors must explore.

Set age bands. Under group coverage, similarly-situated employees (same medical plan and contract tier) usually pay the same amount of the premium through pre-tax payroll deductions. If the company offers two plans and two tiers (self-only and family), that’s four possible payroll deductions. All are pre-tax if the company establishes a Cafeteria Plan.

But nongroup plans are priced according to family size and the age of each family member. Thus, an employer who gives all employees with self-only coverage a $300 monthly ICHRA might find that a 25-year-old can buy a plan for $350 ($50 out-of-pocket) and a 62-year-old who buys the same coverage mays a $900 ($600 out-of-pocket) monthly premium. That’s why it’s important that companies create age bands. This process is a balancing act. The larger the age bands (say, 15 years) the fewer the company must manage, but the wider the difference in out-of-pocket premium costs between employees at each end of the age band.

Manage enrollment. When a company sponsors a group plan, employees enroll either on the employer’s or the insurer’s online tool. Either way, the employer and insurer can pull reports during open enrollment to identify employees who haven’t enrolled.

But with an ICHRA, there is no single enrollment portal. Employees shop for coverage through an insurer, a state-or federal-facilitated marketplace (exchange), or a private marketplace. The employer can establish its own online tracking tool, but employees manually enroll that information; it’s not downloaded from an enrollment tool. That makes it difficult for an employer who wants to encourage employees who haven’t bought coverage to enroll prior to the deadline.

Manage payroll deductions. Back to our age-band discussion above. Each employee pays a different premium on an ICHRA plan, so each payroll deduction amount is different is different. And the tax treatment is different as well – pre-tax if purchased from a private distributor (insurer or private marketplace) or post-tax (public marketplace). Employers need to collect that information from employees and feed it into their payroll systems; there is no single enrollment tool from which to download the information accurately and completely.

The Ideal ICHRA Market Conditions

Plans offered in the nongroup market differ from those in the group market – particularly the large group market. The Affordable Care Act restricts insurers’ opportunity to price their products based on individual risk. Auto insurers can price according to driving records, life insurers according to medical condition, and homeowners insurers based on neighborhood and distance from a fire hydrant or fire station. But medical insurers can’t price their plans according to the risk of the applicants.

So, they use the tools at their disposal to try to manage risk as best they can. Those tools include the size of the network, deductible and coinsurance, drug formulary, and access to out-of-network providers. In the nongroup market, plans tend to have smaller networks (often excluding expensive teaching hospitals), high out-of-pocket costs, restrictive formularies (for example, covering only some drugs within a pharmaceutical class) and no coverage for non-urgent, nom-emergent care outside the network. Thus, the nongroup market generally has less attractive products.

And premiums in the nongroup market are often higher than group premiums because the covered population is, on average, older, sicker, and poorer than the group-coverage population.

But there are markets in which a transition to an ICHRA is nearly seamless. Massachusetts, Vermont, and the District of Columbia (and Maine beginning in 2022) have merged the nongroup and small-group markets. That means that the same plans at the same premiums (adjusted for age and family size) are offered to nongroup enrollees and small bakeries, car washes, and professional-services firms. These merged markets generally offer products that look more like group plans, because insurers who want to write business with 40-person medical practices have to offer the same attractive product to nongroup applicants as well.

The 2021 rate filings in some states point to a reduction in gap in premiums between nongroup and small-group markets. In Maine and New Hampshire, for example, the gap has been between 20% and 25% in recent years. But insurers in each state have filed rates with double-digit decreases in nongroup and high single-digit increases in small-group premiums. Those rates, if approved, will nearly eliminate the pricing disparities. And similar trends have occurred in other states because of the establishment of high-risk pools, more market competition, and insurers’ improved pricing of nongroup plans.

The ICHRA Dilemma

I had an interesting conversation several months ago with the CEO of a small New-Hampshire based company that wanted to move to an ICHRA. His company had more than 50 employees, about 18 on benefits, and one high claimant – the perfect formula for an ICHRA. He’d done his research on the nongroup market products and premiums and calculated substantial savings with an ICHRA.

“But there are no PPO plans, and I spend 17 weeks in Florida,” he said.

“That’s right,” I explained. “You’re not going to have the out-of-network coverage in the nongroup market that you can get as a small group.”

“The nongroup plans have limited networks. I can’t get to Boston,” he told me.

“That’s right,” I explained. “Networks are restricted. But one insurer does offer a plan that includes access to hospitals in Boston.”

“Yes,” he replied, “but that one has the highest premium>”

“Bingo!” I wanted to say, but didn’t.

ICHRAs deliver financial benefits to groups with certain problems, especially when the nongroup market is favorable. But in general, a company can’t have its cake and eat it, too. The product choices that make the ICHRA program financially attractive don’t serve the needs of everyone. And it’s usually someone in the C-suite who feels the pain most directly.

What We’re Reading

The Kaiser Family Foundation examines the state of the Affordable Care Act and how a Biden presidency might affect the market.

Has your retirement planner talked about tax diversification – the concept of funding account whose distributions in retirement are tax-free (Roth retirement plans) or taxable (traditional retirement plans). If so, don’t forget about Health Savings Accounts as part of this strategy. They enjoy superior tax treatment to traditional retirement accounts. Read more here.