ICHRA Insurance: Passing the Hot Potato

“If dreams were lightning and thunder desire, this old house would've burned down a long time ago”

- John Prine, Angel from Montgomery

Passing the buck, or passing on a better deal?

It is not secret that employers have been struggling to deal with the ever increasing costs of health insurance for their employees due to regional provider communities driving up underlying unit costs. Since 2020 employers have had the option of providing an Individual Coverage Health Reimbursement Arrangement (ICHRA) in stead of traditional employer health insurance - offering the expense certainty and the chance to pass the cost increase hot potato. While ICHRAs have seen somewhat slow adoption, there is increasing attention focused on them this year.

The question is are ICHRAs a better option for employees or just a way for employers to pass the headache of rising healthcare costs on to their employees?

How ICHRAs work

Employers offering ICHRAs make a defined, non-taxed payment to their employees, who in turn are required to use the funds to enroll in an Affordable Care Act (ACA) individual plan sold on Healthcare.gov or the state exchange equivalent. The payment amount must comply with the Federally mandated affordability standard based on employee salaries and the lowest cost ACA Silver plan offered in the area.

The amount of the defined payment must be substantial enough that the employee and any covered dependents are not eligible for a Marketplace tax credit. The employees are allowed to use the Flexible Spending Account (FSA) to pay for any portion of the ACA plan not covered by the funds provided by the employer.

Employers must offer the same health insurance to all classes of employees, though there is an exception for companies to offer one class of employees traditional employer insurance while another class is offered only an ICHRA becomes larger. Employee class types include:

· Salaried employees · Hourly employees

· Full time employees · Part-time or seasonal employees

· Remote employees · Collective bargaining agreements

An example would be a large, retail corporation offering an ICHRA plan to the majority of their employees and a traditional employer group insurance plan to the executive team.

Employer group insurance vs ACA individual insurance

Insurance carriers underwrite health insurance plans for employers with more than 50 employees to set premiums. This process considers the demographics of all employees, the type of health plan benefits and network being purchased, and the pricing pressures from competitors. Due to competition between insurers, employer group plans vs ACA individual plans often have lower copayment amounts, are more likely to have complementary services like acupuncture and massage included, and deductibles as low as financially feasible. Many employer plans are based on a Preferred Provider Organization network (PPO) offering employees a broad selection of providers and hospitals with in-network out of pocket costs.

ACA individual insurance plans are structured and priced in a far different manner. They are primarily based on an Health Maintenance Organization network (HMO) that limits the number of hospitals and providers available with in-network out of pocket costs. The pricing structure of these plans is required to be based on the age of the purchaser, gender and smoking status without additional underwriting considerations. In an effort to keep premiums as low as possible, these plans typically have very large deductibles and out-of-pocket maximums – meaning the insurance pays for only limited services until the purchaser meets their deductible.

What the employer’s bucks buy today

Kaiser Family Foundation research indicates nationally 80% of employees on traditional employer group insurance pay at most 25% of the monthly health insurance premium for their personal coverage. In the Pacific Northwest the average employer premium is about $500 per month – meaning most employees are paying at most $125 per month and many pay less than that amount. 96% of those employees are on plans using PPO or similar provider network – offer a broad range of available providers and hospitals to choose from.

What the bucks buy tomorrow

An employee with health benefits shifted to an ICHRA may be a bit surprised by what they find on Healthcare.gov. To begin with they are likely to only find HMO network plans offered – which may or may not include their current doctor and preferred hospital. If they are younger they will be able to purchase a richer plan, since ACA plan premiums are age rated. If they are older they may be unhappy with what their employers defined contribution buys. While employers are allowed to offer older employees an increased contribution vs younger employees, the increased amount can be no more than 3x the lowest contribution.

Below are the lowest priced 2024 Silver ACA plan in Portland, Oregon that an employee on an ICHRA plan could buy.

Premium Deductible Out of pocket max

30-year old $422 $6,500 $9,450

50-year old $617 $6,500 $9,450

The 30-year old is going to pay $5,064 per year in premiums and the 60-year old $7,404. Hopefully the employer defined contribution covers most if not all of those costs. But that is only the beginning. This is the least expensive Silver plan and each of them will have to pay $6,500 out of pocket before the insurance company covers any medical care that is not defined as an Essential Health Benefit (EHB.) After that their out of pocket costs will continue to accumulate in the form of copayments until they spend a total of $9,450, at which point the insurance will pick up all costs.

It is unlikely an employer would offer these lean benefits on a traditional, underwritten employer group insurance plan. Some employees may be happy with this type of benefit offering, but employees with a choice of employers may well seek a job elsewhere.

ICHRAs – what are they good for?

There is a place for ICHRAs in the small employer market. The ACA requires employers with fewer than 50 employees to purchase ACA health insurance plans for their employees. These small group ACA plans are not underwritten like traditional employer group insurance and are similar to individual ACA plans in many ways. These plans too are often on HMO networks, with rather high deductibles and out-of-pocket maximums, and are priced based on the age of the employees. An employee at one of these small companies could gain the chance to choose their network and insurance carrier if offered an ICHRA, which could be preferrable to the employer provided plan. And small employers may see ICHRAs as a tool to manage the financial challenge paying for health insurance benefits.

When you hear talk of ICHRA health plans being a better way to spend health insurance bucks, be sure to ask for the details. The size of the employer, the cost and richness of the lowest cost Silver ACA plan available, and the impact on older employees are all subtleties critical to discerning if it’s just passing the buck or a reasonable option.

Copyright 2itive 2024

2itive is a Portland based consultancy founded by Erik Goodfriend, offering a unique combination of market intelligence, knowledge of healthcare payment systems and creative business strategy insights.

Feel free to contact us at info@2itive.com