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Key Takeaways:
ARTICLE | To ICHRA or Not To ICHRA?
Individual Coverage Health Reimbursement Arrangements (ICHRAs) have been getting an increasing amount of attention in recent years and are being touted as a potential next evolution in how employers support employee healthcare.
While the rate of adoption has been quite impressive in the little more than 4 short years since ICHRAs were first legislated into existence, however, the question remains as to whether the reality of what ICHRAs can deliver lives up to the hype they have been generating.
Thus far at least, the heightened attention surrounding ICHRAs and the resulting meteoric rise has only translated into a tiny sliver of market share, and although that market share has been obtained over a relatively short amount of time, the types of companies that are best suited to capitalize on the advantages that accompany ICHRA adoption are too few in number to make widespread adoption seem likely.
Essentially, ICHRAs provide employers of any size the opportunity to set aside a fixed amount of money each month/year that employees can use to cover health care expenditures like premiums, deductibles, copays, and other qualified medical expenses.
There are several aspects of ICHRAs that are very appealing to employers for very obvious reasons, including they enable employers to satisfy Affordable Care Act requirements via tax-deductible contributions as long as cash available for reimbursement meets or exceeds the minimum affordability standards.
Also, these accounts can be offered as standalone health benefits, or they can be offered in tandem with traditional employer-sponsored insurance and there is no upper limit on reimbursement levels, allowing for great flexibility in tailoring these arrangements to the needs of the talent your organization hopes to attract and retain.
Further, compliance and administration for ICHRAs is theoretically simplified relative to traditional group-plan coverage, and risk/cost is limited due to the predetermined amount of reimbursement available each term.
At face value, the potential ICHRA appeal is immediately clear - risk limitation for employers and freedom of choice for employees - but a deeper analysis reveals a significantly more complex dilemma than may be apparent on the surface.
The story of the ICHRA can not be told without the Health Reimbursement Arrangement (HRA) from which it evolved.
The IRS first recognized HRAs in 2002, and though the popularity of HRAs swelled throughout the early part of the century, in 2013 an interpretation of the Affordable Care Act effectively outlawed them for failure to comply with the new credible coverage rules.
Because many companies (especially those on the smaller side) were unable to provide any employee healthcare spending support at all in the wake of the HRA ban, however, Congress created the QSEHRA in 2016 to allow small employers to offer HRAs if they met certain conditions that made providing traditional health insurance coverage less feasible.
In 2019, the Department of Labor took the additional step of enacting rules to expand the access to HRAs to companies of all sizes, enabling the first ICHRAs to come online in 2020 and bringing the HRA adoption trend line full circle.
And while HRAs continue to be a major factor in employer-sponsored health coverage today, and make up a core component of most high-deductible health plans, which in turn make up about 45% of all employer-sponsored health plans, it is ICHRAs that are currently dominating the spotlight, with the number of companies offering ICHRAs last year increasing by more than 60% over the year before.
Supporters like to compare the current shift toward ICHRA adoption and away from traditional health insurance coverage offerings as analogous to the shift away from defined benefit retirement savings offerings toward defined contribution retirement savings plans.
In short, plenty of ICHRA proponents think that ICHRAs will eventually replace traditional healthcare benefits similar to how pensions have been largely replaced by 401ks and other investment vehicles over the last 40 years, and based on the year-over-year changes between 2022 and 2023, that possibility seems quite plausible.
As the chart below shows, there were about 2,500 employers offering ICHRAs in 2022, but that number jumped up by about 64% to an approximated 4,100 employers in 2023.
The QSEHRA adoption tells a somewhat different story, however, with only about an 8% increase between 2022 and 2023 in the number of small employers offering QSEHRAS bringing that figure from 6,000 up to an approximated 6,500.
Of course, QSEHRA adoption had a few years-long head start on ICHRA under the latest regulatory rules, which can partially explain the slower adoption rate for QSEHRAs relative to ICHRAs.
More importantly, however, the additional flexibilities built into ICHRAs have made QSEHRAs relatively obsolete for all but a small slice of qualifying small businesses, so the disparity in pace of growth between ICHRA and QSEHRA adoption is more likely to grow than shrink at this point.
For context however, even with this kind of significant levels of year-over-year adoption, ICHRAs went from accounting for 0.08% of employer sponsored health care expenditures in 2022 to 0.1% of employer sponsored health care expenditures in 2023, so the impact on the overall market still remains incredibly small for the time being at least, and that may not be a bad thing.
- Nearly two-thirds of employers (64%) that offer ICHRAs or QESHRAs have 5 or fewer employees;
- Only 6% of employers that offer ICHRAs or QESHRAs have 50 or more employee;
- The fastest growing segment of ICHRA adoption is by employers with 50 or more employees, which grew by more than 140% between 2022 and 2023; and
- The number of employers offering ICHRAs grew by 170% between 2022 and 2023 while the number of employers offering QSEHRAs grew by about 100% over the same period.
- 55% of employees insured via ICHRAs or QSEHRAs in 2023 were age 44 or younger.
It’s important to note that there are some understandable reasons driving interest and adoption in ICHRAs. In fact, there are, of course, a number of situations in which ICHRAs or QSEHRAs may be the best available option for employers to support employee health care coverage.
First and foremost, employers that don’t intend to contribute at least 50% contribution toward total employee healthcare spending may be well-served by offering ICHRAs, which allow employers to specify and cap in advance the maximum amount of reimbursement available to each employee each one-year term.
This type of risk-limiting arrangement can be appealing to employers, especially those on the smaller side that may not have sufficient resources to fund traditional employer-based health insurance coverage.
Further, despite requiring employees to submit monthly any healthcare bills for which they are seeking reimbursement, ICHRAs are also considerably less complex and labor-intensive to administer than traditional employer-sponsored health plan management, which appeals to employers that may lack the necessary human resources or finance department/professional(s) capable of handling the workload.
ICHRAs also can be a good idea for employers with high turnover and/or whose employees primarily qualify as low-income and therefore can still obtain substantial discounts on health insurance through the public marketplace as a result, even after accounting for the ICHRA reimbursement funds available to them.
As the above example under the Advantages of ICHRA header make clear, having a relatively small business and a small number of employees is the primary common factor linking the situations in which ICHRA adoption is most optimal, which seems to remain the case for both ICHRAs and the QSEHRAs that were designed specifically to accommodate the needs of small employers.
Interestingly, however, employers with 50 or more employees were the fastest growing segment in terms of ICHRA adoption between 20223 and 2023 nonetheless, even though employers with more employees and greater resources are often going to find that the disadvantages associated with ICHRAs outweigh any advantages they may have hoped to gain via implementing an ICHRA program.
For example, while it is true that ICHRAs set a hard limit on employer healthcare costs, that limit is only meaningful for employers that intend to provide less than market competitive employee health benefit spending.
In reality, almost all employers covering 80% of an employee’s healthcare costs (which is the market average) are going to get a much better group rate for their employee pool than what individual employees would be able to obtain on their own through the ACA exchange, with the only exceptions being employers that have a very small number of low-income employees, as noted above.
The alternative, of course, is offering healthcare benefits that are below market rate, which is a strategy that comes with tangential disadvantages of its own, including productivity-loss, higher turnover rates, and other talent acquisition and retention issues.
There are also some other potential - though relatively minor - issues with ICHRA administration that aren’t necessarily baked into the system but can be problematic nonetheless. ICHRAs rely on employees to submit their medical expense bills in a timely and consistent manner, for example, which doesn’t always result in lightening the administrative workload as much as expected.
Perhaps the main problem with ICHRAs, however, is that they are simply not currently designed to work in a complementary fashion with the current insurance broker model that undergirds the weight of the US healthcare system.
Similar to Medicare Advantage enrollment, initiating an ICHRA or QSEHRA program requires each employee to be enrolled individually. Currently, however, most brokers don’t really have an ICHRA enrollment vehicle to efficiently facilitate that process, so many traditional brokers who currently own employer accounts will no longer be able to collect the health commission and fees associated with those accounts, which would instead go to the Medicare-Advantage-type of enrollment broker.
Those Medicare-Advantage-type brokers, on the other hand, are unable to facilitate enrollment in dental and vision plans as well as other employee benefits that traditionally sit in the traditional insurance broker wheelhouse, further scrambling the division of responsibilities and the incentive structure as they currently exist in the insurance and employee benefits markets.
While there are clearly advantages that can be gained by implementing an ICHRA program, those advantages appear to be primarily applicable to a much smaller subset of employers than the current interest in ICHRAs and the accompanying expectation for their impact on employer healthcare provision norms in the future seem to indicate.
At the end of the day, however, for most employers other than those with only a small number of low-income employees, the disadvantages that come with ICHRAs will amount to more on balance than the advantages.
Although the ICHRA adoption growth rate still looks impressive, those rates are already slowing year-over-year just a handful of years after their introduction on the market.
Further, employers utilizing ICHRAs still make up an infinitesimal portion of overall market share at one-tenth of one percent, and with brokers and carriers both disincentivized to help expand the size of that market, adoption rates seem likely to continue slowing in the next few years.
Despite any clamor about a potential future in which ICHRAs play a much more prominent role in supporting employee health coverage, the numbers as they currently exist and the forces likely to shape those numbers going forward largely don’t support those conclusions.
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