Health insurers with big exchange marketplace operations such as Centene and Oscar Health are partnering with newly formed companies to take a bite out of the lucrative employer health benefits market through a relatively new form of coverage.
These exchange carriers are betting big premium increases will push more employers to adopt individual coverage health reimbursement arrangements, or ICHRAs, as an alternative to group coverage.
Through ICHRAs, companies can offer workers tax-exempt subsidies for exchange policies instead of providing insurance themselves. These arrangements save employers money by effectively capping health spending and free them from the administrative burden of managing benefit programs.
ICHRAs direct workers toward coverage that is less comprehensive than typical job-based plans. But structured correctly, they could provide a pathway for small and newly formed businesses to offer employees health insurance, some for the first time, said Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation.
In the three years since President Donald Trump’s administration ushered in ICHRAs, employer uptake has been slow. But vendors, insurers and brokers contend this year represents a tipping point as small-business health insurance premiums soar and the exchanges grow more competitive.
“There is a little bit of a second wave of enthusiasm about it, where there's a lot of new ICHRA companies that have formed lately,” Hempstead said. “For plans that don’t have a good group business, it’s all good. If they get more members out of the group market, that’s terrific. And the more people that are in the individual market, the harder it becomes to take things away from it, or weaken it.”
Individual versus small group
Advocates of ICHRAs contend they have the potential to revolutionize health benefits by giving employees more choices. The coverage also promises to shift the financial and administrative burden from companies to individuals. The Trump administration predicted in 2019 that 800,000 companies employing 11 million workers would offer ICHRAs.
So far, that market prediction has not come to fruition. Just 11% of employers that offer health plans and 7% of those that don't gave employees money to buy their own policies last year, including through ICHRAs, according to a KFF survey of 2,188 companies. Smaller businesses more commonly choose this route than larger employers, but the share of small businesses compensating workers for insurance premiums has declined from 17% in 2015, according to the survey.
Employer-based health plans are the largest source of coverage in the U.S. Businesses sponsored insurance for almost 159 million people last year, according to KFF. Just over half of employers offer health coverage but that figure is heavily skewed toward large companies: 99% of businesses with at least 200 employees have health plans compared to 51% of those with 10-199 employees and 39% of those with 3-9 employees, KFF reported.
Exchange insurers see this as an opportunity for growth. Centene, the largest marketplace carrier with 3.3 million members, is eyeing investments to beef up its ICHRA portfolio, CEO Sarah London said during the company’s second-quarter earnings call last month. Centene did not respond to an interview request.
“In terms of long-term growth, relative to what we’re seeing from gig workers, contract workers, ICHRA and the burgeoning individual marketplace, what are some of the capabilities that we think are going to be important to own, in terms of those distinctive competencies?” London said. “Those are all part of the consideration in the overall [mergers and acquisitions] pipeline.”
Oscar Health, which covers 970,500 exchange enrollees, structured products with ICHRA in mind for the 2024 season, CEO Mark Bertolini said during the company’s second-quarter earnings call this month. Bertolini said ICHRA provides more financial certainty for companies than small-group coverage. Oscar Health declined to make an executive available for an interview.
Like everything in healthcare, insurers and vendors contend ICHRA adoption is local. They say the coverage makes the most sense for employers operating in areas where the individual group rates are lower than the small-group premiums, which is more than half the country, according to Ideon, a health insurance data startup. That proportion will accelerate in 2024 as carriers are pitching the largest increases in years to account for rising medical expenses, said Dan Kuperstein, senior vice president of compliance for Corporate Synergies, an employee benefits brokerage and consultancy.
ICHRAs are particularly attractive for companies that employ a mix of full-time, part-time and temporary workers, Kuperstein said. “You can take out a class of employees and make a defined contribution to their health insurance,” he said. “That's something that's really happening, in light of the rising costs that we've seen.”
The majority-Republican House passed legislation to support ICHRAs on a party-line vote in June. The Custom Health Option and Individual Care Expense (CHOICE) Arrangement Act of 2023 effectively would codify the Trump administration's regulatory actions and allow small employers to band together into associations and purchase this form of coverage. Democrats argue this would enable association health plans to offer benefits to healthier employees while pushing sicker, higher-cost workers to the exchanges.
So far, not enough employers have adopted ICHRA to make waves in the exchange risk pools, Hempstead said. But a number of regulatory loose ends can leave workers liable for higher costs under ICHRAs than they would face if they purchased individual marketplace coverage without their employer’s assistance, she said.
Companies that adopt ICHRA must offer workers enough subsidies to buy coverage considered “affordable” under federal law, meaning workers may spend no more than 9.12% of household income to purchase the second-lowest-cost silver exchange plan in their area. Because this form of coverage is technically considered “affordable,” employees are not eligible for premium tax credits or cost-sharing reductions from the Affordable Care Act. And a recent fix to the ACA's “family glitch,” which limited coverage options for people offered job-based health benefits, does not apply to ICHRAs. The IRS has said it is considering further guidance on that issue.
Employers can set up pre-tax wage deductions to assist workers who can't afford the full premiums using their ICHRA allotments, but only if the workers purchase individual policies off of the health insurance exchanges.
This inspired brokers such as HealthSherpa to market ICHRAs, said Suril Kantaria, an independent healthcare consultant. Kantaria co-founded Savvy, an ICHRA administrator that Take Command acquired for an undisclosed sum last year. Yet the shift toward ICHRAs is hampered because brokers earn larger commissions selling group coverage, he said.
ICHRA administrator Take Command doubled its customer base to 5,000 employers with 70,000 employees over the past year, said Kyle Estep, vice president of policy and strategic partnerships. Small employers make up the bulk of its clients but large businesses are its fastest-growing segment, he said.
“There are certain states in the country, particularly where the individual market’s really competitive, where it just makes a little more sense to use ICHRA,” Estep said. “We’re probably going to see different waves of the country hit at different times in terms of how quickly this model takes root.”
More employers are open to adopting ICHRAs as insurer participation and enrollment grow on the exchanges, said Ben Light, vice president of partnerships at Zorro, an ICHRA administrator with what Light described as "hundreds" of customers.
The average consumer has 88 different exchange plans from which to choose this year, according to a report McKinsey & Co. published in April. Exchange enrollment swelled to 16.4 million in 2023, up 13.1% from the 14.5 million the year prior, after President Joe Biden enacted a law beefing up premium subsidies, according to data from the Centers for Medicare and Medicaid Services.