In search of the holy grail of employer-sponsored benefits startups

What is ICHRA, what are its benefits and drawbacks and what is the 'Holy Grail' of ICHRA implementation?

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The start of Individual Coverage Health Reimbursement Arrangements (ICHRA) marks a significant evolution in the domain of employer-sponsored health benefits, introducing flexibility, personalization, and a host of strategic opportunities for startups.

Having invested in a number of health and benefits startups (shoutout to my partner Laura Bock in leading our investments in Decent, Easy Health and Finch), we at QED are very excited about what’s to come, and wanted to share some of our learning and notes from our research.

If you are building in this space, we are excited to hear from you - please reach out. Connect with me on LinkedIn here or email me here.

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The inception and a brief history of ICHRA

The launch of ICHRA in 2020 marked a transformative moment in healthcare choice and flexibility for both employers and employees. Prior to ICHRA, IRS guidance effectively restricted employers from offering standalone Health Reimbursement Arrangements (HRAs) for employees to buy coverage in the individual market.

The introduction of ICHRA is effectively aiming to allow employers to use pretax dollars to subsidize employee premiums for individual health insurance, including plans on the ACA public exchanges.

Expected to particularly benefit small employers by offering another option for financing worker health insurance coverage, ICHRA was designed to increase employer flexibility and employee choice. The rule anticipated that around 800,000 employers would offer ICHRAs, covering more than 11 million employees and their family members. This arrangement provided a way for employers to control costs while offering employees a wider range of personalized health insurance options, underlining the move towards more flexible, tailored healthcare benefits.

As of late 2023, around 3 million Americans are enrolled in ICHRA. According to the HRA Council, adoption of ICHRAs has more than tripled since they were introduced in 2020. As many as 89 percent of benefits decision-makers, who don't currently offer them, are considering ICHRAs for their employees over the next three years.

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ICHRA vs. ACA small group plans vs. level-funded plans

For SMBs with 50 or fewer full-time employees, some of the most popular ways to provide health benefits include offering fully insured small group plans, level-funded plans, and now ICHRA.

Small group plans

The Affordable Care Act (ACA) introduced small group plans to offer standardized health coverage with specific benefits and protections. These plans are designed with community rating rules, which can limit the flexibility in pricing based on health status, age, and other factors. The premiums for ACA small group plans do not consider group-specific claims cost projections that could be influenced by non-allowable rating factors under healthcare reform, making it challenging for small businesses with healthier employee demographics to benefit from lower premiums. However, for some groups, ACA plans might be the most affordable coverage option, especially if transitional relief is not available.

Level-funded plans

Level-funded plans offer a middle ground between traditional fully insured plans and self-funding, where employers pay a set monthly fee that covers employee health claims up to a certain stop-loss limit, potentially receiving a refund if claims are lower than expected. This option can offer savings opportunities for businesses with stable or predictable health claims and a willingness to assume a bit of risk.

However, the total Level Funding premium equivalent represents the maximum a group will pay on a per member per month (PMPM) basis for the upcoming plan year, making it potentially the most expensive option, especially for groups with higher claims costs. Level-funded plans are priced based on stop-loss coverage, and if actual paid claim costs are less than the Paid Claims Fund, the group will receive a refund.

Oftentimes, level-funded plans require a minimum number of employees. Another wrinkle for smaller employers is that single high claims may lead to dramatic premium increases, leading to problems at the time of renewal.

ICHRA

Individual Coverage Health Reimbursement Arrangements (ICHRAs) provide employers with a flexible, tax-friendly model to offer health benefits. Unlike traditional group plans, ICHRAs allow employers to set a defined contribution for employees to purchase their health insurance, granting more personalization for employees and cost control for employers.

This model is applicable to companies of any size and offers significant flexibility in terms of plan design and budgeting. Employers can also design plans to reimburse both premiums and medical expenses, with no minimum or maximum contribution limits. ICHRAs can meet the employer mandate for large employers if the offer is "affordable" and meets minimum value standards. The advantage here is the shift of employer responsibility for health risks and the provision of more personalized plan choices for employees without participation concerns.

Each of these models presents distinct advantages and considerations, underscoring the importance of a tailored approach to selecting health insurance benefits that align with business objectives and employee needs.

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The impact of community rating on cost of fully-insured small group plans

As mentioned above, under the ACA, small group plans are subject to community rating rules, which impact how premiums are determined. In certain states, these rules mandate that premiums within a given geographic area must be the same for all enrollees, irrespective of health status and other factors.

While these regulations aim to make health coverage more accessible and fair, they also have nuanced implications for the market dynamics of small group health plans and inadvertently affect the affordability and attractiveness of ACA small group plans. Since insurers cannot adjust premiums based on the actual health risk of the group, healthier groups — which would otherwise benefit from lower premiums due to their lower risk profile — might not find the best value in these community-rated plans.

Consequently, these groups often explore other avenues like level-funded plans, where the underwriting process allows for a more tailored premium setting based on the group's health status and claims history. The partial departure of “good” risk out of the fully insured small group category potentially has caused individual policies to become more economical / cheaper than group offerings in many major metros.

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Potential drawbacks of ICHRA

In our conversations, several potential drawbacks of ICHRA have been surfaced.

Narrower networks

One of the worries with ICHRA plans is they tend to have narrower networks. These plans often limit the range of healthcare providers and specialists available to enrollees, potentially affecting the accessibility and quality of care. For employees accustomed to broader network plans, this shift can lead to dissatisfaction and challenges in continuing care with preferred providers.

Challenges in setting a uniform contribution

Finding a single contribution amount that is equitable and sufficient for all employees is another concern. Given the wide variance in health insurance premiums across different geographic areas and age groups, determining a contribution amount that covers a significant portion of every employee's premium costs without favoring any particular group is complex.

Perception of reduced benefits

There's a misconception among some employees that ICHRA equates to employers scaling back on health benefits. This perception can arise from misunderstandings about the nature of ICHRA, where instead of providing a one-size-fits-all group plan, employers reimburse employees for individually chosen plans. Proper communication and education are essential to address this concern.

Difficulty in plan selection for employees

Another significant issue is that employees may feel overwhelmed by the responsibility of selecting their health insurance plans. The abundance of choices, varying levels of coverage, and the complexity of insurance terms can lead to decision paralysis or poor plan choices.

Administrative complexity

The backend administration of ICHRA is notably more complicated than traditional group plans, primarily because employers have to manage reimbursements across a wide array of carriers and plan types. This can introduce logistical challenges and necessitate a robust administrative system to ensure smooth operation.

Broker Resistance: Another issue that has emerged with the adoption of ICHRA is resistance from brokers. This resistance often stems from uncertainties regarding how ICHRA impacts their commission structure.

Since ICHRA involves employees selecting individual plans rather than a group policy traditionally facilitated by brokers, there is concern within the brokerage community about potential reductions in commission or changes in the nature of their compensation. This uncertainty may lead some brokers to be hesitant in recommending ICHRA to their clients, despite the potential benefits it offers in terms of flexibility and cost efficiency for employers and employees alike.
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Promising elements of ICHRA

Despite some of the drawbacks mentioned above, ICHRA brings forth significant advantages in the evolving landscape of healthcare benefits, addressing several long-standing challenges faced by employers and employees alike -

Employers can exit the healthcare business

ICHRA allows employers, especially small and medium-sized enterprises, to focus more on their core operations rather than navigating the complex and often costly waters of healthcare management. By defining a fixed contribution towards employee health benefits, employers can predict and control their healthcare spending more effectively, potentially avoiding the annual increases in premiums that are typical with traditional group health plans.

Increased flexibility for both employers and employees

Employers have the flexibility to set up ICHRA contributions based on employee classes, such as full-time, part-time, geographic location, etc., allowing for a more tailored benefits strategy that aligns with the business’s financial and operational goals.

Employees gain the freedom to select health insurance plans that best suit their personal and family needs, rather than being restricted to the options selected by their employer. This flexibility can lead to higher satisfaction and a better fit for individual health care requirements.

Funneling more people into the individual market – A step toward broader reform

By directing more individuals to the individual health insurance market, ICHRA contributes to expanding the customer base, which could, in theory, lead to more competitive pricing and innovation among health insurance providers. While the transition to a single-payer system in the U.S. remains a contentious and distant possibility, the increased participation in the individual market through ICHRA could provide valuable insights and a gradual move towards broader healthcare reforms. =

It showcases a model where individuals have more autonomy in their healthcare decisions, a concept that aligns with certain aspects of universal coverage models.

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What do we believe: The 'Holy Grail' of ICHRA implementation

While we never know what the “perfect” startup looks like, we can only hypothesize about the elements a product needs to encompass to deliver better ICHRA implementation and further aid ICHRA adoption -

1. A well-guided direct enrollment product

For ICHRA to truly serve the needs of employees, a direct enrollment product that goes beyond being a mere wrapper on top of healthcare.gov is crucial. This product should offer a guided experience through the plan selection process, leveraging sophisticated decision-support tools to recommend plans based on an individual's health needs, preferences, and financial situation.

Access to employees' claims data could play an important role here, enabling the system to suggest plans that are not only cost-effective but also aligned with the employee's historical healthcare usage and future needs.

2. Sophisticated payment handling via direct payroll deduction

A seamless experience for employees is envisaged where ICHRA contributions are handled through direct payroll deductions. This approach simplifies the process for employees, ensuring that their portion of health insurance premiums is automatically taken care of each pay period.

This not only streamlines the financial aspect of health insurance for employees but also reinforces the employer's commitment to their health and well-being. (We’d like to give a shoutout to our portfolio company Finch for anyone looking for best-in-class vendors in direct payroll deduction and other employment system integration needs).

3. Seamless administration automation and integration with carriers

The backend administration of ICHRA poses a significant challenge, particularly due to the diversity of carriers and plans involved. Achieving seamless admin automation and integration with insurance carriers would greatly reduce the complexity of managing ICHRA.

This means developing systems that can automatically handle eligibility verification, claims reimbursement, and compliance requirements without manual intervention. Such automation would also facilitate real-time data exchange between employers, employees, and carriers, ensuring that coverage is accurately maintained and managed.

A shoutout to the cool companies we’ve come across and have learned from in doing this deep dive below. And again - we are just dipping our toes and would love to hear from you if are building in the health benefits space, have any thoughts or want to compare notes!

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