By Hanan Rakine
Two large, publicly traded insurance companies recently revealed to investors an intent to invest in new employer-based health reimbursement accounts as a potential growth area for their business. Called Individual Coverage Health Reimbursement Arrangements (ICHRAs), these tax advantaged accounts enable employers to make a defined contribution to employees’ premiums for an individual market insurance policy. Should this strategy bear fruit, and large numbers of workers move to the individual market for their health coverage, it could have a significant impact on workers’ exposure to health care costs as well as for insurance markets.
Background
In 2019, federal rules allowed employers to provide an ICHRA instead of a group health plan for employees to purchase Affordable Care Act (ACA)-compliant individual market insurance. Employees with an ICHRA may be eligible for Marketplace premium tax credits (PTCs), depending on their employer’s contribution, but they cannot use both the ICHRA and PTCs to purchase a Marketplace health plan. In addition, in order for an employer’s ICHRA contributions to be made on a pre-tax basis, the employee may only purchase an ACA-compliant individual market plan off-Marketplace. Employers who choose ICHRAs can vary the amount they contribute to the ICHRA based on employees’ age, giving older workers up to three times the amount contributed for younger workers, if they want to account for allowable age rating in the individual market.
ICHRAs may be attractive to employers that want to control and limit their contribution to their employees’ health coverage, and particularly to small employers that have struggled to keep pace with rising health care costs. However, ICHRAs have been slow to gain traction. This is due in part to tax and administrative complexities, but also to some employers’ perceptions that the individual market offers lower quality health insurance than the group market.
There are signs that ICHRA enrollment is growing. The HRA Council, an industry group, reports that ICHRA adoption grew 29 percent between 2023 and 2024, with an estimated 5,000 firms offering ICHRAs in 2024.
Health Insurers – and Some States – See Potential Growth Area
In recent calls with investors, two large publicly traded insurance companies—Oscar Health and Centene—are banking on continued ICHRA growth. Oscar Health CEO Mark Bertolini stated: “We believe ICHRA’s time has come,” noting that many employers will see ICHRAs as a “hedge” against rising health care inflation.
Centene CEO Sarah London touted her company’s strategy of marketing ICHRAs to small employers, using the health benefits platform Take Command. Both of these companies have a significant presence in the individual market, and wishful thinking may underlie their strategies. However, if their bet on ICHRAs pays off, it could significantly change the way many employees obtain health insurance, particularly for small business workers.
At the same time, some state lawmakers may view ICHRAs as a way to expand coverage options for small businesses. For example, in 2023 Indiana enacted legislation giving small employers a tax credit if they switch their employees from a group plan to ICHRAs; Texas legislators have considered similar ICHRA-boosting proposals.
How would greater ICHRA adoption impact workers?
Workers shifted to ICHRAs who are not eligible for PTCs could be more vulnerable to rising premiums. Employers’ contributions to ICHRAs are not required to rise in accordance with annual premium increases, or to reflect higher premium costs for some employees. While some employers may choose to increase their contributions to keep up with medical inflation or variations in their employees’ premium costs, others may not.
ICHRAs can be particularly risky for low-wage and older workers. Low-wage workers may be financially better off with PTCs and cost-sharing reductions in a Marketplace plan than in employer-sponsored insurance, but an ICHRA offer that is deemed affordable under the ACA will make them ineligible for Marketplace subsidies. Older workers may bear a greater share of the non-ICHRA funded premium due to individual market age rating.
Additionally, because many employers will want to make pre-tax contributions to ICHRAs, employees will need to purchase their plans off-Marketplace. Navigating the many plan choices available, including many that are not ACA-compliant, puts employees at risk of inadvertently buying a plan that fails to meet the requirements of an ICHRA. Those shifted from group health plans to individual market plans could also face higher deductibles and less robust provider networks.
What would wider ICHRA adoption mean for insurance markets?
The percentage of small businesses that offer health insurance has been declining over the past decade. In 2021, 31.9 percent of all small employers offered health insurance to their employees compared to 43 percent in 2008.
Many small employers appear to be switching from ACA-compliant group plans to level-funded health plans. These quasi self-funded plans are the “highest growth area” for insurers in the small-group market and an increasing number of group health plan sponsors are using level-funding plan arrangements. According to the Kaiser Family Foundation, the percentage of small employers that have level-funded health plans increased from 13 percent in 2020 to roughly 40 percent in 2023.
Insurers are barred from using health status to set the price for state-regulated ACA small-group market plans, but they can do so for level-funded plans. This allows them to siphon away healthy risk from the state-regulated small-group market, leaving behind a smaller and sicker risk pool, and thus higher premiums for the small employers who remain. Each year, as prices rise for state-regulated small-group insurance, more employers with relatively healthy workers will shift to level-funded plans, a classic adverse selection “death spiral.”
Some small employers may not qualify for level-funded plans because of the age or health status of their workers. In their case, the choices are then to (a) absorb premium increases by shifting costs to workers or trimming wages, (b) drop coverage entirely, or (c) transition to ICHRAs. To the extent small business employers choose ICHRAs, it could result in further erosion of the small-group market, threatening its stability. At the same time, the expanded use of ICHRAs among employers, large and small, would boost individual market enrollment, with the potential to impact individual market premiums and insurer participation.
Conclusion
It is far from clear that employers are ready in significant numbers to move their employees into ICHRAs. While two major carriers are betting that they will, questions about the affordability and adequacy of individual market coverage, as well as administrative complexities, are likely to cause many employers to hesitate before making such a change. However, as premiums continue to rise faster than inflation for many small businesses, some employers may decide they must offer an ICHRA or drop coverage entirely. If they adopt an ICHRA, there are financial risks for employees and their families, as well as potential market impacts that policymakers and regulators will need to monitor and address.
