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When it comes to healthcare benefits, you may be surprised to learn that employers have dozens of different options to choose from. Most people are familiar with the Traditional Group Health plan. This is where your employer works directly with a carrier (oftentimes via a healthcare broker) to provide 2-3 options to the employees. Some companies cover the cost of these plans entirely, but most will share the cost with the employees.
About five years ago, the concept of an Individual Coverage Health Reimbursement Arrangement (otherwise known as ICHRA) came into fruition. Under an ICHRA, the employer gives employees a monthly “allowance” – a specific amount of money which may differ depending upon the age and location of the employee. The reason the amount differs is because plans may be more or less expensive for employees depending on their age and location, and employers want to treat their employees equitably by giving them equal buying power. The employees in turn can shop for a plan that is best-suited for them.
ICHRA is a fairly new concept, so not a lot of people understand its value and potential impact yet. But bettors on the market are big believers. There are already dozens of software companies competing for business in the ICHRA market and they have raised hundreds of millions of dollars from Venture Capital markets in just the last few years alone. With that in mind, let’s take a look at some of the key advantages of offering an ICHRA to employees.
- Cost Savings
In many cases, an ICHRA can be advantageous from a cost perspective to an employer. Under a Traditional Group Plan, risk is distributed amongst the population of the employee pool. In a 50 person company, this means risk is distributed amongst 50 people. If just one person within that pool has significant insurance claims over the course of the year, the premiums for the group could be raised significantly.
Under an ICHRA, however, risk is distributed entirely amongst the individual market, which consists of millions of people. When risk is distributed across a broader population, there is always a decent chance that there will be advantages from a cost perspective to the business.
These cost savings may also be realized by the employees. Keep in mind, when premiums go up for an employer, the amount of responsibility for the employees also goes up. Thus you will often find cases where both employers and employees are likely to save a lot of money by having an ICHRA.
- Budget Control
As I just mentioned, Traditional Group Health plans are subject to review on an annual basis. Even if renewals go up by a small amount – say, 3-5% year-over-year – you need to keep in mind that these increases are occurring on a compounding basis. What this means is that over the course of just a few years, you may actually be looking at a significant increase in costs to provide healthcare coverage for the employee pool even if the annual increases felt marginal at the time.
Almost every company tries to set up some sort of annual budget and forecast. When these numbers are thrown askew by unexpected increases in healthcare coverage, there can be a lot of negative impacts. Unexpected costs could lead to reductions in other initiatives to boost employee morale and engagement, which can lead to unnecessary attrition or in more extreme cases, layoffs.
With budget control, invariably you also have cost control. This means that the employer knows every single year what they will spend on healthcare. In fact, not only do they know what they will spend, but it is entirely up to them what they will spend. They can adjust it up or down accordingly. This is dependent upon what is called an “allowance model.” The allowance model looks at how much money the company wants to give to every employee and what percentage of the premium the company wants to spend for individual employees, employees plus spouse, and full families.
- Plan Flexibility
On the employee level, an ICHRA is a fantastic option. Instead of choosing from 2 or 3 options, the employee can now often choose from several dozen. The reality is, not every employee is in the same situation. Some may visit the doctor rarely, and others may have families with complex needs, including specific providers they need to see. The beauty of many of these ICHRA platforms is that they can ingest data about the employee (doctors, medications, what they want to optimize for, etc.) and recommend best-fit options to the employee. ICHRA is particularly valuable for an employee who may otherwise be forced to accept too much or too little coverage for their needs.
The reason employers should value employee flexibility is because it leads to a higher level of engagement and is more likely to increase retention. For many employees, having specific healthcare benefits can be the difference between leaving and staying at a company. It is also a great bargaining chip from a recruitment perspective. For example, I once worked at a startup which had predominantly young and healthy people in it. As such, the healthcare plans were not very good for families. I knew several people in the company who had multiple children who were forced to buy their own coverage in the individual market as a result. This has led to retention challenges.
- Administration + Employer Flexibility
Another nice benefit to an ICHRA is the flexibility provided on the employer level. Unlike a Traditional Group Health Plan, there is no minimum participation requirement in order for the plan to take effect. Many carriers will require that a minimum number of employees enroll in a plan and they can enforce that minimum through their fees. Under an ICHRA, the employer will simply pay for whichever employees decide to enroll. Whether that is none of them or all of them, there are no penalties.
ICHRAs are also relatively easy for employers to set up. As I mentioned, there is a lot of competition in the ICHRA space, and these platforms have set up turnkey services that allow employers, brokers, and employees to navigate different portals effectively to play their specific roles in the process. There is certainly some change management involved for companies who are accustomed to doing things the old-fashioned way, but most good ICHRA vendors have dedicated service teams who will handhold the employer and their employees along the way.
For all of these reasons and many more not discussed, an ICHRA can be an attractive solution for a lot of employers.
Jeff Kirchick 