Is ICHRA The Answer For Employee Health Insurance?

As of May 2, more than 27 million people have lost their employer-sponsored health insurance, estimates an analysis from the Kaiser Family Foundation. Even before COVID-19 turned everything upside down, however, small and mid-sized businesses have struggled to afford comprehensive health insurance for their employees. Offering coverage post-pandemic will be even more challenging -- and all the more necessary. Luckily, there's a new option, the Individual Coverage Health Reimbursement Arrangement (ICHRA). While not perfect, it's a potentially more affordable and flexible way to provide your people with medical and health care benefits.

A Looming Coverage Crisis

While the Kaiser report didn't detail employers by size, with more than half of the workforce employed by firms with fewer than 500 employees, it's fair to say a large portion of people who've lost their insurance had worked at small and mid-sized companies. "COVID-19 is showing just how dependent this country is on employer-sponsored health insurance and why that may not be sustainable," says John Barkett, senior director of Policy Affairs at Willis Towers Watson, a risk management advisory company/insurance brokerage.

Well before the pandemic, small- and mid-size companies had a serious lack of options when it comes to providing health insurance, Barkett explains. Group health plans, for example, are extremely expensive for small companies to administer and sustain. It looks as if COVID-19 has only exacerbated the problem: Health insurers are anticipating a flurry of claims from not only COVID patients, but from the backlog of patients who are finally getting treatment and surgeries for other conditions that had been delayed. A recent analysis from Covered California estimates that health insurance premiums could rise as much as 40% next year.

Enter the ICHRA

In the past, instead of directly purchasing a group health insurance plan, many small businesses have opted for health reimbursement arrangements (HRAs). Essentially, with an HRA, employees purchase their own individual health insurance plans, and the employer contributes tax-free to the cost of the coverage. ICHRAs, which became active this past January, are the latest incarnation of this arrangement, but they're designed to be more flexible than the HRAs of the past.

The program evolved from Qualified Small Business Health Reimbursement Arrangements (QSEHRA, often pronounced Q-Sarah) that were created in 2017. QSEHRAs allow businesses with less than 50 employees to reimburse workers for health insurance premiums and medical expenses tax-free. ICHRAs allow employers of all sizes to provide tax-free health care reimbursements. Also, unlike QSEHRAs, there are no limits on contributions and administration rules can be more flexible. Each company gets to design the reimbursement program however it sees fit.

The change may have come at just the right time. "We've seen about 25% of our clients make changes in their HRA in response to COVID-19, say Michael Manes, director of marketing for Take Command Health, a benefits consulting firm that specializes in technical platforms for HRAs.

Manes also observes another positive trend. Several big insurers that discontinued selling individual and ACA marketplace plans in recent years have recently filed with state regulators indicating they intend to get back into the individual-policy business, signaling a new strength in the market.

How ICHRAs Work

Here's what business owners need to know about ICHRAs in a post-pandemic world.

Employees keep their benefits. Even if the ICHRA reimburses costs in full, it is actually the employee -- not the company -- who purchases and owns the health insurance policy. That means if workers are laid off, furloughed or their employer discontinues the ICHRA contributions, the employee is still covered under the insurance plan.

Of course, unemployed workers then have to pay the entire cost of their premiums and medical expenses. Not ideal. But unlike a group health insurance plan, coverage does not abruptly end. What's more, employees that purchased individual coverage through their state's ACA marketplace exchange may be able to apply for government-sponsored premium subsidies if their HRA contributions end.

Costs stay in the employer's control. Employers decide how much to contribute to employees' health care cost, keeping complete control of the budget without having to deal with unexpected premium increases or claims costs. Employers can also change the contribution amount when the company's finances change. "For employers worried about the volatility involved in offering coverage, the ICHRA model starts to make sense," says Barkett.

Manes notes that half of his firm's clients who modified their HRAs in the face of COVID-19 did so to maintain reimbursements for employees that are laid off, furloughed, or had their hours reduced. About a third of clients paused HRA contributions, in the hopes of providing them again when times are better.

What's more, when employees buy their own plans, they can, conceivably, find a plan that fits their own unique needs. That takes a costly headache out of the equation for small employers. They no longer have to worry about providing enough plan options that can adequately cover both a young, healthy worker and an older employee with health conditions.

Benefits can be changed to cut health costs. ICHRA rules allow employers plenty of flexibility regarding what are reimbursable health care costs. This helps employers maintain offering some type of benefit when times are hard, even if it isn't as comprehensive as owners and staffers would like.

Some cost-cutting moves companies have made include limiting reimbursements to premiums only; eliminating payments for certain out-of-pocket health expenses; or limiting payments that go to a spouse's health plan.

"ICHRA allows employers to take the risk out of providing health insurance," says Manes. "That can be very attractive to small business, especially in the wake of a global pandemic."