ICHRA is gaining momentum - and if so, what does it mean for health-tech?

This piece was co-written by yours truly alongside Manatt’s policy experts Tracy Massel and Michael Kolber. It was sponsored by Oscar Health, a leading healthcare technology company serving more than 1.6 million individuals and families through the ACA marketplace. 

ICHRAs: Are they here to stay?

That is the question of the moment and one that we at Second Opinion have been paying close attention to. In the months since we published an explainer piece on the topic, ICHRAs have continued to dominate the conversation. Are they a good thing for employers and their employees? Will they continue to grow and what will the impact be? And is it a smart bet for venture capitalists to back them? Before we answer these questions, we’d love to suggest some branding experts get involved here. It’s hard to muster enthusiasm for any trend that forces us to utter the sound “ick.” 

For those not familiar, ICHRA stands for the Individual Coverage Health Reimbursement Arrangements. These “arrangements” can be used by businesses to offer employees a sum of tax-free money to buy health plans that comply with the Affordable Care Act (a.k.a marketplace plans, Obamacare, or individual health plans). So, instead of signing up for health care through the employer (“Will it be the Kaiser HMO or Aetna high deductible plan again this year?”), employees can choose a plan that suits their needs. 

ICHRAs were a Trump-era policy, but they’ve been a long time coming. Remember the Defined Contribution trend, anyone? They are a result of an ongoing discussion amongst policymakers since the passing of the ACA about whether employers could change the way they provide healthcare to workers and let them purchase plans directly on the marketplace. All that came to a head in June 2019, during the Trump Administration, when the Departments of the Treasury, Labor, and Health & Human Services jointly published a final rule – effective January 2020 - allowing employers to offer employees ICHRAs leveraging pre-tax dollars. This shift changed the economics for employers to consider leveraging individual health plans for employees – putting them on a level playing field with other health plan options. For context, that is what you might call a “market-making moment.” Before this shift in tax policy - it was a poor economic decision to sponsor employee health insurance on the exchange - the employer and employee would effectively lose value. Further, many arrangements under which an employer earmarks money for an employee to buy individual market coverage may not have been legal prior to the rule changes. The timing of this policy shift coincided with shifting societal and ever-evolving labor trends, such as the rise of remote work, which we’ll discuss throughout this piece. 

Given the growing momentum around ICHRA, I teamed up with two colleagues - Tracy Massel and Michael Kolber - both insurance and health policy experts, to explore this topic through the lens of a set of important questions. Oscar agreed to sponsor the piece - after Chrissy spoke to the company’s CEO Mark Bertolini on stage at HLTH a few weeks back - and we did our best to give weight to all sides of the discussion. Plenty of ICHRA detractors out there point out that momentum is still slow (Oscar suspects the total number of people enrolled in ICHRA is only around 500,000) and that it may not be suitable for most. And yet, some believe it’s still a promising trend worthy of attention. 

So…let’s get started. What are the bear and bull cases? 

The bull case

The ICHRA argument is clear for employees: More flexibility and increased choice. As the market for individual health plans has stabilized, there’s been an increase in insurers selling plans. That could lead to an increase in choices for consumers. With a shift to ICHRA, employees get the benefit of more choices to select the right benefit plan based on the providers they use and how much care they expect to need. On Healthcare.gov, 96% of enrollees had access to 3 or more issuers. But, according to the Kaiser Family Foundation, 77% of workers in employer plans in 2023 were offered only one type of health plan — accounting for 61% of covered workers. What remains to be seen (and as we’ve heard from many ICHRA skeptics) is how much members actually care about flexibility and choice. But in theory, it’s a nice idea that could gain momentum. 

Another benefit that may be more appealing is the portability of the health plan. Without ICHRA, employees who switch jobs lose access to their health insurance plan. Most of us are switching jobs every three or four years, which means you may start a new deductible midyear or some trusted providers may no longer be in network. To continue seeing those providers might mean paying higher out-of-pocket costs. Of course, COBRA offers a window where an employer would allow the employee to continue to pay their own premiums after termination. But ICHRAs offer another option. One part of the ICHRA benefit – the employer funding the premium - will not continue after an employee leaves their job. ICHRA advocates argue that employees have the flexibility to choose to continue to pay their own premiums and remain on their plan, regardless of their employer. Beyond the portability of the plan, the cost of COBRA for an average employer-sponsored plan premium is about 30% higher than the cost of the marketplace premiums that an employee would need to bear in the same situation. Of course, the counterpoint here is that if the employee is moving to an employer that offers an employer-subsidized plan, it will rarely make sense for the employee to pay for individual market coverage out of their pocket.

Finally, once the employee has used the money from the employer on their premium, they are free to use any remaining funds for qualified medical expenses. The bulls argue that consumer protections are built into ICHRAs to cover a bulk of employee costs and provide the same standard of coverage as they’re used to. And there’s essential coverage baked into ACA plans, including for preventative care, chronic disease management, maternal health, medications, hospitalizations and more.

Those are some potential benefits for us. How about for employers?

For employers, it really comes down to cost. Medical cost trends are continuing to tick up, both in the Individual and Group markets, per PwC. That has put all sorts of pressure on benefits departments to find ways to lower costs and provide high-quality care, which might provide an opening for the ICHRA conversation. As a reminder, the average annual employer-based health insurance premiums in 2023 were $8,435 for single coverage and $23,968 for family coverage. These average premiums each increased 7% in 2023. In some markets, the equation is particularly attractive for employers where premiums through ICHRA are lower than those they can access through group plans. 

By funding ICHRAs, employers can decide on a set amount of money they will put towards employee medical costs – capping their total risk and providing predictability around cost increases year to year. There might be other, more indirect sources of savings — such as the costs associated with administering health plans for those that offer insurance as a benefit.

As Bertolini argued on stage, those that enroll in ICHRA could use funds they receive to enroll in other benefits also, like vision and dental. Right now, he said, many employers are actually providing larger defined contributions, so employees can buy these other benefits and upgrade to Gold plans (the market requirement is to provide at least Silver level coverage). There are examples like this one where a university was able to save a significant amount by offering ICHRA, and their employees saved thousands of dollars in premiums, all without jeopardizing the standard of care they were used to. And here’s another.  But it’s still early days, so there aren’t many published case studies just yet to speak of. 

Bertolini also noted that employers are offering extremely broad PPO plans to cover their employees, which may be overkill for many and include services they’re unlikely to use. In his view, companies cast a wide net because they only offer two or three options that must cover a small percentage of employees that require costly care. He said Oscar’s strategy involves rolling out condition-specific plans so that an employer doesn’t need to offer a diabetes management solution like Livongo, because that is instead embedded within a health plan. Members who don’t have diabetes may also not find those vendors relevant, but instead may choose to enroll in a condition-specific plan that meets their needs. 

Regulations also allow employers to modularize which employee classes are offered ICHRAs vs. traditional group plans based on several factors, including the rating region or state where the employee lives, whether full-time, part-time, or temporary, and many other factors. This flexibility can allow employers to offer insurance to classes of employees they typically would not cover with limited increased risk. 

The bear case

For ICHRA to work, the plan design and network should ideally look and feel like traditional group health insurance plans and the payment/payroll deductions, administration, tax forms, and so on to make it easy for members. Employees have certain expectations about the health benefits they receive, so ICHRA should not feel like the lesser or more confusing option, and currently, it may. 

For now, most jumbo employers are sitting on the sidelines. Per Business Group on Health, only 12% of 125 respondents to the annual Employer Health Care Strategy Survey said they would consider an ICHRA as a last resort to address rising health care costs. Most perceive ICHRA to be a better option for smaller employers and those that have geographic concentration, given the state-by-state nature of marketplace insurance. Jumbo employers often have employees distributed across multiple states. Additionally, many of the largest employers offer more than just insurance benefits — they also offer solutions to manage chronic diseases, vision, dental problems, and so on. The plans sometimes offer these services as a cost management tool and/or marketing device. They may have to continue to do so - even if they shift the health insurance to an ICHRA—because these programs are good for employee recruitment and retention, and healthy employees are more productive. Ellen Kelsay, Business Group on Health’s executive director, described ICHRA to us via email as a “financial transfer only.” 

One of the biggest differences between marketplace plans and employer-based plans is their provider networks and the financial repercussions for members of using out-of-network doctors. Typically, marketplace plans are built using narrow networks. On average, Marketplace enrollees had access to 40% of the doctors near their homes through their plan’s network. In 2023, only about 9% of employers who offered health insurance included a plan with a narrow network. As of 2023, 47% of covered employees were enrolled in PPOs—plans with some out-of-network benefits that do not require specialty care referrals; only 13% of covered employees were in HMOs. Marketplace plans, however, are dominated by EPOs (29% of plans) and HMOs (53%) both of which do not have out-of-network benefits for nonemergency services. Shifting from employer market-designed plans to marketplace ones will require a shift in employee behavior and preferences. Realistically, marketplace plans vary widely across the country and even in neighboring counties. The specific geography where an employee is living will dictate the plans that are accessible to them on the marketplace and how attractive they are relative to employer based plans. . 

Another potential downside involves the reimbursement allowance not fully covering an employee’s health insurance premium or medical expenses, particularly if they purchase a plan with high deductibles or out-of-pocket maximums and suffer from one or more expensive conditions or unexpectedly require significant medical care. That could lead to unexpected employee costs unless the employer carefully sets aside allowance amounts beyond the premium. It’s worth noting that the predictable cost - an attractive part of ICHRA for employers - is only predictable one year at a time. As Kelsay points out, the level of an ICHRA that satisfies the Affordable Care Act’s definition of “affordable” to the employee in that geography may change year after year as market rates go up. Those market rates may climb by “hefty percentages,” she said.

There are yet more challenges around how employees enroll and manage their health insurance via ICHRA. We’ve become accustomed to how it’s done today, so there may be confusion and mistakes without handholding and support. Startups like Venteur, Thatch, and others are popping up to make it easier for employees and solve this particular user experience problem. Oscar said it is also moving into this space by launching an ICHRA-specific billing and enrollment platform called “ICHRA Connect.” The goal of that is to make it easier and more efficient to buy off-exchange plans. 

For consumer advocates, there’s a major concern that ICHRA could favor healthier individuals while providing less coverage for those that are older and sicker. That could be especially problematic if the employers who most favor ICHRA are the ones who tend to employ higher-risk and more vulnerable individuals. And that could drive up premiums in the individual market. 

The bear case is real. There’s still a long list of potential issues, including compliance, lack of familiarity on all sides, the administrative burden, institutional resistance from brokers, skepticism amongst jumbo employers, and so on. The number of employees enrolled in ICHRA is still small, even as it continues to grow. So it may take many years before it seems like a true alternative to the status quo. And there will be high variance for a while – geography matters a lot. But there are a slew of startups popping up to solve these problems, as well as larger incumbents coming to the table, so there remains a lot of potential. As we’ll discuss, there may also be policy tailwinds.

Who will adopt ICHRA first?

We asked a bunch of insiders and consultants that question and got a vastly different set of opinions. Adam Stevenson, cofounder at Thatch, pointed to companies like Amazon that have a mix of gig economy, hourly workers, and employees. 

If not the jumbos, there might also be progressive technology companies that make the shift because they’re on the cutting edge in other industries, like Alphabet or Open AI. Another obvious candidate for an ICHRA might be the venture firms investing in the space. Why not start with your own people, and then encourage portfolio companies to jump on board (and provide a playbook for how to do that)? That is a playbook from fin-tech — it was the investors funding companies like Gusto and Zenefits in the payroll space that provided an important initial boost to adoption. Companies that use a lot of 1099 workers might also flock to ICHRA (there are now about 20 million independent and gig workers in the U.S. alone). 

Other experts felt that small to midsize businesses (SMBs), including early-stage startups, would be more likely to hop on ICHRA. The case for SMBs is probably the most obvious, given potential cost savings and the challenges with administering benefits. It’s not a small market - roughly 75 million employees are working for small to mid-sized companies in the U.S. “For smaller employers, rising health care trends may push them more quickly to consider ICHRAs,” said Kelsey, while noting that the “bear case” issues are still relevant to these companies. The startup market is a particularly intriguing one, as smaller companies have the potential to scale quickly — meaning ICHRA will scale with them.

One big impediment is the lack of a highly trained broker force — until brokers see ICHRAs as an option to be sold, rather than bought, there might be an awareness gap. 

Who are the winners if ICHRA succeeds? 

Given the need, we predict there will be a set of ICHRA startups that do well in this space. There are more than 20 solutions that are already involved in the benefits administration and enrollment, many of which have raised venture capital funding. The big focus for the technology players is to improve upon the highly manual nature of ICHRA, particularly with aspects of the process like paying premiums. VCs have been funding companies like Venteur Health, Thatch, and StretchDollar, backed by multi-million dollar funding rounds. VC firms behind those organizations include smart money like a16z, GV, GSR Ventures, Right Side Capital, and LiveOak Venture Partners.

Major players in the health plan market root for ICHRA’s success because it bolsters the individual market. Oscar Health’s CEO Bertolini has talked extensively about how ICHRAs are a key part of the business's future growth, including in an interview with Second Opinion and on a panel at the HLTH conference in Vegas. At Centene’s December 2023 Investor Day, leadership also repeatedly highlighted the growth opportunity they see in ICHRAs. 

Some employers may also find that they can save money on health care by offering ICHRA as an option. There’s complexity around the amount of money they need to provide for employees in their ICHRA, so that they can choose a plan that provides sufficient coverage for their needs and is also affordable. This is a helpful read on the topic. 

Does the result of the presidential election impact ICHRAs?

There’s rampant speculation about what the next administration under President Trump will do from a healthcare perspective, but no one really knows yet. The enhanced premium tax credits that Congress enacted in the American Rescue Plan Act and Inflation Reduction Act expire at the end of 2025, and if Congress extends them, they are likely to become less generous. That could shrink the size of the market for individual health insurance coverage, which would, in turn, reduce the appeal of ICHRAs. Further, the first Trump administration also supported alternative insurance products that could attract people off the exchange - this collective loss of lives may introduce some instability to the exchanges and make ICHRAs less attractive. On the other hand, the first Trump administration was supportive of ICHRAs (see above) and an increase in uninsured people creates opportunity for employers to subsidize health insurance without taking on the full risk.

Oscar said the market also has the potential to grow by about 5 million lives with individuals above 100% of the Federal Poverty Level through Medicaid reform, and this is something conservatives like Paragon are currently touting.

In theory, there’s a case to be made that ICHRAs are actually fairly bipartisan. Both Republicans and Democrats could get behind them because there are compelling reasons on both sides. Republicans could get excited by the freedom of choice and flexibility, while Democrats could be heartened by the boost of new members to the Affordable Care Act’s marketplace exchanges. 

There has also been some interesting momentum on the state level. Some states are now taking a bolder stance to favor ICHRA, which may lead to others doing the same. As of January 1, 2024, Indiana introduced a new tax credit to incentivize small businesses to consider the option. 

Under this initiative, employers gain access to a tax credit of $400 per covered employee in the initial year of ICHRA implementation, reduced to $200 per covered employee in subsequent years. The most ICHRA-friendly states have received section 1332 state innovation waivers from CMS to waive key requirements or experiment with policies in the individual insurance market. At least 15 states have used waivers to reinsure their populations, which may continue to stabilize the marketplace, reduce outlier costs for payers, and make individual health plans more affordable, which could make them more attractive states in which to use ICHRAs.

Still, some skeptics say policy changes are needed to make ICHRA a mainstream option. “Absent policy changes, ICHRAs will remain a small part of the commercial insured landscape for the foreseeable future,” said Ari Gottlieb, an industry analyst focusing on insurance. “The actual market will be smaller than the hype.”

Why now?

This might be the most important question. And we’ll answer by highlighting a few reasons.

First, the individual health insurance market is as large and stable as ever, with 21 million people getting health insurance through the ACA exchanges. This has been driven by enhanced federal subsidies dating from the Covid pandemic and set to expire at the end of 2025; millions of people being disenrolled from Medicaid at the end of the pandemic, and many of those enrolling in exchange coverage, and a relatively stable regulatory environment that has encouraged carriers to participate in this growing market. 

Overall, premiums have stayed relatively stable even as federal subsidies since COVID-19 have impacted the actual cost, which is also a major factor. However, Bright Health's exit from the individual market, which affected 16 states, impacted this landscape (although this happened a few years ago and new carriers have popped up since then). Individual premiums across all metal levels have shown a trend towards parity with small group premiums or less expensive. 

Then there's another factor: The post-pandemic world. While some of the workforce has returned to the office since the height of COVID-19, most recently with Amazon’s CEO Andy Jassy calling employees back in, many others are working flexibly and in remote work arrangements. The Bureau of Labor Statistics found that around 27% of the U.S. workforce was working remotely at least part-time as of August and September 2022, while a handful of academic surveys have suggested that the number is closer to 50%. That changes the game for employers. Administering health benefits in multiple states can be costly and time-consuming. It can also limit the states from which an employer can hire if they don’t have networks that serve their employees. As mentioned earlier, employers are allowed to modularize which employee classes are offered ICHRAs, and one of the factors considered is the employee’s geography; this flexibility may be particularly useful when considering a distributed workforce. 

Lastly, one of the biggest impediments for ICHRA has been the product experience and the technology. Previously, employees had to front money to pay for the health plan and were reimbursed by their employer. This was a limiting factor because employees often did not have access to the hundreds of dollars each month to make the initial premium payments. Today, most ICHRA platform startups have an architecture that allows the employer to pre-submit money into a special bank account, a “for the benefit of” or FBO account, which allows the employer to remain the legal owner of the funds, but the employee to draw down on the funds to pay for the premiums or other approved health-related expenses. 

There are also startups that are working on this very problem. As we’ve surveyed the landscape, we also see (although not all the companies can do this full spectrum): 

• Integrated financial modeling for the employer to maximize their contributions;

• Payroll integration to automatically deduct the employee’s contribution to their premiums;

• An integrated experience to help employees sign on to new health plans – similar to the Ask Alex app that many employers use; 

• Enrollment integrations with the health plans;

• Regulatory compliance;

• Integration with existing HR systems

But hurdles still remain, as we discussed. The next few years will be critical.  

Bottom line 

We think there will be a slow and steady climb for ICHRAs, so it’s worth paying attention to the trend and familiarizing yourself on the impact. They make sense and will be beneficial for many employers. As employers evaluate their total healthcare spend, the case for ICHRAs will be too great - especially in light of 7% premium increases in the group insurance annually (which seems to be climbing yearly). As employees begin to purchase individual health insurance - we may see the very nature of the plans evolve to make them more competitive for the new audience - with broader networks and more generous benefits.