The Marketplace Pulse series provides expert insights on timely policy topics related to the health insurance marketplaces. The series, authored by RWJF Senior Policy Adviser Katherine Hempstead, analyzes changes in the individual market; shifting carrier trends; nationwide insurance data; and more to help states, researchers, and policymakers better understand the pulse of the marketplace.
The Individual Coverage Health Reimbursement Arrangement (ICHRA) was created in 2019 as a way for employers to use a tax-advantaged account to partially reimburse the cost of premiums on the individual marketplace. At the time of ICHRA’s creation, the Treasury Department estimated that, in about five years, there would be 800,000 employers and 11 million employees and dependents making use of this new option. As we enter the fourth year, where do things stand?
Approximately 35 million workers are employed by businesses with fewer than 50 employees. Of these, roughly one quarter, 8 or 9 million, are enrolled in health insurance coverage offered by their employer. Small employers have faced escalating health insurance costs, leading some to drop coverage or pursue approaches such as outsourcing benefits through Professional Employer Organizations or partially self-insuring through “level funded” plans, where the risk of non-renewal is just a serious illness away. These practices increase premiums in the small group market, which becomes less healthy as lower risk groups exit. In some states, the wellbeing of the small group market has become a source of public concern. For example, Maine recently merged its small group and individual markets to allow the small group market to benefit from the individual market’s reinsurance program.
To what extent has the availability of ICHRAs provided a solution? The premise is inherently provocative. The arrangement allows employers to make a partial contribution toward coverage. Some draw an analogy, favorable or unfavorable, to the transition from defined pensions to 401k accounts. Use of ICHRAs should permit more employee choice of plans. And at sufficient scale, ICHRAs could be a meaningful source of growth for the individual market. Thinking longer term, the mechanism, while not a literal opening of the “firewall,” is potentially a gateway to a larger scale migration from group to individual coverage.
But there are significant headwinds on the ground. In most states, the small group market is still cheaper than the individual market, particularly at higher “metal levels,” which sort health plans based on premium prices and the percentage of service costs they cover. This reflects both the lower administrative costs associated with group coverage as well as the better risk profile of the group market in many states. Additionally, small group plans generally have broader networks and more generous drug coverage. In a labor market that is still relatively tight, these are tradeoffs that may give employers pause. And while the Inflation Reduction Act's continuation of the expanded premium tax credits will continue to make the individual market more attractive to individuals and small employers, this potentially comes at the expense of the ICHRA option, which requires employees to forgo subsidies. The fixing of the "family glitch," which will enable an estimated 1 million to seek more affordable coverage in the individual market, may also change employer behavior. Providing affordable coverage for employees, but not necessarily their dependents, may become a more common strategy.
There are other drawbacks. ICHRA recipients are impacted by individual market age rating, with the result that older employees must pay more for coverage. Employees seeking to pay for their share of premiums with pre-tax dollars are required to purchase plans off exchange. Potential threats exist to low-income workers, who may find themselves effectively firewalled by an ICHRA offer that is officially “affordable” yet prevents them from obtaining a far more generous premium tax credit.
There is also the threat of adverse selection into ICHRAs that could harm the individual market. While the rule requires employers to offer the ICHRA option either to all employees or to clearly defined categories of workers, the possibility for creative classification of workers nevertheless exists. More difficult to prevent is selection at the firm level, as groups with higher claims, and therefore poorer opportunities for level funding, may be more likely to look to ICHRAs as an alternative.
The ICHRA option has spawned small groups of ardent fans and fierce adversaries, amidst a vast sea of unaware employees and employers. A group of industry supporters have combined to form a trade group, the HRA Council. Several brokers, such as e-Health, have started promoting ICHRAs to their clients, which include large employers. Some employer organizations, such as the Peak Alliance in Colorado, are promoting ICHRAs as an option for their members. Yet other employer groups are wary or disinterested. From the looks of their marketing efforts, health insurers right now seem more enthusiastic about pursuing level funded business. There are opponents from the ESI establishment, including the U.S. Chamber of Commerce as well as some labor groups, who are concerned that ICHRAs may weaken employee benefits. An anonymously funded group has conducted a sporadic campaign against ICHRAs.
Yet the main response to ICHRAs so far has been silence. A recent survey of small employers found that more than 70 percent know little or nothing about the option. These data, along with results from the federal Medical Expenditure Panel Survey, puts combined ICHRA and QSHRA uptake among small employers in the low single digits. Even these estimates may be too high. A recently released report from the HRA Council shows relatively rapid growth but from an extremely small base. The Council reports that approximately 2,500 employers offered an ICHRA and about 6,000 offered a QSHRA in 2022. The Council’s report finds that nearly 70 percent of employers had five or fewer employees. With an estimated 60 percent offer acceptance rate among employees, total enrollment may be less than 200,000, although it is not clear how much of the market is represented by the HRA Council members. CMS intends to track enrollment in ICHRAs this year by collecting information from health plans, which should improve understanding of how ICHRAs may affect the risk pool of the individual market. Yet given the very low level of enrollment, signs of impact may be hard to discern.
The problem that led to the creation of ICHRA is still with us. However, premature announcements of the death of the small group market have been made repeatedly, and by some measures, the decline in small group enrollment during the last decade has been smaller than predicted. Right now, level funding is a far more popular workaround, with nearly 40 percent of small firms that offer coverage reporting use of a level funded plan. Yet this strategy can be risky for employers and arguably is bad for the small group market as a whole. Greater uptake of ICHRAs could also weaken the small group market but would strengthen a single, community-rated market that could better serve both individuals and groups. Such a trend may be conducive to combining the individual and group markets in more states.
Some of the potential problems with ICHRAs, like plan comparability and the potential for adverse selection, could be lessened if there were sufficient uptake. Outreach to small employers can increase their awareness of how the individual market, with or without the offer of an ICHRA, may be relevant to their strategies around employee health coverage. But, as a recent Bipartisan Policy Center report recommends, outreach should be combined with strengthening safeguards to better protect workers and the individual market. It is not hard to imagine ways in which increased migration from the group to the individual market could be beneficial to employees, employers, and individual market enrollees. The first three years since the creation of ICHRAs have been quiet indeed, and while the potential for growth is there, it is not clear when, whether, or how it will come.
The Marketplace Pulse series, authored by RWJF Senior Policy Adviser Katherine Hempstead, provides expert insights on timely policy topics related to the health insurance marketplaces.