Will the ICHRA Party be Over Before it Gets Started?

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 ICHRA community is excited about a number of proposals in the Reconciliation bill that are designed to increase the demand for this option. But their enthusiasm may be misplaced, because the bill has many other provisions that would have negative implications for the individual market. If ICHRA is to come close to living up to its hype, it must offer employers a better alternative to group coverage. But the greater the damage to the individual market, the harder that will be to achieve.

Background

In recent years, enrollment has surged in the individual market, increasing from 14.5 million in 2018 to more than 25 million in 2024. With this growth has come increased competition from health plans and stable premiums. Much of this healthy trend is due to the expansion of the premium tax credits, which greatly increased affordability for a wider group of enrollees.

There are a few core design features that help the marketplace thrive. Since there is no underwriting, affordability is paramount, so adequate tax credits are essential. Additionally, marketplace eligibility and enrollment design has historically recognized ensuring access to the premium tax credit at the point of enrollment as key to the ability for most applicants to enroll. Automatic renewal, annual eligibility checks, and a provisional approval process to determine eligibility for tax credits have enabled this access while ensuring program integrity.

Individual Coverage Health Reimbursement Arrangements (ICHRAs) were developed in the early part of the first Trump Administration through an executive order. Their key innovation is to allow employers to make a partial payment toward the cost of premiums in the individual market. At scale, ICHRA could chart a course out of the employer market to something that looks closer to universal coverage. Widespread use of ICHRAs could also reduce the welfare of employees if implemented in a way that reduces benefit quality without increasing compensation.

Enthusiasm about the ICHRA option has been unfettered among a small but growing group of insurers and platform companies. Thus far, enthusiasm has greatly exceeded actual enrollment, and overall ICHRA membership is estimated to be far south of one million. The case for ICHRA is strongest in places where the individual market offers a better value, through lower premiums and diversity of plan offerings, than does the small group market.

Reconciliation Bill

There are several proposals in the reconciliation bill recently passed by the House that would strengthen the ICHRA option and potentially increase its deployment. The rule that created ICHRAs would be codified and the option will be renamed Custom Health Option and Individual Care Expense (CHOICE) arrangements. A proposed tax credit would incentivize small employers to provide ICHRAs by providing $100 per month for each enrolled employee in the first year and $50 per month in the second year. Employees would now be able to use tax free salary reductions to purchase plans both on and off the marketplace. These two tax provisions are estimated to result in $500 million in lost revenue.

These tax credits are designed to jump start deployment of ICHRA, yet the reconciliation bill also contains a number of provisions that would greatly impact enrollment and affordability. They fall into three major categories: measures that would increase the difficulty of enrollment, measures that would restrict eligibility, and measures that would directly increase premium costs. There are a number of proposed policies that would make it more difficult to enroll in coverage in the individual market. These include ending automatic renewals, ending pre-verification eligibility for tax credits, shortening the open enrollment period, eliminating special enrollment periods, increasing the requirements for income verification, and lifting the clawback cap that limits the amount that the government can recoup if an enrollee understates their income. Another provision eliminates premium tax credit eligibility for some lawfully present immigrants. Finally, the enhanced premium tax credits are expected to lapse at the end of 2025.

The net effect of these proposed changes will be to make the individual market smaller, less affordable, and less healthy. The lapsing of the enhanced premium tax credits will have a profound effect on premium costs for many, especially older enrollees and those from states where healthcare costs are high. For example, many enrollees will see premiums rise by more than one hundred. In 70% of congressional districts, even dropping from a silver plan to a bronze plan will not avoid a premium increase. Those who are willing to pay the higher premiums are more likely to have health conditions that make it more difficult for them to forgo coverage.

The increased friction created by changes such as eliminating auto enrollment and changing the length of open enrollment will also lead to adverse selection, as healthier enrollees are more likely to be deterred by new requirements and shorter windows for enrollment.

Finally, revoking eligibility for marketplace premium tax credits for lawfully present immigrants that are not legal permanent residents and for all lawfully present immigrants with incomes under 100% of the federal poverty level will serve to remove a healthier-than-average population from the enrollment rolls. As this population exits, premiums will increase for those remaining.

All told, the projected coverage impacts of the reconciliation bill are massive, and are forecasted to cause a nearly forty percent rise in the size of the uninsured population. A little more than half of the 16.0 million that are estimated to lose coverage will come from the individual market. (Figure here)

The group of enrollees that remain will be less healthy. As the market becomes smaller and more expensive, it will be riskier and less profitable for health plans. One national insurer (Aetna) has already announced their exit and others may follow suit, which will lead to more conservative pricing among those remaining.

Conclusion

Since its creation, ICHRA has existed as a somewhat hypothetical shiny object, loved by some, hated by others, and ignored by most. Hype has greatly outstripped reality, but the future has been legitimately looking brighter as the conditions in the marketplace improved and the acceptability of the ICHRA idea started to gain ground. Now ICHRA enthusiasts are excited over the potential for some long-sought provisions, particularly federal tax credits, that may be included in the reconciliation bill. But the timing seems inauspicious. ICHRA can’t succeed without a healthy individual market, and the provisions in this bill put that very much in doubt.