Marketplace Pulse: ICHRA at a Crossroads 

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.

Introduction

As the health insurance landscape continues to evolve, Individual Coverage Health Reimbursement Arrangements (ICHRAs) have emerged as a flexible, employer-driven alternative to traditional group health plans. ICHRAs are a type of employer-sponsored health benefit that allows businesses to reimburse employees for the cost of individual health insurance premiums and other qualified medical expenses. Unlike traditional group health plans, ICHRAs give employees the flexibility to choose coverage that best suits their needs from the individual market, while employers maintain control over their health benefit budgets.

Many insurance experts claim we are perched on the cusp of a benefits revolution, with meteoric growth in ICHRA adoption in the near future. There have been a number of well-publicized investments in ICHRA platforms, and many insurers have said that ICHRA is an important part of their strategy, including most recently Oscar’s Mark Bertolini at the Q2  earnings call, where he noted they were seeing “increased momentum” for ICHRA and growing interest from larger employers.

But with the enhanced Affordable Care Act (ACA) subsidies set to expire at the end of 2025, and individual market premiums clearly on the rise as double digit increases are beginning to be announced across the country, the short-term trajectory of ICHRAs is uncertain. Here we consider how these changes could impact employer behavior, the stability of the individual market, and the long-term viability of ICHRAs.

The Role of Enhanced Subsidies in ICHRA Adoption—and What Happens When They Expire

Enhanced premium tax credits (ePTCs), introduced under the American Rescue Plan and extended through 2025 by the Inflation Reduction Act, dramatically improved the affordability of ACA marketplace plans. As a result, marketplace enrollment surged, particularly among healthier individuals who previously found coverage unaffordable.

However, with ePTCs set to expire at the end of 2025, affordability will decline sharply for many enrollees. Early projections suggest that healthier individuals—those with lower expected claims—are the most likely to drop coverage when subsidies shrink. This selective disenrollment is expected to drive up average premiums in the individual market, creating a feedback loop of rising costs and declining enrollment.

This dynamic has direct implications for ICHRA adoption. Employers offering ICHRAs rely on a stable and affordable individual market to make the model work. If premiums rise and plan options narrow, the value proposition of ICHRAs diminishes—especially for small and mid-sized employers seeking predictable costs and broad employee appeal. 

While it would not be possible to legally exclude other unsubsidized enrollees from these plans, issuers can market these plans in such a way to limit non-ICHRA enrollment. Regardless of the ICHRA plans availability to non-ICHRA consumers, it’s important to note that ICHRA plans cannot segment themselves from the rest of the individual market. Beyond single market rating requirements, ICHRA plans must participate in the individual market risk adjustment program. Consequently, should these plans have favorable risk selection (i.e., attract only healthy people), they will need to pay other individual market plans that have worse morbidity. Consequently, ICHRA plan premiums and their attractiveness to employees and employers is directly influenced by the stability of the individual market.

Beyond the direct effects of potentially higher premiums due to the expiration of ePTCs, provider networks could also be affected by a smaller individual market. While it’s possible for ICHRA plans to use group health networks, it’s possible that a shrinking individual market may result in tougher provider negotiations and a constrained ability to offer broad networks.

The Reinsurance Connection: A Shrinking Market, Shrinking Impact

State-based reinsurance programs have played a critical role in making ICHRAs attractive. These programs, funded through ACA Section 1332 waivers, reimburse insurers for high-cost claims, effectively lowering premiums in the individual market. In many states, this has led to individual market premiums that are lower than those in the small group market, making ICHRAs a financially compelling option for employers.

But the effectiveness of reinsurance is tied to the size and health status of the individual market. As enrollment shrinks post-ePTC expiration, the funding for reinsurance program may worsen, and the per-capita impact of reinsurance will decline without a corresponding decline in reimbursements for high-cost enrollees from the reinsurance program. States may find it harder to justify or sustain these programs, especially if federal pass-through funding decreases. This erosion of reinsurance effectiveness could further reduce the appeal of ICHRAs in states where they’ve gained the most traction.

Sizing the Shift: Individual vs. Small Group Markets

To understand the potential impact of ICHRA growth, it’s important to consider the relative sizes of the markets involved. As of 2025, the individual market covers approximately 24 million people, while the small group market covers about 10 million. Even modest migration from small employers to individual coverage via ICHRAs could significantly alter the risk profile of the individual market for better or for worse depending on the relative morbidity of those migrating. The impact may be felt differently by carriers, as some carriers operate in one but not both markets.

However, the small group market has been steadily shrinking due to lower cost alternatives such as level-funded plans and multi-employer welfare associations, as well as the recent success of ICHRAs. ICHRAs offer a flexible alternative, but their growth must be managed carefully. A rapid influx of employer-sponsored enrollees into the individual market could destabilize both the individual and the small group markets. For example, if there is a large exodus of enrollment out of the small group market, certain carriers offering small group products may choose to abandon the product altogether if the enrollment declines below a critical threshold, making the cost and financial risk of offering the product disproportionately large relative to the financial upside. Consequently, issuers offering ICHRAs must consider the implication of the offering not just on their ICHRA/individual market products but also their small group products. Similarly, states that wish to encourage ICHRAs should consider the implications for both the individual market and small group market.  Transition of members from small group to specific individual market carriers could result in changes to the individual and small group market risk pools that disproportionately impact some carriers more than others leading to mispricing.

The Challenge for Large Employers

Advocates see ICHRAs as an attractive solution for large employers, and many envision a large-scale migration away from group plans and self-insurance to a new benefits environment where a “defined contribution” becomes the norm. The analogy to 401k plans versus pensions is often made. Given the much larger size of the large group market, the potential impact of ICHRA adoption in this segment would be significant for the individual market. Yet unlike small employers, large employers are currently required to provide an affordable offer of coverage or pay a fine. For 2025, coverage is considered affordable if the employee’s share of the premium does not exceed 9.02% of household income[1]. But if premiums in the individual market rise sharply, the employers’ share of an affordable ICHRA may not necessarily represent savings over group premiums. The exception might be for groups that currently have higher-than-average costs, which could start a destructive and ultimately self-limiting cycle of adverse selection into ICHRAs which could be fatal for both ICHRA and the individual market as a whole.

What About Employees?

When considering the impact for employees, it’s important to distinguish between very small firms (i.e., sole-proprietor firms) where there may not be a distinction between employer and employee. For mid-sized and larger firms, the implications for employees may be different. Awareness of ICHRAs is not high among employees, since currently adoption is relatively low. In the early days, ICHRA was advertised as a mechanism that would largely be appealing to employees because of increased choice and the potential for savings. Yet ICHRA is increasingly described as an option that benefits employers, with the clear message that any savings that might accrue may not always find their way into employee paychecks. The reality of increased choice may also be fading, since there may be fewer plans to choose from depending on the implementation of the ICHRA offerings, as some platforms may limit the marketing of plans to specific off-exchange plans. Additionally, insurers with existing group business are marketing their ICHRA offerings through their broker network, likely reducing the potential for meaningful comparison shopping at least in some contexts. With no financial upside, little choice, and potentially narrower networks, employees may view the potential of ICHRA adoption to be a negative development and react accordingly. 

Conclusion: A Tipping Point for ICHRAs

When ICHRAs were established by an executive order in 2017, original projections were that 800,000 businesses and 11 million employees and family members would use the option by 2024. So far actual uptake has fallen far short of these projections, with current estimates likely south of 1 million. Recent progress in the individual market and growing pressures in employer insurance may be creating the context where ICHRA can come closer to reaching its potential. Yet looming threats in the policy environment put this expansion at risk. The expiration of enhanced ACA subsidies and the unpredictability of individual market premiums place ICHRAs at a critical juncture. While they offer a promising path forward for employer-sponsored coverage, their success depends on a stable, affordable individual market.

About the Co-Authors

Karan Rustagi is an actuary at Wakely specializing in the ACA market. He has served health plans, state governments, startups, and providers in understanding the opportunities and risks underlying this segment.

Michael Cohen is a principal at Wakely specializing in health policy. He has served health plans, state governments, and the federal government in understanding how health policy affects coverage and affordability.

[1] IRS announces 2025 ACA affordability percentage - WTW