By JACK HOOPER
A new model of benefits called the individual coverage health reimbursement arrangement (HRA) hit the market this past January. HRAs have quickly gained traction as an alternative to traditional group plans, with California businesses leading the country in signups for the new plan. In fact, our research shows that California accounts for 35% of total signups since the HRA’s inception. As an HRA plat-form, our team at Take Command Health analyzed our frst 200 signups for the individual coverage HRA to identify emerging trends in location, size, industry and design.
The new individual coverage HRA (ICHRA for short—pronounced ick-ruh), sometimes referred to as defined contribution or 401(k) style benefits, allows business owners to reimburse their employees for health premiums and expenses tax-free. While one-size-fits-all group plans are subject to year-over-year premium hikes and participation rate concerns, ICHRAs are flexible, predictable, budget-friendly, and allow business owners to effectively exit managing the risk of administering a health plan.
Why California is prime for ICHRA
It’s not surprising that California tops the list for ICHRA signups; the individual insurance market in several key California cities is prime for the adoption of ICHRA, according to a recent study we released. Our research analyzed metros across the country that have ideal conditions for individual coverage HRAs, including affordability of lowest cost silver plan and how it interacts with premium tax credits; difference in individual vs group plan premiums; network types and availability; carrier competition; average premium change year over year, and name brands of carriers. While San Jose, San Diego, Sacramento and San Francisco all make the top 50 list for top individual insurance markets prime for ICHRA, Los Angeles comes in at #2 and Riverside #10, claiming more major metros in the State of California than any other state.
Los Angeles, for example, has more options than most in terms of insurance carriers, and the average individual premium increase is less than 1%—two key indicators that the market has optimized conditions for ICHRA. For 2020, California has implemented an individual mandate and state-based subsidies to boost participation and keep costs low on the individual market. While California state subsidies cannot be accepted with an ICHRA, the subsidies have contributed to an overall market environment where ICHRA can thrive.
The research also shows what types of companies are opting for an ICHRA, with nonprofits, associations, software and technology companies, home health, healthcare providers, financial services, household employees, professional services (like architects and engineers), consulting, churches, staffing firms, and manufacturing and construction at the top of the list. A good portion of these companies signed up through their group brokers. While the average number of employees in this study was seven, small businesses aren’t the only ones signing up—6% are large businesses with more than 50 employees and 16% are mid-sized companies with up to 50 employees.
How ICHRA works
The mechanics of ICHRA are fairly simple. First, the business owner sets the monthly reimbursement amount and the employees purchase an individual health plan that works best for them. After an employee submits receipts, the business owner simply reimburses them. The funds aren’t subject to payroll tax from an employer standpoint and aren’t considered income for the employee and taxed accordingly.
Plus, the employer can skip the hassle of choosing and administering a group plan that would bring the possibility of premium hikes and participation rate requirements. Businesses of any size can offer this new “401(k) style” of group benefits and there’s no limit on reimbursement rates. Under normal circumstances, the familiarity of traditional group health plans makes them a popular choice among business owners. But in uncertain times (including the current pandemic), the predictability, portability, and flexibility of “defined contribution” health insurance models should be closely considered.
How ICHRA benefits business owners and workers
ICHRA benefits both owners and their employees. For starters, ICHRA allows business owners to get out of the insurance “risk” game. Any employer with 50+ employees, (whether they are currently self-insured or fully-insured) are effectively responsible for their employees’ healthcare spend. Some employers invest in wellness programs or engage in high-performance network design to help manage costs. Other business owners are looking for a way out while still helping their employees with benefits. With this new type of HRA, business owners can still offer generous benefits and their costs are fixed because there’s no risk to manage.
Another key advantage is budget control. Unlike the costs of an employer-sponsored plan that can fux with premium hikes, employers can rest assured that their ICHRA costs will stay the same. Business owners can choose a reimbursement rate that works for their budget, choose which classes of employees will receive the benefit, and not have to worry about fluctuating prices or participation rate requirements.
Closely tied to budget control is the streamlined approach and customizable options ICHRA offers. For example, employers can vary monthly reimbursement amounts to
11 different classes of employees—like hours worked, geographic location, or salary vs. hourly. This is particularly helpful for companies wanting to offer a reimbursement to all employees but want to make a distinction between salaried management and hourly and/or part-time. Business owners can also scale their reimbursement rate by age and family size.
ICHRA is good for employees too. In contrast to a one-size-fits-all group plan, ICHRA allows employees to choose an individual health plan that’s best for their family, their prescriptions, their conditions, or that’s accepted by their favorite doctors. Another benefit is portability—a valuable concept in the midst of a pandemic. The ownership of the health plan stays with the individual. That means if layoffs occur or if they switch jobs, they don’t lose their insurance. They can take their health plan to work with them at their next job and won’t be left with pricey COBRA as their only option for coverage.
The ICHRA trend is rising—and it’s time to jump on board
Upwards of 800,000 employers will offer individual coverage HRAs within five years, according to estimates from the federal government. About 90 percent of these companies will have less than 20 employees and an estimated 11 million individuals will use their HRA to purchase a plan in the individual market, which could bolster the individual market considerably. We believe that if the market breaks just right, the numbers could be much higher.
Watching the flexibility inherent in HRA design play out during the pandemic has brought considerations as well. In the midst of the crisis, we’re already seeing early evidence that HRAs will prove more resilient than traditional group plans, allowing business owners to quickly make strategic decisions. With group plans, you either cancel your plan or you don’t; your employees are either part of the group plan or they are not. There’s just not many levers to pull.
HRAs like ICHRA, on the other hand, have proven to be extremely valuable as companies navigate the fallout of the pandemic. At Take Command Health, for example, we’ve seen a quarter of our clients make changes to their HRA in response to COVID-19. About half of these clients have modified their HRAs to maintain reimbursements for employees that are laid-off, furloughed, or have had their hours reduced. About a third of those clients have simply paused their HRA contributions and plan to pick up when business re-opens. Employees will lose their reimbursements, but they will keep their coverage and plan.
How to get involved
Benefits professionals across the country, and especially in California, are evaluating how to add the ICHRA model to their portfolio of client solutions. Our team at Take Command Health can help. We’ve launched a unique broker partnership program where agencies maintain their strategic advisory relationship with clients and we help design an ICHRA solution and administer it. The end-to-end model includes pre-sales consultative support to ensure the designed ICHRA solution is compliant and meets the client’s objectives. Our software platform and expert service lead to a smooth onboarding experience for employers and employees alike. Should the broker want our team to assist employees with picking the right individual market plans, our online shopping platform and in-house enrollment support team can make that happen. The combined revenue streams of administrative fees and individual market commissions are shared with broker partners. To learn more and begin the onboarding process, please visit our website at www.takecommandhealth.com.
Jack Hooper is an HRA advocate and the co-founder and CEO of health tech startup Take Command Health. He has been profiled in The New York Times, received two innovation awards from the director of the FBI, and is a graduate of the Wharton School of Business. His motto? “Health insurance was never meant to be this complicated.”