Emerging Health Reimbursement Accounts May Disrupt Insurers
Editor’s note: This is the second in a series of articles analyzing the future of the Affordable Care Act. The first article provided an overview of five key trends that will reshape the market.
A record number of people signed up for health coverage in 2024 through the Affordable Care Act’s Marketplace. The open enrollment total — 21.3 million — is a 30% increase over the 2023 open enrollment period. Numbers like those would have been unfathomable a few years ago for market segment that was seen as turbulent and unsustainable. Now, the ACA is viewed as stable and highly competitive from the payer perspective.
That stands in contrast to the volatility, uncertainty, complexity, and ambiguity that continues to sweep through the employer-sponsored coverage market. Although 153 million people receive health insurance through their employer, economic conditions are squeezing pocketbooks. Annual family premiums for employer-sponsored health insurance climbed 7% on average in 2023 to nearly $24,000, with workers’ premium contributions averaging $6,600 and rising, according to KFF’s annual benchmark report. Mercer anticipates per-employee healthcare costs will rise by 5.4% in 2024, and that’s after employers implement efforts to slow cost growth.
Given these market dynamics, Individual Coverage Health Reimbursement Arrangements — ICHRAs — are growing in popularity and could disrupt the insurance industry going forward. In fact, ICHRAs may do for health insurance what 401(k)s did for pensions. And like the 401(k), ICHRAs seem to be here to stay.
What’s an ICHRA?
Created under the Trump administration and first made in 2020, ICHRAs allow employers to reimburse employees a set amount of monthly tax-free money for health insurance premiums and other qualified medical expenses, without the need to administer a traditional group health insurance plan.
Unlike other health reimbursement accounts, an ICHRA has no minimum or maximum employer contribution limits. Reimbursements are free of payroll taxes for the employer and free of income taxes for the employee. They differ from traditional group insurance, too, since there’s no employee participation requirements to offer an ICHRA.
5 advantages for employers and employees
Since they are relatively new, employers, employees, and insurers are still trying to assess the benefits of ICHRAs. We’ve identified five areas that employers and employees in particular should zero in on.
1. Cost-effectiveness: Employers aren’t locked into a high premium group plan and employees can pick a plan that fits their budget.
2. Customization: ICHRAs allow for different levels of reimbursement based on employees’ job classifications, as well as other factors. Employees can shop on the Exchange and select any carrier and plan available in their zip code.
3. Remote work friendly: Employers are relieved from the administrative burden of managing multiple group plans across multiple locations, while employees can locate anywhere and have access to an array of choices on the Exchange.
4. Portability: An employee can take their individual coverage with them if they leave their current job, and the employer is relieved from the administration of COBRA.
5. Built-in compliance: If the reimbursement meets the affordability and minimum value requirements of the ACA, an ICHRA satisfies the employer coverage mandate. And employees gain access to ACA-compliant plans.
ICHRAs could lead to payer disruption
Certain carriers and enrollment platforms are already announcing ICHRAs as part of their longer-term strategy. Executives at Centene, the largest individual marketplace carrier in the country, predicted that as much as 45% of the employer group market could be disrupted through ICHRA growth. Disruption of the small group market “presents Centene with the potential to widen the aperture," Centene CEO Sarah London said during the company’s 2023 investor conference. Centene chose Indiana as the entry point for ICHRA, announcing a partnership last November with health benefits platform startup Take Command. Employers in Indiana can get a $400 tax credit per employee for offering ICHRAs.
ICHRA momentum is accelerating elsewhere, as evidenced by HealthSherpa, the largest enrollment platform for individual ACA health coverage, announcing a more than 10X growth in its ICHRA pipeline. Softheon, the second largest individual enrollment platform, is also heavily focused on the ICHRA opportunity through its subsidiary W3LL.
At the recent JP Morgan Health Conference, Oscar Health CEO Mark Bertolini discussed ICHRAs as part of the company’s long-term strategy. "I sort of see Oscar Health as a pirate ship with cannons amid Spanish galleons filled with gold," he explained. "They're called big insurance companies who are not going to want to give up middle market and small group insured."
Health payers should brace for ICHRA impact
Multi-line health carriers and Blue Cross Blue Shield plans should give ICHRAs a hard look during their capital planning cycle and strategic investment portfolio prioritization. Advanced analytics and financial scenario planning should be in full play for carriers with significant blocks of profitable group business. With ICHRAs rising, carriers are faced with the hard choice of disrupting their own profitable group business to retain members as individual exchange customers, or double down on the value of group coverage with employer decision makers.
Carriers that fail to incorporate an ICHRA solution into their strategies risk losing out on valuable business opportunities. Simply put, if carriers are not presenting ICHRA as an option to their group clients, someone else will. Disrupt or be disrupted.
For more information about Oliver Wyman's Exchange platform, contact Travis Kistler, Partner, Health and Life Sciences, and Shyam Vichare, Partner, Health and Life Sciences.