More Employers Use ICHRAs to Save Health Dollars

How do ICHRAs work?

In general, HRAs [health reimbursement arrangements] work quite the way the acronym suggests. The employer sets aside an allowance, let’s say $500 a month. The employer can vary that by employees’ age and family status so that they can give more to older employees and less to younger employees and you can get a larger allowance if you’re married than if you’re single. Employees use that allowance to buy an individual health policy from the health insurance carrier they most like on their state marketplace. This is a formalized benefit that’s tax-free to both the employee and the employer. The employees select the plan they think best works within their budget and for their personal situation—like one that covers their preferred healthcare provider and prescriptions they use.

How do employers set ICHRAs up with vendors like PeopleKeep?

We do an affordability analysis and let employers know the cost of switching from a group plan, how to design the benefit, which classes of employees are involved, and how employers can adjust for age, family status and location. That can be as quick as a week’s work for our type of employers. Where they actually struggle most is coming up with an employee census that has the right data.

Most employers are not going to self-administer this relatively complex type of benefit. They’re going to look for a third-party provider like PeopleKeep to set up and administer that benefit. We try to keep it simple because we largely work with employers with fewer than 300 employees. They need an easy-to-use software platform that helps them stay compliant with the regulations and design their benefits. Our platform will communicate to each employee what their benefit is and when it will start. Most of our employers also want to reimburse eligible out-of-pocket expenses, so the platform can approve expenses and pay the employee back. We verify expenses are eligible for reimbursement. This is generally the way solutions providers in the industry work.

Adoption of these plans grew by 64% last year, according to the HRA Council. Why such growth now

2023 was the third year [ICHRAs were available], so I think there’s a great deal more awareness, particularly within the licensed health insurance broker community, that ICHRAs might be a very viable alternative to a traditional group plan for employers. I think you’re seeing the effect of a couple of years of early adopters and now other employers are feeling more comfortable. Also, there’s the increases in group health plan costs, and it looks like 2024 might be bigger than last year. Employers are really eager for something different that gives them more budgetary control instead of setting a budget and the insurance quote comes back 35% more than last year. You’ve also seen more vendors in the space, and that’s helping the data pool get bigger. We can see that the market was maturing in 2023, because it was really the first time we saw customers coming to us from a competitor. They weren’t new to ICHRAs; they just wanted a different solution provider.

Are there particular areas where these are becoming more popular? Employer sizes, industries, employee population types?

From what I understand, there isn’t a lot of adoption with very large employers right now. That’s partially because they have a lot of sophistication and help around their healthcare benefits. But these small to midsize employers really want something different because annual cost increases on their employer-sponsored plans [are] really becoming untenable.

One interesting segment of the market that I think is borne out from my conversations with other HRA Council members is employers with employees in multiple states are more likely to look for a health reimbursement arrangement because it’s hard to pick one plan that works for employees in multiple states. There are some nationwide insurance carriers, but their networks differ from location to location, so if you’re smaller and you are only going to offer one plan and yet you have a geographically diffuse or diverse employee base, an individual coverage HRA makes a ton of sense. So that is a segment where we see faster adoption.

What are the benefits of ICHRAs for employees?

The general idea is that employees are picking their own plan. That’s very new and I think really important for bringing down general healthcare costs. The vast majority of employers who offer an employer-sponsored plan give you one choice [77%, according to a 2023 Kaiser employee benefits report]. It’s very paternalistic. It doesn’t enable the employee to be responsible for their own decision-making or be engaged in their benefit. Employers are saving money over their group plans with ICHRAs, so they can offer a fairly generous premium allowance. They can actually get sometimes a richer benefit through an ICHRA. And, particularly with QSEHRA [qualified small employer health reimbursement arrangement], it can be an on-ramp to benefits if they’ve had no healthcare benefit before.

What are the benefits for employers?

Historically with group plans, a benefit specialist or an HR generalist at a company picks the plan. With ICHRAs, we do a lot of communication on behalf of the employer through email and also through texts to help employees find the right health plan for them. If you’re a 75-person employer who probably doesn’t even have a dedicated benefit specialist, they can use our platform. Employers are able to rely heavily on us to help them with the communication, the regulation, the approval steps and any analysis they want to do. That can include tracking how much they are paying out to employees every month and how much allowance employees are using.

Are employers saving money with ICHRAs instead of traditional group plans?

The main cost savings really come in tailoring the allowance by employee location, age and family status. If you do that analysis, and you’re in states that have strong individual health insurance markets like Colorado, Texas or Ohio, there’s a real cost difference between the group plan and the individual plans. That’s really where the cost savings are coming from. It’s generally at a large enough cost savings that when you add in the software cost of the PeopleKeep platform (or any of our competitors) there’s still a very nice return. It’s not unusual for us to see an employer who, even with our platform costs included, can save 30% to 40%.

What are the differences between ICHRAs and HRAs for small employers?

They’re both ice cream; they’re just different flavors. The qualified small employer HRA has been around since 2016 as part of the 21st Century Cures Act. We’re into our eighth year with the qualified small employer HRA, and as the name suggests, that’s available only to employers who have fewer than 50 full-time-equivalent employees. The QSEHRA has an allowance amount maximum. It changes every year, and ICHRAs do not.

Your report noted that small employers tend to give much larger allowances—companies with one to four people provide, on average, $1,144 per month, and employers with 50-plus employees give $434. Why is that?

Anecdotally, often those employers really know their employees, and they will stretch their budget to offer a more generous allowance or a richer benefit. When you’re working with five colleagues, you know their family situations, their house situations. I have heard employers say that is what drives them to go a little bit beyond where they might otherwise go in terms of their benefit. Also, we have a lot of small nonprofits that work with us, and they tend to be, as a general rule, a little bit more people-focused and mission-focused.

And employers can pay for premiums or a premium-plus plan, where employees are given money for out-of-pocket expenses, correct? (Employers using QSEHRAs provide extra for out-of-pocket expenses 99% of the time, according to the report.)

Yes. In our study we found about 56% [of employers] want to cover both the premium and these eligible out-of-pocket expenses. Depending on how large their allowance is, that’s more or less realistic, but the intent is there.

How do employers determine what allowance they can afford while still saving money?

We begin with an anonymized employee census. We get age, location, salary, family status, and we use that information to run an analysis off the second-lowest-cost silver plan for that employee. That’s how the affordability calculation is derived. And then we’ll also engage in a discussion about their budget. We find out if they are coming off a group plan and also their philosophy about benefits. We want to know if they really just want to focus on the premium, getting their people health insurance, or if they want to think a little bit more holistically.

What did you learn about out-of-pocket expenses employees are submitting for reimbursement in the study?

Our two most common types of out-of-pocket-eligible expenses are prescriptions and doctors visits. Employees can really struggle with both of those, so getting help from their employer is a huge win. For the employees who are getting reimbursements for prescriptions, their average prescription amount [per purchase] is $275. Even if they may be getting multiple months’ worth at a time, pharmaceutical drugs are driving a lot of the costs in our healthcare system. The average doctor visit reimbursement is $138, literally half the cost of medications.

Are there any employers that ICHRAs aren’t right for?

There’s a handful of employers where, based on their individual health insurance market and employees’ ages, it’s not advantageous for them. We have had employers who would have saved money and benefitted for the vast majority of their employees, but they don’t switch because a specific employee or two will get a less-good benefit. If you have a handful of employees that are older and maybe in a rural area, you have less competition in the individual health insurance marketplace, so you may not have a great choice of affordable plans for them.

Any thoughts for brokers or employers wanting to know more about these plans?

It’s really important that brokers feel well informed around HRAs because, if they’re not bringing these options to their clients, their clients are going to start asking about them.

For employers, I would say it does not hurt to at least look, because it will raise a number of good questions. It will force the employer to think about what their budget is, how they think about budgetary control, how they feel about budgetary certainty versus uncertainty year to year, and how much autonomy they want to provide to employees. It’s a very healthy self-reflection exercise to at least consider an HRA, even if you end up not moving to one this year. We have customers who talked to us back in ’21 or ’22, and now they are putting one in place in ’24. Just the process of considering it will be instructive around health benefits.