ICHRAs and the Explosive Growth of Personalized Health

In recent years, the world of employee benefits and health insurance has undergone a seismic shift, reflecting broader changes in the needs and expectations of the modern workforce, and impacting employer strategies as they compete to attract and retain talent.

In the past decade, health insurance costs have skyrocketed with the average employee contribution to plan premiums increasing approximately 70%, while overall plan costs have increased by more than 53% in the same period, according to the 2023 Employer Health Benefits Survey from Kaiser Family Foundation.

Fortunately, there have been several monumental legislative changes that have provided opportunities, and become beacons and catalysts, for changing that. This includes the Individual Coverage Health Reimbursement Arrangements (ICHRAs) applicable January 2020 and the SECURE 2.0 Act of 2022.

I’m specifically intrigued and encouraged by the rapid adoption and appeal of ICHRAs as the first truly significant departure from the traditional one-size-fits-all group health plan options that have been the mainstay of plan design for the past 80 years.

Many believe that health insurance as we’ve known it is in the early phases of what will be a complete transformation and evolutionary shift. In this article, I will unpack the dynamic growth of ICHRAs, their impact on the healthcare benefits landscape, and the role they play in supporting the evolving expectations of the modern workforce.

The Emergence of ICHRAs

ICHRAs represent a novel framework within the domain of employee benefits. ICHRAs offer businesses of all sizes the flexibility to provide pre-tax health benefits that can be tailored to the unique needs of their employees.

The principle behind ICHRAs is simple: Employees are given a financial contribution by their employer; they are then free to shop the open markets, expanding options to potentially dozens, if not hundreds, of health plan choices. Employers then get to free themselves from the burden of deciding for their workforce and instead simply reimburse employees for their health insurance premiums and any medical expenses on a tax-free basis.

The result, more often than not, is a perfect harmonization of lower-cost plan options with the power of true personalized choice for employees.

The Shift in Consumer Expectations

The traditional employer-employee contract has evolved. It’s no longer a check-the-box relationship where employees get what they get without becoming upset. In today’s marketplace, employees are seeking to work with a company that has a broader perspective on employee health and wellness, and is able and willing to provide employees more control over their health benefit options.

The advent of ICHRAs — perhaps a coincidence, perhaps an inspiration — is a timely response to this shift, empowering individuals to select plans that best suit their personal and family healthcare needs. This trend towards personalized health benefits is reflective of a broader movement towards customization and flexibility in the needs, goals, values and expectations of the workforce.

ICHRA Market Growth and Adoption

While the adoption of ICHRAs was slower in its inaugural year (2020-2021), the HRA Council indicates that the overall growth and adoption of ICHRAs have increased by over 350% since inception. The U.S. Department of Labor projects that ICHRAs will grow an additional 255% by 2025. I believe that to be conservative and predict we’ll experience much more growth than this (I’m suggesting 500% or more) as market awareness increases and additional legislation is passed.

For example, Sen. Ted Cruz introduced the Personalized Care Act of 2023 which, albeit still in its early stages, has strong bipartisan support around its core principles and creates that path to what one might consider an Individual Coverage Health Savings Account (ICHSA) by making premiums tax deductible under an HSA. If/when this happens, it’s game over for the old employer group health model. Regardless, the surge in ICHRAs underscores a broader market expansion for all health reimbursement arrangements, signaling a paradigm shift in what employer-funded health care will look like in the future.

Just like their Affordable Care Act marketplace counterparts (referred to as “on-exchange” plans), ICHRA plan options (referred to as “off-exchange” plans) and choice of carriers vary by state. Some states have been more aggressive in their approach to ICHRAs than others. In conducting detailed analysis of more than 1,200 client benefits plan cases, my experience has found ICHRAs to be a compelling option the majority of the time in more than 35 states.

It is expected that more states will shift from the federal platform to state-based exchanges in the coming years, which will enable states to provide greater cost savings/tax incentives, greater visibility to data, improved Medicaid alignment/integration, and more control over the enrollment process. Simultaneously we can expect to see insurance carriers increase their focus on the exchange plans and compete for the shift in spend control from the employer to the individual.

Impact on Employers and the Healthcare Benefits Landscape

For employers, the transition to ICHRAs represents both an opportunity and a challenge. On one hand, ICHRAs offer the opportunity to remove the organization from the middle of a painful and tedious process, while also creating the potential for delivering a far more cost-effective and personalized health benefits program for employees.

On the other, it necessitates a re-evaluation of the company’s benefits strategy, a willingness to put employee cost savings opportunities highest on the priority list, and the ability to adopt new administrative tools — or to partner with a vendor — who can help to manage these arrangements effectively.

To pave the way for an ICHRA at your company, it may also require adding employee self-service portals and/or AI assistants.

The reality is the cost savings for both the employer and employee are often so material (commonly several hundred dollars or more per month in reduced premiums for an individual or family) that the decision to move to an ICHRA should be very easy. Data shows that when it’s a fit, its usually an overwhelmingly better option.

The Future of Personalized Benefits

With the majority of the U.S. workforce living paycheck to paycheck and 57% having less than $1,000 in the bank for emergency purposes, the ability for an employee to personalize and control how their money is spent is more critical than ever. Benefits should impact the totality of any employee’s life, but unfortunately the majority of the time a disproportionate percentage of the funds go to medical premiums.

In fact, they may not realize it, but most employees are over-insured. They’re paying higher than necessary premiums for insurance benefits they are unlikely to use. ICHRAs provide optionality and create a broader opportunity for employees than just increasing choice and reducing premiums. ICHRAs herald a new era of personalized benefits, enabling benefits equity across the workforce. As consumer expectations continue to evolve, so too will the strategies employed by employers to attract and retain talent through flexible, personalized health benefits offerings.

Making a Smooth Transition

ICHRAs have special enrollment eligibility, meaning you can switch from a traditional plan to an ICHRA at any time during the year and don’t have to wait for a traditional renewal. This can be valuable when you have employees overpaying for coverage and can save for the year by making a switch sooner than later.

A key consideration for moving to an ICHRA is to understand how employees will be supported through the plan selection process to ensure they right-size their plan based on their personal situations. For example, if an employee is healthy (at any age) at the start of a plan year, the chance that they’ll hit their max out-of-pocket (max OOP) expense (assuming $10,000 max OOP) for that year is about 1.2%. So the real consideration isn’t the difference between the $6,500 deductible with a $10,000 max OOP vs. the $2,500 deductible and a $7,500 max OOP, but rather the difference in the premium costs for that plan for the year.

Why? There’s a 100% exposure to the premium cost vs. the 1% exposure to the Max OOP. So if that employee can save $250 per month in premiums, they’ve covered the gap in the Max OOP in just 10 months. And if they follow that strategy for multiple years, they can bank that savings (with interest if they have an HSA-eligible plan). So even if they have a bad year three, four or five years later, the savings more than cover it!

Because of this, two key questions employers must consider when switching to an ICHRA are:

• How will employees be supported?
• What happens to the hundreds, or even thousands, of dollars of savings an employee realizes? (i.e., What is the employer going to do to help employees most effectively utilize those leftover benefits dollars?)

I believe it’s essential to consider how a provider will help employees make the best decisions and create the greatest value for each employee individually.

Bottom Line

There has been rapid growth around ICHRAs since 2020 and we are only seeing the tip of the iceberg. We are entering a period where we’ll see more and more widespread adoption, significantly influencing the healthcare benefits landscape.

ICHRAs are enabling a shift towards true personalized health benefits, which is incredibly appealing for the true end-user, the individual employee/consumer. ICHRAs enable employers to offer a more flexible, tax-advantaged alternative to traditional group health plans, increasing savings and easing the financial impact of health insurance for their employees. This transformation coincides with the changing expectations of consumers, shifting control to the individual, and leads us toward a future where personalized benefits are not just preferred, but expected.