Dave Lantz is no stranger to emergency department or doctor bills. With three kids in their teens and early 20s, “when someone gets sick or breaks an arm, all of a sudden you have thousand-dollar medical bills,” Lantz said.
The family’s health plan that he used to get as the assistant director of physical plant at Lycoming College, a small liberal arts school in central Pennsylvania, didn’t start to cover their costs until they had paid $5,600 in medical bills. The Lantzes were on the hook up to that annual threshold.
The high-deductible plan wasn’t ideal for the family of five, but it was the only coverage option available to them.
Things are very different now. In mid-2022, the college ditched its group health plan and replaced it with a new type of plan — an individual coverage health reimbursement arrangement, or ICHRA.
Now Lantz gets a set amount from his employer every month that he puts toward a family plan on the individual insurance market. He opted for a zero-deductible plan with a richer level of coverage than the group plan. Though its $790 monthly premium is higher than the $411 he used to pay, he ends up saving money overall by not having to pay down that big deductible. Plus, he now has more control over his health spending.
“It’s nice to have the choice to balance the high deductible versus the higher premium,” Lantz said. Before, “it was tough to budget for that deductible.”
As health insurance costs continue to rise, employers are eyeing this type of health reimbursement arrangement to control their health care spending while still providing a benefit that workers value. Some consumer advocates are concerned the plans could result in skimpier, pricier coverage for certain consumers, especially sicker, older ones.
Critics point to downsides
The plans allow employers to make tax-preferred contributions to employees to use to buy coverage on the individual market. Employers thus limit their financial exposure to rising health care costs. Everybody wins, say backers of the plans, which were established in 2019 as part of a group of proposals the Trump administration said would increase health insurance choice and competition.
“It’s a way to offer coverage to more diverse employee groups than ever before and set a budget that controls costs for the companies,” said Robin Paoli, executive director of the HRA Council, an advocacy group.
Some health insurance specialists say the plans aren’t necessarily a good option for consumers or the individual insurance market. Even though the rules prevent employers from offering this type of coverage to specific workers who may be sicker and more expensive to cover than others, employers with relatively unhealthy workforces may find the arrangements appealing.
This, in turn, may drive up premiums in the individual market, according to an analysis by the University of Southern California-Brookings Schaeffer Initiative for Health Policy.
Plans sold on the individual market often have smaller provider networks and higher deductibles than employer-sponsored coverage. Premiums are often higher than for comparable group coverage.
Workers, especially lower-wage ones, might be better off financially with premium tax credits and cost-sharing reductions to buy an Affordable Care Act marketplace plan, but using the work-based ICHRA benefit would disqualify them.
“From a worker perspective, the largest impact is that being offered affordable coverage by your employer makes you ineligible for marketplace subsidies,” said Matthew Fiedler, a senior fellow at the Brookings Institution who co-authored the analysis of the rule establishing the plans.
Growing interest in an alternative to group plans
The plans are currently offered to only a tiny slice of workers: an estimated 500,000 of the roughly 165 million people with employer-sponsored coverage, according to the HRA Council.
But interest is growing. The number of employers offering ICHRAs and an earlier type of plan, called qualified small-employer HRAs, increased 29% from 2023 to 2024, according to the council. And, although small employers have made up the bulk of adopters to date, larger employers with at least 50 workers are the fastest-growing cohort.
Individual market insurers like Oscar Health and Centene see opportunities to expand their footprint through the plans. Some venture capitalists are touting them as well.
“The [traditional group] health insurance cornerstone from 60 years ago has outlived its usefulness,” said Matt Miller, whose Headwater Ventures has invested in the ICHRA administrator Venteur. “The goal is to ensure people have coverage, detaching it from the employment construct and making it portable.”
Employers can offer this type of health reimbursement arrangement to some classes of employees and group plans to others based on characteristics such as geography, full-time vs. part-time status, or salaried vs. hourly pay.
Lycoming College wasn’t aiming to be on the cutting edge when it made this coverage switch. Faced with a 60% premium increase after some members had high claims, the school, which covers roughly 400 faculty and staff and their family members, needed to look at alternatives, said Kacy Hagan, its associate vice president for human resources and compliance.
In the end, they opted to offer ICHRA coverage to any employee who worked at least 30 hours a week.
In the first year of offering the new benefit, the college saved $1.4 million in health care costs over what they would have spent if they’d stayed with its group plan. Employees saved an average of $1,200 each in premiums.
“The finance folks really like it,” Hagan said.
A potential disruptor?
As for employees, “from a cost standpoint, people tend to be pretty happy with it, and people really like having a choice of plans,” she said. However, there have been issues with the plan’s administration. Some employees’ coverage was dropped and had to be reinstated, she said. Those problems have been largely resolved since they switched plan administrators this year.
This coverage arrangement can be complicated to manage. Instead of a company paying one group health plan premium, dozens of individual health insurers may need to be paid. And employees who’ve never shopped for a plan before need help figuring out what coverage works for them and signing up.
The complexity can be off-putting. This year, a number of companies that have tried this type of health reimbursement arrangement decided they’d rather go back to a group plan, said Tim Hebert, managing partner of Sage Benefit Advisors, based in Fort Collins, Colorado.
“They say, ‘Employees are all over the place in different plans, and they don’t feel like they’re being taken care of,’” Hebert said.
Vendors continue to crop up to help employers like Lycoming College and their workers manage their plans.
“If you just say, ‘Here’s $1,000,’ it’s extremely discombobulating and confusing,” said Jack Hooper, CEO of Take Command Health, which now administers the Lycoming ICHRA.
It’s unclear whether the plans will take off or remain a niche product.
“It’s a big disrupter, like 401(k)s,” said Mark Mixer, board chair of the HRA Council and CEO of HealthOne Alliance in Dalton, Georgia. Still, it’s not for everyone. “It’s simply another tool that employers should consider. When it fits, do it.”
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