William Freedman |
Let’s be honest: The way America provides health care is expensive, inefficient and patently unfair to the middle class. It’s hard to imagine how anyone, aside from a few insurance executives in Greenwich, Conn., could be happy with it.
U.S. healthcare coverage, or at least the version of it that’s prominent today, is the misbegotten child of two suboptimal models. The first is the employer mandate – something companies cooked up in the 1940s because civilian wages were frozen during World War Two, while home front businesses needed to attract a scarce number of workers. The other is the Affordable Care Act or, if you prefer, Obamacare, which offers tax credits to offset the high cost of private, individual insurance.
This system is far from ideal, but that’s what we have to work with. We don’t get to start with a fresh sheet of paper. There is, though, a synthesis of these two that would allow employees to trim their families’ healthcare budgets while helping companies across the U.S. economy get out of the insurance brokerage business.
A new solution was approved jointly by the Treasury, Labor and Health and Human Services departments three years ago. Now well tested in the marketplace, Individual Coverage Health Reimbursement Arrangement, or ICHRAs, are gaining awareness among companies and their employees. ICHRAs present a new option for companies to ensure the ongoing wellness of their work forces.
ICHRAs allow firms of any size to make a choice. According to the rule that went into effect in 2020, they can continue offering the legacy health insurance plans they had been offering, or they can offer employees tax-free contributions to cover up to 100% of their individual health insurance premiums as well as other eligible medical expenses. Up until 2020, this flexibility was available only to companies employing 50 people or fewer.
So instead of offering insurance policies directly, companies advise their employees to shop on a government-sponsored exchange and select the individual or family plan which best fits their situation. Instead of the premium being reduced by a tax credit, though, it’s reduced by the employer reimbursing the employee, tax-free, for the payout.
ICHRAs can also provide further reimbursement for out-of-pocket expenses, including online health products and services.
ICHRAs have the capability of saving startups – as well as more established businesses – both money and time. In addition to there being no upward limit to how much founders can reimburse their employees, neither is there a downward limit; companies that only need to reimburse 25%, 10% or lower to attract the needed talent can set that needle at its optimal point.
ICHRA save administrative time by out-tasking the responsibility of shopping for insurance to the employees. Because these arrangements are less expensive and time-intensive for employers, the benefit can be extended to more classes of employees. Instead of only full-time employees getting this perk, part-time seasonal or temporary workers can have one less thing to worry about.
That’s also true if and when they decide to move on to another company. ICHRAs are portable so, as long as an individual can find another company to sponsor the arrangement, an ICHRA can follow its owner from job to job.
While there’s a lot of substance behind the ICHRA hype, it’s true that companies have been slow to embrace the new model.
There are any number of reasons. The most obvious is inertia. Absent a burning platform forcing them off a legacy system, corporate decision makers are a cautious bunch – and rightly so. Adding to the inertia is that abruptly switching to ICHRAs for full-time, badged employees might need to wait until contracts with current insurance carriers expire.
Some consumer advocates warn that one consequence of ICHRA adoption is a transfer of risk from employer to employee. That is true; the transfer of ownership and control inevitably includes a transfer of risk. And of course, there’s the political element. Just as half the country was skeptical of Obamacare, the other half is entitled to be skeptical of something proposed by the Trump administration, even if it was modeled on an Obama-era innovation, the qualified small employer health reimbursement arrangement, or QSEHRA.
And yet the individual market is surging. ICHRAs, together with QSEHRAs, are a big part of that. Further, the new consumers are exactly the ones the insurance companies want to see: younger, healthier participants who can offset the risk of insuring their parents. Federal government projections suggest that 11 million Americans will be covered by ICHRAs by the end of the decade. That’s up from today’s 3 million, as estimated by advisory firm Avalere Health.
Year-over-year growth estimates are next to meaningless given the newness of the market and today’s relatively low baseline, but ICHRA advocates have good reason for optimism. They would remind us that, a generation ago, the 401(k) plan eclipsed the traditional, fixed-benefit pension plan. As with ICHRAs today, critics carped on how it transferred risk from employers to employees but now it’s next to impossible to find a private-sector employer that still offers pensions rather than 401(k)s.
Thatch is the easiest way to manage an ICHRA for your company. Schedule a demo to see how Thatch helps startups provide better healthcare for their teams.Schedule demo