February 21, 2025

Employers have long recognized that offering health care benefits to their employees requires more than a “one size fits all” approach, and today they have more options than ever. As health care costs continue to rise and benefit administration and compliance become more complex, employers may be apt to consider a broader range of options to provide health benefits. In the current environment of evolving workforce dynamics, cost concerns and compliance challenges, the Individual Coverage Health Reimbursement Arrangement (ICHRA) is of increased interest for some in the industry, including among certain employers.

The following key points need to be considered as employers evaluate ICHRA as an option:

Annual Cost Predictability

An ICHRA offers employers a way to manage health care costs with somewhat greater predictability on an annual basis. If an employer that is subject to the ACA requirements to offer minimum value and “affordable” coverage to full-time employees intends to use an ICHRA to satisfy that obligation, then the ICHRA amount must meet a calculated minimum funding amount for the individual employee for the year. To ensure more consistent financial planning for a given year, employers set a fixed funding allowance and avoid fluctuating costs by shifting it to employees. This option reduces an employer’s direct financial exposure for claims for the year and may help with budgeting or reducing short-term volatility, although it should be noted that this approach results in negative effects on employees in terms of increased financial exposure and volatility.

However, while the predictable cost is likely an intriguing feature of an ICHRA, it is only predictable 1 year at a time. This is because the funding for ICHRAs intended to satisfy ACA offer of coverage requirements and avoid a tax penalty need to be calculated annually as a percentage of the low-cost silver (LCS) option, which would be available in the applicable ACA marketplace for employees based on their geographic location. The LCS is determined by each ACA marketplace and is subject to price changes, generally annually. This means that as the prices in the ACA marketplaces change year over year, the required contribution to an ICHRA will change for the employer. Each ACA marketplace price change is driven by its own market trends, regulatory changes, medical inflation and other factors that may or may not end up being a savings over what an employer would otherwise have experienced in a group plan. Additionally, ACA marketplace pricing is based on different insurance rating and review rules than employer large group plans generally would be. If ACA marketplace premiums rise significantly in a given year, employers may need to adjust their contributions to maintain competitive benefits, undermining their financial planning and the predictability year over year.

Support and Programs

When an employer adopts an ICHRA, they may need to assess how or whether the company can offer any integrated support or benefits beyond the funding for the basic insurance coverage. Generally, with group plans, large employers look to provide additional support like care navigation, expanded behavioral health networks and chronic disease management initiatives. For employers offering an ICHRA, it may be practically infeasible or present additional compliance and regulatory challenges to try to integrate these additional supports and programs with whatever ACA marketplace coverage the employee ends up electing. For many employers, these types of programs are critical for addressing broader health care challenges—such as access to care, health disparities and chronic disease burden–which have a direct impact on downstream costs, population health, productivity, absenteeism and other factors. Moving to an ICHRA may require an employer to step back from these efforts—or, at minimum, to revisit the way these efforts are delivered—and participants may experience a gap in employer support, plan curation, navigation, customized programs and other employer value. This outcome, in turn, may impact the employee experience, the ability to get care when needed, productivity and ultimately attraction and retention of current and future employees.

Flexibility and Choice

ICHRAs may provide flexibility and choice if there are robust individual ACA marketplace offerings where employees are located. This may allow employees to choose among more insurance carriers and plan design options than an employer may offer through its group plan(s). However, redirecting employees to ACA marketplaces could lead to confusion, poor choices by employees, inadequate coverage and little to no employer involvement to help with issues, leaving employees without the support they currently receive from their employers.

Under the ICHRA rules, employers may have additional flexibility to support portions of their workforce in new or different ways. The rules have specific requirements to help ensure that an offer for coverage with an ICHRA account vs. the employer’s group health plan does not intentionally or inadvertently discriminate, potentially causing higher costs for plan participants. ICHRA guardrails seek to ensure that an ICHRA population is not made up of higher-cost individuals while the employer’s group plan retains the lower cost individuals; in other words, the ICHRA guardrails ensures that the group plan does not “cherry pick” the participant population for its group plan and send sicker/higher-cost individuals to the ACA marketplaces.

Simplified Administration

Using an ICHRA may also simplify benefits administration for some employers, especially for smaller employers that have limited resources. By focusing on funding an ICHRA account and shifting employees to individual coverage, employers eliminate many of the complexities, compliance obligations and burdens of purchasing and administering a group health plan, including almost all direct selection or management of carriers, vendors and other partners. In general, as long as an employer’s ICHRA plan and vendor follow the appropriate rules for designing and administering the ICHRA account itself, the substantive coverage requirements and compliance obligations would be borne by the insurance carrier and individual coverage selected by the employee.

Limitations of ICHRAs

There are several limitations that need to be considered when implementing an ICHRA.

• Multistate employers: For employers with a presence across multiple states, it’s important to know that many elements incumbent in ICHRA programs are subject to mandatory state-by-state or other geographical variation.
• ICHRA funding for premiums: As mentioned, an ICHRA used as an ACA compliant offer of coverage to full-time employees must meet minimum funding levels that are determined based on premiums for individual coverage where the employee is located. Premiums vary widely from market to market and can fluctuate year over year; individual market premiums also tend to be higher than those for employer-sponsored insurance.
• Coverage designs and requirements: Because individual coverage is an insurance product (as opposed to a self-insured group health plan), it is subject to state law regulation in addition to the federal ACA and other requirements. Self-insured employer group plans generally avoid state-by-state regulations under ERISA preemption which allows for uniform coverage nationally. Insured individual coverage may vary significantly from state to state, which may lead to differences in employee experience, cost and satisfaction.

• Network sufficiency: The ACA marketplaces often offer narrower network options than employer-sponsored health plans, potentially limiting employees’ access to preferred providers and increasing the likelihood of out-of-network care.
• Plan quality: The quality and availability of individual health plans can vary significantly by market. In regions with fewer insurers, employees may face higher premiums, as well as limited network or design options. The types of services covered under plans may also vary.
• Employee confusion: Employees may find purchasing individual insurance overwhelming, particularly if they are unfamiliar with marketplace plans, requiring employers to invest in additional communication support or navigation services to guide them through the process. Without clear communication, employees accustomed to traditional group health plans may perceive the shift as a downgrade.
• Employee selections: Employers may be limited in helping to ensure that employees select and are able to utilize appropriate coverage and care options. Generally, it is expected that employers would not be able to endorse or guide their employees on the individual coverage they choose, so overall health insurance literacy becomes a determining factor on whether an employee enrolls in the most appropriate health plan for their overall health status.
• Pharmacy benefit: Under ICHRAs, pharmacy benefits are determined by the individual health plans employees select without any employer involvement over pharmacy benefit design, including formulary tiers, copays and access to medication. This variability can result in differences in coverage, cost and access to medications.
• Claims data visibility: Employers would no longer have visibility into claims data for employees participating in ICHRAs. This reduces their ability to track health care utilization and implement targeted health interventions. Without access to this data, well-being initiatives and individualized programs may become more difficult to manage, potentially limiting the employer’s ability to achieve cost savings, improve health outcomes and productivity and reach other goals through tailored programs.
• Plan customizations: Employers lose the ability to customize benefits in accordance with the needs of employees and their families and organizational goals. This flexibility, which is often a key feature of traditional employer-sponsored plans, is diminished in an ICHRA model.
• Global benefits harmonization: For large employers operating in multiple countries, use of an ICHRA would present additional challenges in any effort to harmonize global offerings. The multistate variations mentioned above may compound already existing international differences. making it impractical to try to have uniformity or equity globally.

Conclusion

While ICHRAs may potentially represent an alternative approach to employer-sponsored health benefits, they are not a universal solution for all organizations and have significant implications and shortcomings from a health and well-being perspective. Employers must carefully consider the full range of implications before implementing this strategy. Transitioning employees to the individual market shifts significant responsibility onto employees, whose experience navigating ACA marketplaces may not match the curated support and quality networks traditionally provided through employer-sponsored plans. This change can impact their ability to access appropriate care and coverage. Organizations must assess their workforce needs, budget constraints and long-term objectives to determine whether ICHRA is the right strategy—or if an approach utilizing an employer group health plan may better serve their employees and business goals.

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Resource Value-based Care Affordability & Cost Management Plan Design & Administration