What Is ICHRA?
In 2020, ICHRA (Individual Coverage Health Reimbursement Arrangement) was introduced, giving employers a flexible way to support their employees’ healthcare costs. With ICHRA, employers can provide a fixed, pretax dollar amount that employees can use for qualified medical expenses or to purchase insurance plans – whether through the ACA exchange or directly from an insurance provider. While a similar option previously existed for smaller employers (<50 employees), ICHRA offers greater flexibility, with no contribution limits and availability to employers of all sizes.
What Pain Point Does This Solve?
Why could this policy be significant? >50% of Americans get their health insurance through an employer, but the cost to employers of providing this has grown substantially. Over the past 5 years, the avg. cost to an employer of providing family coverage for an employee has grown by 32%, or 5.7% per year. This trend is expected to continue: Mercer estimates that the total cost of health benefits per employee will grow by 5.8% in 2025. For employers that currently offer health benefits, transitioning to ICHRA can enable them to cap these costs, or at least reduce their volatility – implementing ICHRA is somewhat analogous to transitioning from defined benefit retirement plans to defined contribution plans. Furthermore, for employers who cannot afford to provide traditional health coverage, ICHRA can make it possible to offer benefits to their employees.
How Does ICHRA Benefit Employees?
ICHRA offers potential benefits for employees as well. Currently, employer-sponsored health plans are relatively one size fits all. Employees sometimes have a few options, but they are anything but customizable. Purchasing an employer subsidized individual plan, however, could allow employees to choose the plan that best works for their specific needs.
Furthermore, to the extent a new employer also utilizes ICHRA, given employees tend to switch jobs every four years or less, when they do so they can keep their insurance plan.
The ability to maintain a loyal customer base could create greater incentive for insurance providers to differentiate themselves, whether it be through benefit design, ease of use, or other methods. Finally, it could also improve incentives for insurance plans to invest in care that has a longer return horizon since the reduced churn would increase the likelihood that they will be the payor that benefits from it.
What Does The Future Hold For ICHRA?
Though it is hard to predict the future of ICHRA, Oliver Wyman recently published a few potential scenarios below:
The ICHRA Startup Landscape
Implementing an ICHRA plan is easier said than done. It requires navigating regulations, setting allowances for employees, determining employee eligibility, among other things. As a result, over the last few years there has been an emergence of startups aimed at solving these pain points. Below is a non-exhaustive list of startups in this space. With regards to ICHRA, all of these are focused on benefits administration, except for Lynx, which focuses on payment enablement.
In Summary
ICHRA presents a flexible and cost-effective solution for employers looking to manage rising healthcare expenses while offering employees greater choice and continuity in their health coverage. By shifting to this model, employers can stabilize costs and employees can select plans that best fit their individual needs. As adoption grows, the emerging landscape of ICHRA-focused startups aims to simplify implementation, making this option increasingly accessible for businesses of all sizes.
If you’re building a startup in digital health or enterprise, it would be great to connect! You can reach me at [email protected].
