In the US, around 156 million people get health insurance from their employer. It’s a tradition dating back to a wage freeze in WWII that left businesses scrambling to come up with a way to compete on talent if they couldn’t actually pay their employees more. Born was employer-sponsored health insurance and, for better or worse, it is the system we’re stuck with today.
Group plans have evolved over the years and now come in several different flavors:
1) Self-funded plans
These are rare for small businesses and very popular for large employers. The basic idea is the employer leverages its large risk pool of employees and the cash it has on hand to create a health insurance company composed of just the employees and dependents at the company.
This is hard to do, so most companies looking to set up a self-funded plan partner with a TPA (third-party administrator) who handles the nitty-gritty details like setting up stop-loss insurance, securing a network, designing policies, and adjudicating claims.
While it’s a lot of work, if you’re a healthy large company, you can save a meaningful amount of money versus existing options.
2) Level funded plans
Level funded plans are basically self-funded-lite policies. They’re individually underwritten, meaning that premiums are priced based on employees’ health — and if there’s money left over at the end of the year that hasn’t been spent on claims, employers can often receive some of that back.
These plans are hot right now, accounting for just 10% of the 3–49 employee segment in 2019, and today over 35% of all plans offered in that space.
3) Fully insured
These are the most traditional type of group health insurance. Fully insured plans are guaranteed to be offered to all applicants that meet the basic qualifications meaning that the rates are the same for healthy and unhealthy companies. The rates aren’t going to knock your socks off, but these have always been (relatively) easy plans for employers to get.
A Scary Evolving Trend
All of these options have dealt with (frighteningly) consistent price increases over the last 20 years:
On top of annual price increases that range in the realm of 13% (making it more difficult to have control over your budget), the additional onus of a group plan is the administrative burden – with the paperwork process typically spread out over weeks and 30+ hours.
What are ICHRAs then?
ICHRAs are new to the game. Legislation changed in late 2019 to allow this new approach to group benefits. The premise is that instead of a traditional group health insurance plan, employers could give their employees tax-free reimbursements for their medical expenses (including their health insurance premiums).
Instead of finding a group plan, applying, getting priced, managing enrollments, dealing with employee disruption, and managing participation rates — employers can now walk into a room and yell, “Everyone gets $300 per month for their health insurance premiums.”
Well, not exactly, but pretty close.
For the first time, employers can set their own budget when it comes to a health benefit.
This model does place more responsibility on the employees. As owners of the policy, your employees are now responsible for finding coverage and enrolling in a health plan (of their choosing.) Here's a one-page guide that gets into more of the nitty gritty details about ICHRA.
Cage match! ICHRA vs. Small group policies
You now have some context around what ICHRAs and small group policies are. Naturally, you’re probably wondering which one is better and, well, I have an opinion on that. Here’s roughly how the strengths of one option match up against the weaknesses of the other:
In fact, I feel strongly enough about that to call my shot right now — ICHRAs are the future. We’re working at StretchDollar to make that transition easier.