ICHRAs vs. small group plans
How a hot new group coverage type is changing the game (written by a benefit nerd for non-nerds.)
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:
Self funded plans — These are rare for small businesses but 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.
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.
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:
If graphs aren’t your thing, here’s a meme-based representation of the annual experience employers have with their group policies:
Here are some of the pros and cons you can consider when evaluating if group health plans are a better fit for you:
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.”
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.)
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:
If you can find a broker dedicated to hand holding the employees in their journey on the individual market, ICHRAs are a better option for small employers.
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.
If you want to learn more about what I’m doing to make health insurance simpler and more affordable for small businesses, check out StretchDollar.com.
