The two futures of group benefits
And why the fate of the ACA hangs in the balance
Fully insured group plans are on the way out.
These are the traditional way that small businesses have gotten insured ever since the Affordable Care Act passed. Rates are set on a county level, all applicants are guaranteed a policy, and they get 13% more expensive every year. Obviously, that can only go on for so long.
Since 1999, fully insured group rates have risen by 400%. It’s unsustainable and businesses are understandably beginning to turn to alternatives. Most people in the industry believe that group benefits will largely migrate to one of two end states over the next 5–10 years. In one version, the dominant model is something called “level funded plans”, and in another something called an ICHRA winds up serving a majority of employees. (We’ll get you some definitions on these in a bit).
The transition has already begun — level funded plans now account for 36% of the 3–49 employee segment, having only served 10% of the segment three years ago. ICHRA adoption is also up nearly 350% since it’s inaugural year back in 2020.
The starting pistol has been fired.
Here’s what hangs in the balance:
What is a level funded plan:
Let’s start with a definition — what is a level funded plan?
Level funded plans are individually underwritten policies, meaning that if you’re healthy enough, you can be offered coverage. On average, the premiums on these plans are a little lower, they also (potentially) reimburse employers at the end of the year if they wind up costing less to serve than expected.
A level funded future:
By nature, level funded plans rely on fragmented risk pools meaning, each employer receives their own rates. This approach is intrinsically more attractive to healthy companies.
As level funded plans absorb more companies with healthy employees (low risk), the “higher risk” becomes less distributed and the cost of fully insured health plans need to go up to compensate.
We’re already seeing major carriers leave the small group health insurance space due to the deteriorating market conditions. And this is just the beginning.
A future dominated by level funded plans will function much like health insurance did prior to the passing of the ACA. Companies with “low risk” employees who can pass a medical screening will get access to premium pricing while companies with employees who have preexisting conditions (or a spouse or child who does), the ones who truly need the help that health insurance can offer, will likely not be offered a policy at all.
The healthy get coverage, and the ones who need it do not.
What is an ICHRA:
But things don’t have to go that way. In 2020, HRA legislation changed in a way that allowed this beautiful mouthful of a plan to be born (Individual Coverage Health Reimbursement Arrangement).
For the first time, employers could make uncapped, pre-tax contributions to employee health expenses (including their health insurance premiums.) Under this model, an employer selects a monthly budget to give to employees. The employees can claim that money before taxes being involved (a 40% savings) to reimburse themselves for costs related to health plans they purchase on the individual market.
This solved a handful of big pain points for employers:
- It allowed them to set and stick to their benefits budget.
- It (dramatically) reduced their admin work to run policies.
- It opened up additional options to their employees because they could pick between.
Despite all that sweetness, ICHRA adoption disappointed out of the gate. They seemed complicated, boring and requiring employees to get coverage on the individual market seemed like a stretch.
But then things started changing.
Due at least in part to the adoption of level funded plans, in 15 of the largest 20 metro areas in the US, individual market plans are actually cheaper than fully insured group plans. In some cases, by a whopping 21%.
All of the sudden, there were substantial savings in switching for everyone involved. (Note: the numbers below are reflective of 30-year-old employees.):
An ICHRA future:
The whole thinking behind the ACA (and, really, insurance at large) is that if we all share risk, we can all afford risk. The ICHRA model makes that outcome a possibility. (I wrote more about this here.)
On average, employer-based risk is actually a bit better than what the individual market sees so as more companies adopt ICHRAs, the cost of insurance on the individual market should continue to decrease.
Employers can save right now, and should be able to continue to realize additional savings as the macroeconomic trends correct themselves and just maybe, health insurance will actually function as it intended.
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.
