Don't Ask ICHRAs to Stretch beyond Their Inherent Limits

Individual-Coverage Health Reimbursement Arrangements are an attractive option to many employers. But they're not a panacea for the inefficiencies and distortions in the medical-coverage and -delivery systems.

As more companies consider adopting an ICHRA model to replace or supplement their traditional employer-sponsored approach to funding employee benefits, it's important to evaluate ICHRAs objectively. They can make a big difference - expanding coverage and choice for workers and reducing administrative tasks and uncertainty over future spending for employers.

But it's important not to nominate ICHRAs for sainthood. Although they can change the dynamic within a company, they're not likely to fundamentally alter the way the medical system is organized, the relationship between insurers and medical providers, or the long-term cost of medical care.

As a refresher, an ICHRA is an employer-funded account from which employees can withdraw funds to pay for medical coverage that they purchase in their local nongroup market. It's an alternative to the more traditional employer-sponsored model in which the company selects several options, usually pays a percentage of each plan's premium, and actively manages the enrollment process.

What ICHRAs Cannot Do

Let's focus first on what ICHRAs cannot do. Below is a partial list of some of the discrepancies and inefficiencies that exist in our current system of medical coverage and care. In most situations, individual purchasers of medical coverage (whether through an ICHRA or advance-premium tax credits) don't have the market clout to reduce or eliminate these distortions.

Cannot correct provider negotiating-power discrepancies. It's not unusual to see price disparities of 300% to 500% for services delivered at facilities within an hour's drive of each other. These differences are the result of the negotiating power of the provider system, not quality. Employers who accept insurer's negotiated rates (rather than contracting directly with some facilities, as some large employers do) can't influence this reality. Individual purchasers have decidedly less power.

Cannot correct site-of-service discrepancies. In both commercial plans and Medicare, sites of service that identify as hospitals - ranging from tertiary medical centers to the cramped offices of doctors affiliated with the delivery system - can charge additional facility fees. I saw this phenomenon more than a decade ago when my physician was reimbursed $60 for a cortisone shot delivered to my plantar fascia. Because I received the shot in his office located in the hospital rather than his suburban location, the hospital added a $360 facility charge to my financial responsibility. Expensive lesson! Patients covered by employer-sponsored plans or nongroup plans via an ICHRA who know about these discrepancies can't alter these arrangements (though they can look out for themselves, regardless of coverage, once they understand).

Cannot correct transparency shortcomings. Hospitals are required to post their prices in formats that consumers can understand. About one-third of hospitals are estimated to comply with these rules today - more than three years after the law went into effect. If large employers (and, for that matter, elected and appointed government officials) can't force higher levels of compliance, it's unlikely that unorganized individuals covered on nongroup plans can speed up price transparency.

Cannot alter PBM behavior. Insurers contract with pharmacy benefit managers (PBMs) to manage their prescription-drug programs. These PBMs negotiate discounts and rebates with pharmaceutical companies. These arrangements often don't reduce the price that patients pay out-of-pocket, but rather are shared by other parties in the distribution chain. These intermediators alter the price dynamic in the market outside of effective influence by even the largest companies. It's unlikely that individual purchasers of medical coverage can break this business model.

Cannot eliminate mandates and their associated cost. Politicians at the state and federal level are increasingly mandating that insurers cover new services (like acupuncture or expensive diabetes drugs for weight loss) or existing services with either no (full coverage for termination-of-pregnancy services) or capped (a $35 copay on insulin, regardless of the underlying price) patient financial responsibility. These mandates shift the cost not borne by patients to the broader population covered by that claims pool. Mandates increase premiums. Companies can self-insure their plans to avoid state (but not federal) mandates. Individuals who buy nongroup insurance cannot, by definition, avoid the higher premiums for services that they don't utilize.

Cannot control medical inflation. Since the federal government began to assume the dominant role in influencing the delivery system with the launch of Medicare and Medicaid in 1965, medical inflation has risen at roughly double the rate of the general increase in prices across all sectors. There are many reasons for this phenomenon, and a lot are tied to the way commercial insurers follow Medicare's practices. Non-organized nongroup purchasers have limited influence on this trend.

What ICHRAs Can Do

These limitations, however, aren't an indictment of ICHRAs and nongroup purchasers. ICHRAs offer employers and their workers certain important benefits. Though nongroup buyers have little to no influence on how the delivery system is designed or negotiations between providers and insurers, they do possess more power than they had under a group plan to improve the financial effect of medical care on their family.

Do allow each employee to customize. When employees are given a tax-free premium stipend and instructed to shop for the coverage that works best for their family, they tend to make very different choices than their employer did when it sponsored a group plan. Employees shopping in the nongroup market can assess the inverse relationship between premium and out-of-pocket financial responsibility and choose the plan that meets their needs. My twenty-something single children may choose higher cost-sharing and lower premiums, whereas buyers like my wife and me may choose lower premiums and the risk of higher financial responsibility when we receive care.

Do optimize purchases. Companies that sponsor multiple plans usually set their premium subsidies based on a fixed percentage (usually 60% to 80%) of each plan. If the premium difference between two plans is, say, $200 monthly, employees pay only a $50 difference when the employer offers a 75% subsidy. Thus, if the employee values the higher-premium plan by $50.01 or more, she will choose it. But if she's responsible for the full $200 difference, as she is with an ICHRA, she'll choose a plan based on the total difference - not merely the subsidized delta - in premium.

Do allow employers to manage their total spend. Companies that sponsor medical coverage usually use levers like plan design and employer contribution to premium to manage the amount that they spend on medical care. Still, their premiums usually rise far faster than general inflation, sales, and other employee compensation. An ICHRA allows employers to not only set a fixed dollar amount for the current year, but also to choose how much to increase that amount annually on pro forma projected financial statements.

Do reduce the employer's administrative work. Benefits administration doesn't go away with the introduction of an ICHRA program. But the workload is reduced and concentrated around open enrollment. Employers can focus more resources on their core business rather than administering benefits.

The Bottom Line

ICHRAs are an important tool in right-sizing coverage and ensuring that consumers spend their employer subsidy optimally to meet their individual medical and financial needs. Unfortunately, consumers with ICHRA subsidies have no more power to alter the delivery system than they do when their company offers employer-sponsored coverage. But the expanded freedom that employees armed with ICHRAs possess to customize their coverage is a benefit that can't be overlooked.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.

ICHRA Insights is published weekly.