Mining ICHRA Gold, Part I: Firm Size, Employee Sex & Age

Do Individual-Coverage HRAs fit with certain companies based on size, demographics, or location?

This is the first of a three-part series on assessing the financial opportunity that ICHRAs offer based on certain group characteristics.

Next week, in Part II, we'll look at how the company creates value and the stability of its workforce.

The following week, in Part III, we'll look at local nongroup products and markets as a factor.

Individual-Coverage Health Reimbursement Arrangements create an additional model for employers to consider when they design their employee benefits. ICHRAs shift responsibility because employers no longer provide, but rather provide for, employees' medical coverage. This shift can generate financial benefits to both the company and its workers in the right situation.

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.

Let's examine how company size and the sex and age of covered workers and their dependents may make ICHRAs a more attractive option for employers and workers.

Company Size

Companies of any size may benefit from moving from employer-sponsored coverage to an ICHRA model. For example,

Small groups. Smaller companies typically lack the resources to administer medical coverage effectively. They can work with a benefits advisor to choose plans, but the burden falls on the company to schedule open-enrollment activities, coordinate enrollment, and provide ongoing support to employees (and spouses) throughout the year. And communication isn't limited to open enrollment, as each new hire during the year must be educated on the plan options. An ICHRA program decouples the medical plan from the employer, freeing up scarce resources currently dedicated to providing ongoing education and employee/patient advocacy.

Also, small groups (defined as 50 or fewer employees under federal law, although some states establish a higher ceiling) aren't required to offer affordable coverage to their employees. An ICHRA gives these companies more flexibility in determining the breakdown of compensation between cash wages and benefits.

Small applicable large employers. Premiums for companies that fall outside the definition of small group are based on some combination of the group's claims experience and the utilization of the general population within the rating region. This pricing formula is especially harmful to companies with more than 50 employees, low participation, and high claims. Consider this example:

·?????? 80 employees eligible for benefits.

·?????? 18 employees enrolled on the medical plan (the others are enrolled in Medicare, covered on a spouse’s plan, or not covered).

·?????? Two covered employees with spouses managing expensive chronic conditions.

In this type of case,, with premiums based in whole or largely on the group's claims, the price of coverage will either(1) ?be extremely high or (2) skyrocket in the first year following high claims. These companies can shift their claims risk to the nongroup market by offering an ICHRA, with a high degree of confidence that both the company and employees will pay less for comparable coverage.

Large companies. The larger the company, the greater the percentage of claims experience is applied to the formula to determine premiums. An employer with higher-than-average claims can shift this experience to the nongroup market and see premiums for employees' nongroup plans priced according to the nongroup claims pool. That's a win-win for companies with high claims and their workers.

Sex and Age

Company size is one factor that may drive a move toward replacing group plans with an ICHRA. So are the sex and age of covered workers.

Sex. Women incur more claims on average than men, particularly during child-bearing years. An applicable large employer whose population of workers and dependents enrolled in benefits is disproportionately female, particularly in the 25 to 40 age range, will pay more in premiums than a comparably sized company that more closely reflects the population. Insurers can't consider sex when pricing nongroup plans, so males subsidize females in this market. Companies with a large population of covered females, particularly in the child-bearing age range, may be able to reduce overall premiums for comparable coverage by offering ICHRAs and sending employees to the nongroup market (where the male-to-female ratio mirrors the general population) rather than sponsor a group plan with premiums based on the company's sex breakdown and claims experience.

Age. A large company with an older workforce will pay higher premiums based on age, since older workers and covered dependents incur, on average, higher claims than younger covered individuals. In the nongroup market, insurers can adjust premiums for age. But the range is limited to no more than 1:3. In other words, the premium charged to the oldest age can't be more than three times higher than the premium charged to the youngest age. The actual difference in claims is closer to 1:6.

Some states impose even narrower age bands. The ratio in Massachusetts is 1:2. And in New York, it's 1:1. In other words, every nongroup enrollee, regardless of age, pays the same premium for the same plan in the Empire State.

Companies that offer employer-sponsored coverage usually blend their premiums so that all employees on the same plan (say, single coverage on the HMO 1000 plan) pay the same premium, regardless of age. This policy results in young workers’ subsidizing their older counterparts. If the company introduces an ICHRA and directs its workers to the nongroup market, the aggregate premium for the group may be lower (particularly in states with tighter age bands than the federal standard). These savings can be shared with employees via more generous employer subsidies or additional cash compensation.

The Bottom Line

When determining the right fit for ICHRAs, employers and their benefits advisors must look at the insurer's pricing model and some important characteristics of the work force to determine whether the company is better off retaining its claims risk through employer-sponsored coverage or shifting that financial responsibility to the nongroup market and sending employees to purchase coverage there.

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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.