Mining ICHRA Gold, Part II: Employee Value and Stability

Certain characteristics of the work force make ICHRAs a better solution for some companies versus others.

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

Last week, in Part I, we discussed firm size and employee sex and age.

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

Prior to 2020, employers faced a binary choice: either sponsor medical coverage for their workforce or leave employees without access to coverage at work. This structure worked for many employers. But different firms have different characteristics. And for some, shifting to an Individual-Coverage Health Reimbursement Arrangement makes financial and strategic sense.

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.

Employee Value

The value that a company offers to the market represents a combination of its people and its technology. A ski slope lacking the technology to lift skiers from the base to the top of the mountain quickly will fail, regardless of its people. The same slope with the fastest lifts and grumpy, unresponsive workers faces bleak prospects. People and technology both contribute to the value that most companies bring to the market. But the proportions can be quite different.

In some jobs, value is driven by the equipment. For example, many potential workers with spatial skills, some judgment, and uncompromised knees can stand on a lawnmower all day and cut acres of grass. The machine does most of the work, with some human guidance. These jobs tend to offer low compensation because so many people can perform them adequately.

On the other hand, few people have the skills to enter fields like microsurgery, trial attorney, and aerospace engineer. These professionals rely on some technology and equipment, but they deliver value through their ability to absorb knowledge, think, apply, act, and reflect. These jobs offer high compensation, because so few people have the aptitude and interest to pursue excellence in these fields.

How do these characteristics relate to ICHRAs? Employers are typically motivated by one of two factors to offer an ICHRA.

·??????? They want to reduce and control their spending on employee medical coverage.

·??????? They want to offer their workers a broader choice of plans so that they can tailor their coverage preferences to their individual financial and medical situations.

In this context, ICHRAs are a great option for companies that currently offer ICHRAs to their employees whose labor results in less value added than the equipment that they run. Imagine a job that pays $40,000 cash annually and provides $18,000 annually. As medical premiums rise at twice the rate of wages, that ratio is unsustainable. A small company (50 or fewer employees under federal law, though some states set a higher ceiling) in this position may face no alternative to dropping coverage (without a penalty to the company or its employees under federal law).

An ICHRA offers a third option along the spectrum with no coverage on the left and employer-sponsored coverage on the right. The company can set a balance between compensation offered as cash wages and as benefits by defining a dollar amount that can be spent on medical premiums. It can then offer that amount to employees on a pre-tax basis through an ICHRA.

Companies that derive their value from their employees' minds (physicians, architects, financial planners, and learning/training companies, for example) don't face the immediate pressure that lower-wage companies experience when offering the same medical plans. But these employers may want to retain and attract talent by moving to a generously funded ICHRA program to increase coverage options (from two or three to the full range of nongroup plans available in that region) and free benefits administrators to focus on other activities that enhance the work experience.

Work Force Stability

Companies with high turnover face this issue for several reasons. They may be companies whose projects wind down before others start (think construction firms). Or they may hire 20 new workers to fill 12 positions, knowing that a number won't make it through training and the first few months on the job (think customer-service call centers). Or they may simply conduct business in fields where employees don't remain loyal to a company for long and can easily find comparable work at similar wages (think retail clerk and landscape laborer).

When turnover is naturally high, medical coverage isn't a deciding factor in retaining and attracting employees. In this environment, a company may want to cancel its employer-sponsored coverage and instead give each employee a fixed dollar amount (which can be adjusted for employee age and family size) and allow recipients the opportunity to find their optimal medical plan in the nongroup market.

An ICHRA program offers another benefit: No COBRA continuation. The employee, not the company, owns the nongroup plan, so there's no employer-sponsored coverage to continue. (The ICHRA itself is subject to COBRA continuation, though because of the design of the ICHRA itself, COBRA is rarely an attractive financial option for employees.)

Why is this important? Former employees who elect COBRA incur claims at two to three times the rate of active workers. Why?

First, COBRA enrollees are responsible for the full premium, without employer subsidy (unless the company chooses to offset part of the COBRA premium, which isn't common). Thus, the employee who paid only $450 of an $1,800 monthly family premium (75% employer subsidy) suddenly pays the full $1,800 (plus a 2% administration fee) for COBRA. As a result, the employees who enroll in COBRA are more likely to be higher utilizers of care who can justify the monthly price.

Second, because they pay that high premium, they're more inclined to shift their mentality to "getting the most" out of their coverage. That thought process leads to higher utilization.

Third, many are temporarily out of work and thus have more time to undergo testing and procedures without the demands of a job.

Overall utilization by both active employees and COBRA enrollees drives is factored into premiums for applicable large employers (51+ workers). Thus, the higher the percentage of plan participants who are enrolled through COBRA continuation, the higher the claims and the higher the future premiums.

When companies offer coverage through an ICHRA, employees enroll in nongroup plans. They remain covered, regardless of their employment status. Their claims flow into the nongroup claims pool and thus don't affect the group's cost of coverage.

The Bottom Line

Different companies have different characteristics, among them the source of the company's value in the marketplace and employee turnover rates. These factors can create situations in which offering an ICHRA makes more sense for the company (and often employees as well) as an alternative to a traditional employer-sponsored program.

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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.