ICHRA renewal volatility works differently from renewal volatility under traditional group health insurance. One of the commonly cited advantages of an Individual Coverage Health Reimbursement Arrangement, or ICHRA, is greater control over health insurance costs.
Instead of receiving a traditional group renewal from an insurance carrier, the employer establishes an amount it is willing to reimburse employees for individual health insurance.
That sounds straightforward. Set the contribution. Control the budget.
It is true, but there is more to it.
We recently received an ICHRA proposal for a small Ohio employer that helped illustrate what “cost control” actually means, particularly when it comes to future renewals.
The Contribution Has to Start Somewhere
The proposal showed two possible employer contribution strategies.
One would reimburse approximately 50% of the premium for the lowest-cost Silver plan available in the individual market. The other used 75%.
The actual contribution varied by employee age and geographic rating area.
That does not mean employees have to buy that particular Silver plan. Employees can choose from the individual plans and carriers available where they live.
The lowest-cost Silver plan was simply being used as a consistent benchmark for establishing the employer’s initial contribution.
That distinction becomes important when we start thinking about next year.
What Happens When Individual Rates Increase?
Suppose an employer initially establishes an ICHRA contribution equal to roughly 50% of the lowest-cost Silver plan.
Then individual-market premiums increase the following year.
What happens to the employer contribution?
The answer is: the employer decides.
It could increase its contribution enough to maintain approximately the same relationship to the Silver benchmark.
It could increase the contribution by a smaller amount based on its budget.
Or it could leave the contribution unchanged.
The original 50% calculation does not permanently obligate the employer to maintain that percentage.
That is an important form of cost control.
But notice what did not happen.
The health insurance increase did not disappear.
If individual premiums rise 15% and the employer leaves its contribution unchanged, employees absorb more of the increase.
If the employer increases its contribution enough to maintain the same relative support, the employer absorbs more of it.
Or the increase can effectively be shared.
ICHRA does not make health insurance inflation disappear. It gives the employer more control over how it responds to it.
But What About Renewal Volatility?
This is where I think ICHRA can offer a meaningful advantage, but we need to be precise about what kind of volatility we are talking about.
We recently reviewed a traditional employer health plan covering approximately 120 insured lives. Its renewal increase was approximately 59%.
A few years earlier, the same employer had received a renewal increase of roughly 4%.
That is a very wide range.
Traditional employer plans, particularly once we move beyond the ACA small-group market, can have a meaningful relationship to the claims experience and risk characteristics of the employer’s own population. A bad claims year, large ongoing claimants or other underwriting factors can have a substantial impact on the renewal.
An ICHRA moves employees into the individual insurance market.
ACA individual-market premiums cannot be based on an individual’s health status or claims history. Premiums can vary based on permitted factors including age, geography, family size and tobacco use.
That means one employer’s bad claims year does not result in that employer receiving its own 40%, 50% or 60% individual-market renewal.
That particular kind of employer-specific volatility is largely removed from the equation.
But market volatility remains.
Individual Rates Can Move Too
It would be a mistake to turn this into an argument that individual rates only increase by a few percentage points every year.
They don’t.
So I would not tell an employer that moving to an ICHRA eliminates renewal volatility or guarantees smaller future rate increases.
It doesn’t.
What changes is the source of the volatility.
With a traditional medically influenced employer renewal, the experience of that particular employer can play a significant role.
With an ICHRA, the employer is much more directly exposed to what is happening in the broader individual insurance market where its employees live.
Those are different risks.
The Employer Controls the Response
This is the part of ICHRA that I think is sometimes oversimplified.
With traditional group insurance, the carrier delivers the renewal.
The employer might receive a 12% increase, a 25% increase or, occasionally, something substantially worse. The employer then has to decide what to do with the renewal it has been given.
With an ICHRA, individual-market premiums change, but the employer gets to make a separate decision about its contribution.
Imagine an employee whose applicable Silver premium is $700 per month and whose employer initially provides $350.
The following year that premium increases 15% to $805.
The employer has choices.
It could increase the reimbursement to approximately $402.50 and maintain the same 50% relationship.
It could increase the reimbursement to $375.
Or it could leave it at $350.
The individual-market increase is the same in all three examples.
What changes is the employer’s response.
That is why I would describe the ICHRA advantage this way:
ICHRA can reduce employer-specific renewal volatility. It does not eliminate individual-market volatility. More importantly, it gives the employer more control over how much of a future increase it chooses to absorb.
Small Employers and Large Employers Are Not Quite the Same
There is another consideration.
A smaller employer that is not subject to the Affordable Care Act’s employer shared responsibility provisions has considerable flexibility to determine what it wants to contribute from year to year.
It could hold its ICHRA allowance flat.
But even then, the contribution does not exist in a vacuum. Whether an ICHRA is considered affordable can affect an employee’s eligibility for a Marketplace premium tax credit. An employee offered an affordable ICHRA generally cannot simply decline it and receive a premium tax credit instead. An employee offered an unaffordable ICHRA may be able to opt out and qualify for a premium tax credit if the other eligibility requirements are met.
For an Applicable Large Employer, or ALE, the issue becomes more important from the employer’s perspective as well.
An ALE using an ICHRA to satisfy its employer shared responsibility obligations needs to pay attention to affordability. The ICHRA affordability framework uses the applicable lowest-cost Silver plan for self-only coverage in determining the employee’s required contribution. The IRS also provides employer affordability safe harbors because employers generally do not know an employee’s household income.
So an ALE still controls its ICHRA contribution. But if it wants the ICHRA to remain affordable for employer shared responsibility purposes, it cannot necessarily treat that contribution as permanently disconnected from what is happening to individual-market premiums.
There is still a benchmark to watch.
Cost Control Is Not the Same as Cost Isolation
I still think cost control is one of the stronger arguments for considering an ICHRA.
But we should be careful about what we mean by it.
An employer can establish a defined contribution.
It can decide each year whether to increase that contribution.
It can potentially avoid the employer-specific claims volatility that sometimes produces very large traditional group renewals.
And it can establish a health-benefit budget with much more direct control over what the company itself will spend.
But the employer has not escaped the health insurance market.
Individual premiums can still increase. Employees can still face higher costs. Affordability rules still matter. And an employer that wants to maintain a particular level of employee support may find that its contribution needs to increase over time.
So perhaps the better way to think about an ICHRA is not that it eliminates renewal volatility.
It changes the nature of the volatility and gives the employer more control over the response.
For some employers, particularly those experiencing difficult or unpredictable traditional group renewals, that can be a meaningful advantage.
But it is not the same thing as setting a contribution once and forgetting about health insurance costs forever.
Client-identifying details have been omitted or generalized. The contribution examples discussed in this article are based on an actual ICHRA proposal and are included to illustrate how employers may think about contribution strategy, renewal volatility and affordability. Individual-market premiums, plan availability, contribution strategies and affordability calculations vary by employer, employee location and applicable federal requirements.
About the Author
For more than three decades, Ted Stevenot has helped Ohio small businesses and their owners evaluate health insurance and employee benefits as a partner at McCarthy Stevenot Agency, Inc.
He writes the Broker’s Desk series to document the real-world decisions, conversations and observations that come from helping small businesses navigate health insurance.
Talk With McCarthy Stevenot Agency
If your Ohio business is considering an ICHRA, the contribution amount is only part of the decision.
Employers also need to consider the individual plans available to employees, how the contribution will be established, what may happen when individual-market premiums change and how affordability rules may affect the arrangement.
Contact McCarthy Stevenot Agency to discuss whether an ICHRA or traditional group plan makes sense for your business, or call 513-891-9888.
Related Resources
- ICHRA for Ohio Employers
- ICHRA vs. Group Health Insurance for Ohio Employers
- Why Small Businesses Should Build a Health Insurance Renewal System
- Health Insurance Prescreen for Ohio Small Businesses
Disclaimer
Broker’s Desk is a series of observations from more than three decades of helping Ohio small businesses and their owners navigate health insurance. Some articles explain a process. Others examine the tradeoffs behind real employer decisions. Client-identifying details may be omitted or generalized to protect privacy.
ICHRA contribution strategies, individual-market premiums, plan availability and affordability calculations vary by employer, employee circumstances and location. Federal requirements may also change over time. This article is intended to explain practical considerations involved in evaluating an ICHRA and is not legal or tax advice. Employers should review their specific circumstances with appropriate insurance, tax or legal professionals.