Can companies shed bad claims risk by moving to an ICHRA to fund their employees’ medical coverage? Yes. But the law minimizes the opportunity.
Editor’s Note: If the reader thinks ICHRAs are the only way to rid bad risks, the Compassionate Care Plan™ is a much better solution.
Individual-Coverage Health Reimbursement Arrangements create an opportunity for companies with bad claims experience to shed the direct effect of those high claims. The new places guardrails around eligibility, however, thereby limiting this opportunity.
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.
How Insurers Determine Group Premiums
Employers cover employees on plans that are either insured or self-insured. Under an insured arrangement (the subject of this article), the insurer projects total claims and administrative costs, then delivers premiums to the company. The insurer suffers a loss on that business if it underprojects claims and enjoys a profit on that business if premiums exceed claims and administrative costs.
In contrast, a company that self-insures assumes all claims risk (often with stop-loss insurance to cap its exposure). It hires an administrator (often a brand-name insurer) to administer the plan. In this arrangement, premiums are irrelevant. More than half of all Americans covered by employer-sponsored plans that are self-insured.
Let’s focus on insured plans and how insurers set premiums.
Small companies: Under federal law, premiums for small groups (companies with 50 or fewer employees) are community rated. In other words, all claims generated by covered employees and their dependents at all companies within a rating region are dropped into a single pool. The insurer then calculates the base rates for companies within those pools. Each company’s premium is derived from that base rate, with adjustments for age and family size.
Community rating is designed to smooth premiums over time. A company with 10 workers would see its premiums skyrocket if the cost of coverage were based on its claims and one employee or dependent suffered a heart attack or delivered a premature baby. Placing all small companies’ claims into a single claims pool spreads bad and good claims across a large number of employers, thus leveraging the law of large numbers and minimizing the effect of high claims on any one company.
Large companies: Applicable large employers’ premiums are determined by their claims experience. Their employee population is generally large enough that their experience more closely follows market averages. (Though not always – a benefits director once told me, “18,000 hemophiliacs in the United States, and I cover two of them.”) But high claims have much less of an impact on a company with 30,000 covered lives (whose claims will closely follow the market average) and one with 112. Insurers sometimes blend experience and a community rate for smaller large groups to minimize the year-to-year fluctuations caused by sudden high claims.
How Insurers Determine Nongroup Premiums
Under federal law, the nongroup market is community rated. All claims incurred by covered individuals within a rating region are placed in a single claims pool. Thus, an insurer calculates the following year’s premiums as it does for small groups. An individual applicant’s premium is based on the base premium, with adjustment for the number family members covered and their ages.
The ICHRA Solution
How can ICHRAs help groups with bad claims experience?
Small group: ICHRAs have no direct effect on companies that are community rated. If they shift from an employer-sponsored plan to funding employee coverage through an ICHRA, those covered employees’ claims are placed in the nongroup rather than the small-group claims pool. In either case, it’s a community claims pool. The base premium in one market – small-group or non-group – will differ in most markets (exceptions: Massachusetts, Maine, and the District of Columbia merge the small-group and nongroup markets, so base premiums for both are calculated based on the same claims pool). If nongroup premiums are higher than the small-group rates for comparable plans, then either employees (by paying more of the premium of buying a less-expensive plan with higher out-of-pocket financial responsibility) or employers (through the ICHRA) must absorb the difference.
Large group: Because large groups’ premiums are based on their claims experience (“experience rated”), they can shift responsibility for paying claims from themselves to the nongroup market.
Example: Bart’s Tarts, a bakery, employs 80 workers, so its premiums are based on the company’s claims experience. The company offers medical coverage, but the company pays only 50% of the premium, which averages $15,000 annually. Most workers choose coverage on their spouse’s or parent’s plan, so only 17 employees are covered on the company plan. A covered spouse of one of those employees was diagnosed with a digestive-system disorder that will require expensive, ongoing care costing more than $100,000 annually. That one patient will raise the company’s total premiums from about $250,000 to $350,000 annually, or $20,000 on average per employee. Rather than absorb a 33% premium increase, Bart’s Tarts drops the group plan at renewal and shifts to an ICHRA model.
Thus, ICHRAs provide employers with an opportunity to shift their claims risk prospectively. But this is a two-edged sword. To spin the prior example, imagine that the $250,000 of annual claims included the $100,000 in annual claims and that worker subsequently left employment. The company’s $150,000 annual claims experience would drop premiums on the group plan by $100,000 to $50,000 (about $3,0000 per employee), making employer-sponsored coverage a better financial option than the nongroup plan.
ICHRA Guardrails
Officials in the Trump Administration were aware of the potential for abuse when they designed the ICHRA program. To minimize the problem, they limited the number of classes into which employers can divide their employee population when the company wants to offer a group plan to some classes and ICHRAs to other classes. Absent guidance defining only 10 employee classes (for example, full-time, part-time, salaried, hourly, seasonal, and work location), the rules limit some potential claims dumping.
Example: Lincoln Logging, a timber company, covers 120 employees on its plan. It has determined that four employees are driving claims costs and wants to remove them from the group plan. But two are salaried and two are hourly workers. One works in the home office and three are based at the logging camp. Lincoln Logging can’t surgically remove these employees from the group plan. It can do so only by offering an ICHRA to all salaried or all hourly employees, or all workers in the home office and all at the logging camp.
There are situations in which the company’s high claimants fall neatly into a category that represents a permitted ICHRA class. In that case, the company can offload risk.
Example: Boot Heel Distribution services convenience stores in northeast Arkansas and southeast Missouri. Its headquarters is in Paragould, Ark., with a satellite office and warehouse in Kennett, Mo. Among the company’s 120 covered employees (roughly 60 at each location) are two workers who’ve undergone organ transplants and require expensive anti-rejection drugs for the rest of their lives. Both employees work in the Kennett office. Employee work locations are a permitted class. Thus, the company can retain the experience-rated group plan for Paragould-based workers and shed the Kennett claims responsibility by offering an ICHRA to those workers.
The protection isn’t perfect, as the example above illustrates. As a general rule, government lawmakers and regulators can’t keep up with the imaginations of people who are motivated by personal gain to find a way to legally leverage existing laws to their advantage. But the ICHRA rules strike a balance between offering employers flexibility to design an appropriate and affordable benefits program and shifting claims responsibility from the company to the broader market.
The Bottom Line
ICHRAs represent an opportunity – not the only one, just the latest – for employers to offload the financial impact of their employees’ medical claims from the company to a broader pool of premium payers. The ICHRA rules don’t prohibit this practice, but they address it by limiting the number of ways that companies can slice their employee population to their financial advantage.
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.
