Dave Lantz is no stranger to emergency room or doctor bills. He has three children in their 20s, "when someone gets sick or breaks an arm, all of a sudden there are thousand-dollar medical bills," Lantz says.
The family's health plan, which he received while working as assistant director of physical education at Lycoming College, a small liberal arts school in central Pennsylvania, began covering them only after they paid $5,600 worth of medical bills. The Lantzes were on the hook for that annual threshold.
A high-deductible plan wasn't ideal for a family of five, but it was the only insurance option available to them.
Now things are very different. In mid-2022, the college dropped the group health care plan and replaced it with a new type of plan, the individual health care reimbursement agreement, or ICHRA.
Lantz now receives a set amount each month from his employer, which he uses to purchase a family plan in the individual insurance market. He chose a plan with a zero deductible and a richer level of coverage than the group plan. Although his monthly premium of $790 is higher than the $411 he was paying before, he ends up saving money by not having to pay a high deductible. In addition, he can now control his health care costs.
"It's nice to have a choice between a high deductible and a higher premium," Lantz says. In the past, "it was hard to budget for that deductible."
As health insurance costs continue to rise, employers are taking a closer look at this type of health reimbursement plan to control their health care costs while providing benefits that employees value. Some consumer advocates are concerned that these plans could lead to cheaper coverage for some consumers, especially the elderly and sick.
Lycoming College
Critics point out the shortcomings
These plans allow employers to make tax-preferred contributions to employees that they can use to purchase insurance in the individual market. In this way, employers limit their financial exposure to rising health care costs. Everyone wins, say supporters of the plans, which were created in 2019 as part of a group of proposals that the Trump administration says will increase health insurance choice and competition.
"It's a way to offer coverage to a more diverse group of employees than ever before and to set a budget that controls costs for companies," says Robin Paoli, executive director of the HRA Council, an advocacy group.
Some health insurance experts say these plans are not always a good option for consumers or the individual insurance market. Although regulations prevent employers from offering such coverage to specific employees who may get sick more often and cost more than others, employers with relatively unhealthy employees may find such plans attractive.
That, in turn, could lead to higher premiums in the individual market, according to an analysis by the Schaeffer Initiative on Health Policy at the University of Southern California and Brookings.
Plans sold in the individual market often have narrower provider networks and higher deductibles than employer-sponsored insurance. Premiums are often higher than comparable group insurance.
Employees, especially low-wage workers, may be in a better financial position by getting tax deductions for insurance premiums and reduced costs for buying a plan in the Affordable Care Act marketplace, but using a work-based ICHRA benefit will disqualify them from the program.
"From the workers' perspective, the biggest impact is that if your employer offers affordable insurance, you're not eligible for subsidies in the marketplace," said Matthew Fidler, a senior fellow at the Brookings Institution who co-authored an analysis of the rule establishing these plans.
Growing interest in alternatives to group plans
According to the HRA Council, only a small fraction of workers are currently offered such plans: about 500,000 of the 165 million people with employer-sponsored insurance.
But interest in them is growing. According to the board, the number of employers offering ICHRAs and an earlier type of plan called a qualified HRA for small employers will increase 29% from 2023 to 2024. And while small employers have made up the bulk of plan participants so far, the fastest growing cohort is large employers with at least 50 employees.
Individual market insurers such as Oscar Health and Centene see opportunities to expand their footprint with these plans. Some venture capitalists are evaluating them, too.
"The cornerstone of [traditional group] health insurance from 60 years ago is obsolete," says Matt Miller, whose company Headwater Ventures invested in ICHRA administrator Venteur. "The goal is to provide people with insurance by decoupling it from the employment structure and making it portable."
Employers may offer this type of health reimbursement to some types of employees and group plans to others based on characteristics such as geography, full-time or part-time, salary or hourly rate.
Lycoming College was not looking to be on the cutting edge when it changed its insurance coverage. Faced with a 60 percent premium increase after some members' insurance company made high claims, the institution, which serves about 400 faculty and staff and their families, had to consider alternatives, according to Casey Hagan, associate vice president for human resources and compliance.
They eventually decided to offer ICHRA insurance to any employee who worked at least 30 hours a week.
In the first year of using the new benefit, the college saved $1.4 million in health care costs compared to what they would have spent if they had stayed in the group plan. Employees saved an average of $1,200 each on insurance premiums.
"Finance people really like it," Hagan says.
Potential destroyer?
As for employees, "from a cost perspective, people are generally happy, and they really like having a choice of plans," she said. However, there have been problems with plan administration. Some employees were denied coverage and had to be reinstated, she said. Those problems were largely resolved after a change in plan administrator this year.
Managing such a coverage arrangement can be complicated. Instead of the company paying premiums for one group health plan, it may have to pay for dozens of individual health insurers. And employees who have never bought health insurance before need help figuring out which coverage is right for them and signing up.
Complexity can be discouraging. According to Tim Hebert, managing partner at Sage Benefit Advisors, based in Fort Collins, Colorado, a number of companies that tried this type of health reimbursement this year decided it was better to return to a group plan.
"They say, 'Employees are scattered across different plans, and they don't feel taken care of,'" Hebert says.
Providers that help employers like Lycoming College and their employees manage their plans continue to emerge.
"If you just say, 'Here's $1,000,' it's going to cause extreme confusion and bewilderment," says Jack Hooper, CEO of Take Command Health, which now administers the Lycoming ICHRA program.
It remains to be seen whether these plans will catch on or remain a niche product.
"It's a big disruptor, just like 401(k)s," says Mark Mixer, chairman of the board of the HRA Council and CEO of HealthOne Alliance in Dalton, Georgia. Still, it's not for everyone. "It's just another tool employers should consider. When it fits, use it."