New form of employer health insurance growing slower than planned

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Colin Martin, the owner of small furniture company Gavco Industries, was facing a 40% rate increase to continue providing a health plan this year to his 16 employees. Rates had already gone up 8% to 15% annually in the few years before, and the cost of offering insurance was becoming harder to stomach. Shouldering this latest double-digit hike wasn’t feasible for the Kent, Wash.-based company.

Martin felt “morally obligated” to provide health coverage and he wanted to make sure he could attract and keep good workers, he said. As a small employer, he isn’t required to provide coverage.

When his insurance broker told him about a new way to offer benefits, allowed by the Trump administration for the first time beginning in January, he took the opportunity.

Under the new arrangement, Martin ditched the company’s partially self-funded group plan and sent his employees to buy their own coverage on the individual market. He reimburses them a set amount tax-free for premiums and medical services. His employees now have more health plans to choose from—something they’d been asking for, he said. And while Martin isn’t sure if he’ll save money on benefits in 2020, he’s relieved to have more control over any future sticker shock.

“I can lock in what my expense is so I know what it’s going to be, and I can choose next year to up it or not. I’m no longer beholden to the insurance industry as to how they’re going to change rates,” Martin explained.

Martin is one of the first employers to take advantage of this alternative to traditional employer health insurance.

The Trump administration and other proponents of the so-called individual coverage health reimbursement arrangement believe it will revolutionize American health insurance by putting employees in the driver’s seat when it comes to their coverage and care. They bet it will further shore up the shrinking individual market and help small companies afford to offer health benefits.

Despite broad support, conversations with third-party administrators, brokers and insurers revealed that while many employers are interested in the HRA, they have so far been slow to make moves. But these sources anticipate that enrollment will pick up as employers become aware of the option and more vendors surface to help them design and administer the HRAs.

The individual coverage health reimbursement arrangement was created by a federal rule that was finalized in June 2019 and took effect Jan. 1. The rule also created what’s called an “excepted benefit HRA,” which employers can use to reimburse premiums for short-term plans.

Under the rule, employers can pay as much as they want toward workers’ individual plans on a pretax basis. Employees must enroll in an Affordable Care Act-compliant individual plan or Medicare to receive the funds. Previously, only companies with fewer than 50 workers could fund their employees’ individual coverage, and the amount they could reimburse was capped.

Little more than half of firms with fewer than 200 workers provide health benefits, but almost all larger firms do, according to the Kaiser Family Foundation.

“Without an HRA, employees with a traditional employer-sponsored plan have to accept their employers’ choice, which—of course—is no choice at all,” CMS Administrator Seema Verma told an audience at the Center for Consumer Information and Insurance Oversight’s Industry Day on Jan. 29. “While that may be a good plan, an HRA allows them to shop for one that best meets their needs and that of their families.”

Some worry that shifting enrollment to individual coverage HRAs could hurt the individual market rather than help it. That will depend on the characteristics of the people who enroll. The federal government projected that 800,000 employers would offer the individual coverage HRA to more than 11 million workers in the next five years, with 1.1 million of those workers enrolling this year alone.

Health insurers and hospitals also generally supported the rule expanding HRAs, and some health insurance companies are working with third-party administrators to drive enrollment so they can capture new individual market customers.

Though there was no tidal wave of employers who rushed to offer the individual coverage HRA on Jan. 1, at least a couple of hundred employers did make the change. Take Command Health, an HRA administrator that operates a private exchange, said it has so far helped 200 employers implement the new option.

Most of those employers, which span 36 states and Washington, D.C., have less than 10 workers, the company said. But a third of the employers had between 30 and 200 workers, a company size that, if self-funded, can be rocked by rate increases if just one or two employees rack up big medical bills.

“Those were the ones desperate for the ICHRA,” Take Command CEO Jack Hooper said. “The biggest opportunity—and what we saw among half of the groups wanting the ICHRA—was jettisoning the risk of the group plan.”

Victoria Hodgkins, CEO of PeopleKeep, another HRA administrator, said “a good number” of small and midsize employers signed up, but declined to say how many. The appetite for the individual coverage HRAs was strong among companies from different geographies and industries, and particularly among those with employees in multiple states, she said.

Large employers are also eying the new HRA. An informal survey by the American Benefits Council, whose members include Fortune 500 companies, showed that about half of the 71 companies that responded had not ruled out implementing the new HRA, and some of those were considering implementing one soon, said Katy Johnson, senior counsel of health policy.

Some of those employers were looking at offering the HRA to seasonal and part-time workers who don’t normally receive health benefits, but none that she knew of had actually implemented it. Under the rule, employers must offer the same amount to all employees within a “class,” with full-time, part-time or temporary employees each in their own class, for example. It cannot offer employees within a class a choice between a group plan or an individual coverage HRA.

Den Bishop, president of insurance brokerage Holmes Murphy & Associates, said he had one new employer customer choose to implement the individual coverage HRA this year, but none of his existing clients chose to do so.

Meanwhile, Doug Moore, a Pittsburgh-based insurance broker at Seubert & Associates, said just two of his clients made the switch. Both had more than 50 employees and their group health plan rates were based on their workers’ claims experience. High medical claims among the workers sent the companies’ rates higher, so the employers chose the HRA to gain more certainty over costs, Moore said.

Administrators and brokers said employers are so far slow to start funding their workers’ individual insurance coverage because few are aware it’s an option. The regulations came out too late in 2019 for brokers to educate many employers about the individual coverage HRA.

Likewise, most employers did not have time to consider the option and design a plan. Sources said employers may be reluctant to get rid of their group health plans for fear of upsetting their workers at a time when the economy is strong, the labor market is tight, and the war for talented employees is fierce.

Moore also said there were few third-party administrators that understood the individual coverage HRA and were prepared to help employers implement them at the start of the year. He predicted enrollment in the HRA would grow as more administrators and technology vendors enter the space and more insurers introduce individual market health plans, particularly in areas with few choices.

Next year “will be a much better bellwether for how popular these programs will be,” Moore said.

Some health insurers are hoping to speed things up by educating brokers and employers about the new financing option. Denver-based Friday Health Plans, for instance, is partnering with Take Command Health to do just that.

“It just seems like a great way for an employer to accomplish their goal of fixed healthcare cost,” said Friday Health Plans CEO Sal Gentile.

Of course, insurers also want to position themselves to catch as many new individual market members as possible. Take Command receives a commission for every customer that chooses Friday Health, Gentile said.

“If today, nationally, the individual market is 20 million and it grows to 30 million, then that’s just good for our business,” he said.

New York-based Oscar Health is also working with Take Command to promote the individual coverage HRA in certain regions and is tweaking some of its health plans to better appeal to new HRA enrollees by offering lower or no deductibles, said Kyle Estep, Oscar’s market director for its central region.

Moreover, Estep said Oscar is working to make it easier for individuals to enroll in off-exchange plans through private exchanges. New HRA enrollees are likely to opt for off-exchange plans because they tend to be cheaper than on-exchange plans—10% cheaper in Oscar’s case. Workers enrolled in individual coverage HRAs are also ineligible for a premium tax credit, so they don’t need to visit HealthCare.gov.

“One of the things we hear from employers is they’re kind of worried about just throwing employees into the individual market,” Estep said. “That means that we on the carrier side, and at Oscar, need to work closely with the private exchanges to make sure the operational aspects are all going smooth.”

While champions of HRAs tout employee choice as a major selling point, whether an employee is truly better off under an HRA than a group health plan will depend on the individual’s circumstances. It’s also unclear if enrollment in an HRA would hurt the individual market or help it, as the Trump administration hopes it will.

Christian Khan, an employee at furniture company Gavco who signed up for his company’s individual coverage HRA, said he now pays $70 in monthly premiums for his individual silver plan because Gavco is picking up most of the tab; he paid $171 previously. His new copays are lower while his deductible is similar to what it was under the company’s self-funded plan.

But Khan now must switch doctors and is wary about the quality of primary-care physicians in his new narrow network. He had little time to pick a plan in December and chose a silver plan from Centene Corp.’s Ambetter without much research. He later saw that the first 25 or so local doctors in his directory had poor reviews. Centene did not respond to a request for comment.

“Some of what we would call ‘really good insurance,’ the providers that have very large networks … it seemed like those providers were only available for companies (that offer insurance). For individual users, it seemed like that was limited. Blue Cross wasn’t even an option. Aetna wasn’t an option,” Khan said.

Most Americans—more than 155 million—have job-based insurance. That coverage is often richer than what they might find on the individual insurance market. Employer plans generally have broad provider networks. Only 7% of employers described their networks as “somewhat narrow” in a Kaiser Family Foundation 2019 survey. In contrast, nearly three-quarters of ACA exchange plans had narrow networks last year, according to consulting firm Avalere Health.

Deductibles also tend to be higher on the exchange, so patients must pay more out-of-pocket before coverage kicks in. Some U.S. counties have only one or two exchange insurers to choose from. Little data is available about the individual plans sold off the exchange.

Katherine Hempstead, senior policy adviser at the Robert Wood Johnson Foundation, said workers who transition to an individual plan from the small-group market would likely pay more in premiums and cost-sharing, particularly for prescription drugs. Though her analysis focused on the small-group market, she said the same may be true for workers coming from larger, self-insured employer plans.

Some experts also warn that by offering an HRA that is considered “affordable” according to the regulation—the lowest-cost ACA silver plan must cost no more than about 10% of the worker’s household income—employers bar otherwise eligible low-income employees from receiving a federal premium tax credit. Only when the employer’s contribution is considered unaffordable can an eligible worker opt out of the individual coverage HRA and receive an ACA subsidy.

Critics also worry that companies with workers who have high healthcare costs are most likely to opt for the HRA, which could raise premiums for the rest of the people in the individual market. They fear that some employers could dump their sickest workers, despite protections in the rule designed to prevent that.

Martin, the owner of Gavco, acknowledged that the individual coverage HRA isn’t a perfect solution. He said some of his employees had a hard time navigating the ACA marketplace, especially those who don’t speak English as a first language. A few ended up not enrolling in a plan, even though he encouraged them. He also worried that some employees may have a hard time shouldering the cost of a large medical bill upfront before they are able to submit it for reimbursement under the HRA.

But had rates under Gavco’s self-funded plan continued to rise without the HRA as an option, the alternative may have been nothing at all: “If prices continued to go up, then the alternative is am I going to keep offering this benefit? How do I continue this?” Martin said. “This is the kind of the plan B where you don’t have to get rid of healthcare. Does this mean I put more burden on employees? Yes, but we’ll evaluate it every year.”

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