The landscape of group health insurance for small businesses is undergoing significant change, and not in a way that benefits employers. Health benefits are increasingly difficult for small businesses to manage, with rising costs and fewer options for coverage. As group health insurance plans face serious challenges, a new alternative is emerging that could save the day: the Individual Coverage Health Reimbursement Arrangement (ICHRA). Let’s explore what’s happening in the group health insurance world and how this new option can help.
Big Change: The Shift in How Businesses Get Health Benefits
In recent years, the small group health insurance market has seen a dramatic transformation. While most Americans receive their health insurance through their employer, the way businesses offer these benefits is changing fast. Over the last three years, the percentage of small businesses (those with 3-49 employees) using level-funded health plans has surged from 10% to 36%.
But what does this shift mean for the small group market?
Fully Insured Group Health Plans
These plans are the traditional choice for small businesses. The employer selects a health plan for all employees based on their location and age, and employees all pay the same premium rates.
Level Funded Group Health Plans
These plans are newer and are becoming more popular. They involve an underwriting process where premiums are based on the health profile of the company and its employees. In short, businesses with healthier employees receive lower premiums, but this comes at the cost of extra paperwork and health screenings. However, businesses with a less healthy workforce may face much higher premiums.
The Problem with Level-Funded Plans
While level-funded plans are increasingly common, they aren’t a perfect solution. For one, they only work well for businesses with a healthy workforce. Smaller companies (those with fewer than 5 employees) often don’t have enough people to make reliable health risk predictions, meaning they can’t access these plans.
For businesses that can’t qualify for level-funded plans or are considered “high risk” due to health factors, the only option left is a fully insured group health plan, which is often prohibitively expensive. This presents a major issue, as rising premiums are pushing more small businesses out of the group health insurance market entirely.
Why This Is a Growing Problem
The shift towards level-funded plans is creating a two-tier system: businesses with healthy employees can access lower premiums, while others are left paying much higher rates. This is creating a spiral where healthy businesses dominate, and those with less healthy employees are being left behind.
As level-funded plans continue to absorb the “good risk” (healthy employees), fully insured group plans will be left with a more expensive pool of participants. This will drive up the cost of fully insured plans even further, leaving more small businesses with no choice but to drop their health insurance offerings altogether.
The Solution: ICHRA
This is where the Individual Coverage Health Reimbursement Arrangement (ICHRA) comes in. ICHRA allows small businesses to reimburse employees for health insurance premiums on a tax-free basis. Unlike traditional group health plans, ICHRAs give employees the freedom to choose their own insurance plan from the marketplace, ensuring they get the coverage that best suits their needs.
For small businesses, ICHRA offers several benefits:
- Cost Control: Employers can set a fixed budget for health insurance reimbursements, making it easier to predict expenses.
- Employee Choice: Employees can choose the insurance plan that works best for them, giving them more flexibility and personalization.
- Less Complexity: ICHRAs are simpler to administer than group health insurance plans, with fewer restrictions and less paperwork.
By shifting the responsibility of choosing and managing health insurance to the employees while still providing financial support, ICHRAs help businesses avoid the rising costs of traditional health plans. This new model could be the solution that small businesses have been looking for.
Conclusion
The traditional group health insurance market is on a decline, leaving many small businesses scrambling to find affordable solutions. As more businesses adopt level-funded plans, those with less healthy employees are left paying higher premiums or being priced out of the market entirely. However, the introduction of ICHRA provides a promising alternative that allows businesses to control their health benefits budget while giving employees more choice and flexibility. As the landscape of health insurance continues to evolve, ICHRA offers a path forward for small businesses looking for a more affordable and effective way to provide healthcare coverage.
