New HRA rules finalized: Thoughts on Individual Coverage HRA

The new HRAs could potentially re-shape the employer-sponsored healthcare market with a more modern financial model. But will they catch on? Here's what we know (and think) so far.

Today the U.S. Departments of Health and Human Services, Labor, and the Treasury announced finalized rules to expand the use and functionality of Health Reimbursement Arrangements (HRA). We’re digesting the full 400+ page document (you can read for yourself here) and wanted to provide our quick thoughts. There’s also a smaller FAQ document provided.

Note: We'll be updating this blog and our more comprehensive ICHRA Guide as we learn more.

In summary, this is a huge win for small businesses and large employers that don’t want to be caught up in the health insurance game.

Small employers will have a flexible way to “pitch in” to help employees with healthcare costs and large employers will be able to provide benefits without having to manage their employees’ risk. It’s going to take a little while for the market to realize the full potential of these new HRAs, but we believe they are game-changers. We’ll explain more as we go.

Before we get started though, it’s important to point out that HRAs have been largely bipartisan. On a topic like healthcare that can inspire fiery debate and get kicked around like a political football, it’s nice to see movement towards solutions that make sense for employers, employees, and the market. These new HRAs started with QSEHRA under the Obama Administration, and have now been expanded under the Trump Administration. It’s nice when everyone plays nice and does something sensible for small business.

So, what’s happening?

Two new HRAs are being “created” through regulatory action:

1. Individual Coverage HRA (ICHRA)
2. Excepted Benefit HRA (EBHRA)

ICHRA allows employers to reimburse employees for individual health plans and medical expenses. In function, ICHRA works just like a QSEHRA (see our video overview of QSHERA) but significantly loosens the restrictions that limited QSEHRA to a niche market. EBHRA works with a traditional group health plan but allows employers more flexibility in what they can reimburse. 

Here’s a summary chart to compare the HRAs:

Big picture: Why does the Individual Coverage HRA matter?

We’re going to be diving into the nitty-gritty below and over the coming weeks, but first I want to share why we think this matters. Beyond some fancy new healthcare acronyms, what does this mean? Three big reasons come to mind:

1. This represents a step towards a fundamentally new and more modern model of health insurance 
2. Employers can stop worrying about managing employee healthcare risk and spend and get back to running their businesses
3. It has the opportunity to reach 50 million more Americans

Our current model for health insurance is called a "defined benefit". It's old and antiquated. This means employers and insurance companies offer a fixed amount of benefit (as defined in their insurance contracts) to their employees. This isn't a bad thing on it's own, but in our modern day it has obscured true costs from healthcare consumers. We believe this has contributed to out-of-control-costs and an overall confusing healthcare industry.

HRAs represent a new model called "defined contribution". In this model, employers are able to offer employees a dollar amount instead of a benefit. Employees can then purchase what they want and need using those dollars. There may be some growing pains for sure, but this is truly a better model and introduces the proper amount of consumerism our system desperately needs. 

A great analogy is the financial and retirement industry changing from Pension Plans (a "defined benefit") to the 401k style of benefits (a "defined contribution").

It had some growing pains as consumers had to learn more about financial products, but everyone is better off. We'd like to see healthcare make this transition and these new HRAs are a positive step.

Next, the new ICHRA will allow many employers to get out of having to manage their employees' health risk. For any employer that goes through the underwriting process (typically over 50 employees), their healthcare costs are tied to their employees' healthcare spend. This has prompted a wave of innovations and products that employers can provide to their employees to coach them through the healthcare system. While this is all fine and good, some employers would rather get out of the insurance game and just get back to running their business. ICHRA allows these businesses to "take the exit ramp" and offer employees money instead of benefits. This doesn't mean these employers are going to offer lousy benefits (on the contrary, it could be a very rich benefit), it just means they view health benefits as part of compensation and can get back to their core business.

Key question for employers: Do you want to be in the risk management game? ICHRA provides a long-awaited exit ramp.

Finally, ICHRA will bring the options listed above to more Americans than QSEHRA did. QSEHRA was hamstrung from the get-go with some wonky limits and regulations. This made it great for small, professional employers, but not an option for many others. We estimate ICHRA has the potential to impact 50M more Americans than QSEHRA did (higher than the HHS predictions).

What changed from the proposed rules?

OK, let's dive in a bit. We previewed these HRAs when the rules were proposed (see our thoughts when ICHRA and EBHRA were proposed) and discussed what changes we’d hope to see between the proposed and finalized rules.

In general, the finalized rules largely follow the proposed rules with a few significant changes. There were also several things confirmed that were a bit up-in-the-air or open for discussion. Here are the major pieces either confirmed or modified from the proposed rules:

• ICHRA and EBHRA are available as of Jan 1^st, 2020
• New ICHRA classes are available. This is an added layer of flexibility. Now employers can scale benefit contributions differently based on hourly vs. salaried or even temporary employees from staffing agencies. 
• Employees that are newly eligible for a QSEHRA or ICHRA will be eligible for a Special Enrollment Period (SEP) and able to enroll in an individual plan on the marketplace: This is a great fix to the previous QSEHRA rules which required employees to wait until the next Open Enrollment Period (OEP).
• Employers can utilize multiple plan types, but can only offer one plan to each employee class: For example, an employer could offer a traditional group plan to full-time employees and an ICHRA or QSEHRA to part-time employees but they can’t offer both to a single class.
• There will be a minimum class size for some categories: We understand the regulators' desire to limit adverse selection, but wish these had remained a little more flexible. In general, employers with fewer than 100 employees must have at least 10 employees in a "class". For employers between 100-200, classes must make up at least 10% of the total number of employees. Employers with over 200 employees must have at least 20 employees in a given class. There are some exceptions we'll explore further.
• “Traditional Group Plan” has been redefined to not include plans made up solely of “excepted benefits”: This is great and fixes an issue with QSEHRA where employers offering a group dental or vision plan were disqualified from QSEHRA. With this fix, employers can offer ICHRA and a group dental plan without issue.
• Healthcare Sharing Ministries (HCSM) will not be eligible for ICHRA: This is a bummer. Again, we understand the adverse selection concerns of the regulators, but healthcare sharing members are already operating outside of the risk pool.
• QSEHRA and ICHRA will not be subject to ERISA as long as certain safe harbors are met: This is important to keep these plans simple and free of more burdensome regulations.

So, what’s next?

It’s going to take some time for the market to digest these changes although we expect to see some early movement and adopters too. At Take Command Health, we'll be diving in immediately to help our clients determine if sticking with QSEHRA or shifting to ICHRA or EBHRA would be advantageous. We'll need a little time to build models and tools, but we plan to remain a leader in this space--we believe in this model of healthcare.

In addition, we'll be eagerly awaiting a few additional pieces of information:

1. Treasury and IRS to provide finalized rules regarding premium tax credit (PTC) eligibility for individuals offered an ICHRA (expected this Fall).
2. The Department of Labor is finalizing a clarification to provide assurance that ICHRA and QSEHRA are not subject to ERISA provided certain safe harbor conditions are satisfied.
3. Department of Health and Human Services (HHS) is finalizing provisions to provide a special enrollment period (SEP) for employees who are newly provided a QSEHRA or ICHRA

Stay tuned for additional updates or feel free to reach out to our team with questions!