ICHRA: The inflation antidote to help your clients navigate a higher-priced, uncertain world

With rising gas prices, hikes from the Federal Reserve, a generally slowing economy, and an increasingly higher-priced world, your clients are probably facing inflation and uncertainty from multiple fronts, not just health benefits. Today, as inflation hits a 40-year high, your clients are looking for ways to mitigate the damage, whether it’s streamlining and automating, minimizing overhead costs, analyzing profit margins or raising prices. Your role advising clients on their health insurance is a timely opportunity for you to help them contain inflation and minimize volatility when it comes to benefits spend. Remember, health insurance is now the second largest monthly expense for businesses, so the impact inflation has on the bottom line is further magnified.

Luckily, the individual coverage HRA (ICHRA) presents an opportunity for employers to take more control over their benefits spend. ICHRA allows them to set aside tax-advantaged dollars to reimburse their employees for individual health insurance plans that are inflation-resistant compared to group plan premiums. ICHRA brings more cost control and less risk for the employer and more purchasing power and choice for employees.

What’s the effect of inflation on premiums and the cost of care? 

Renewals aren’t exempt from the perils of inflation. In fact, group plans have a certain level of employer risk and inflation sensitivity inherent to their design. The cost of care is also rising in today’s economy. According to the Consumer Price Index Summary posted last month, the medical care index rose 0.7% in June alone, with all medical care component indexes increasing over the month. This is as to be expected given the current inflation rate and we don’t expect this trend to change any time soon.

Is your client’s renewal outpacing inflation?

With renewal season upon us, let’s break down what will drive up your clients’ rates for the coming year. Here’s the formula: [Health Risk] + [Rate of Inflation] = Your Client’s Renewal.

Health risk is specific to your client, while inflation is based on your client’s location and what health care will cost there. In contrast, ICHRA puts control in your client’s hands. It removes the health risk factor for your clients. Competitive individual markets will maintain downward pressure on individual premiums, limiting the damage from inflation.

If your client is faced with a 15% renewal for their group plan, for example, are they winning or losing the game? The answer is, it’s all relative — relative to inflation and relative to the increases in individual and group rates in their area. For example, Georgia’s proposed 6.6% renewal rate for group plans is less than the 9.1% inflation rate, meaning clients in Georgia would be beating market inflation. In DC, on the other hand, a proposed renewal rate of 15.4% indicates that your client’s renewal would be outpacing the 9.1% inflation rate or that your client has high risk. In other words, they should shop around for a new plan or switch to an ICHRA where they won’t have to brace for variability in rates. The important takeaway here is that conditions will be different in every state.

Related: Most Medicare recipients concerned about impact of inflation on prescription costs

How do your clients’ renewals look compared to the increases on individual health plan premiums? In the last few years, we’ve seen group premiums continue to rise while individual rates stayed flat. Based on initial filings (note: proposed, not finalized), with only about half of the states posted, the average increase is right around 10%, but there is a high degree of variability here. Remember, this is state-specific and the final numbers won’t shake out for a few more months. The proposed legislation announced recently by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin could also extend the enhanced subsidies set forth by ARPA, which would drive individual health insurance rates down if carriers have sufficient time to respond.

As more states post their rates, we expect the individual rates to continue to decline. These estimates are just a starting point to the conversation. Some states, like Hawaii, Indiana, Minnesota, Rhode Island, and Washington have individual rate increases for 2023 coming in five full percentage points lower than their small group counterparts (so far). In these areas, in addition to the states that have proven to be early ICHRA adopters or have been trending as ICHRA leaders in the past year, it’s especially worth having a conversation about ICHRA with your clients.

How will group rates fare?

Group rates continue to climb, with or without economic volatility; there will always be varying degrees of risk associated with this model of health insurance. Employee contributions and claims are creeping up as well. If your client has a self-funded plan, the rising cost of claims is paid directly by the employer; if they’re fully insured, those rising claim costs will influence future premium increases. With the current economic outlook, these are especially big burdens to bear.

Read more: Accessibility, control, savings — ICHRAs deliver unique benefits to employees, too

According to KFF, the average premium for family coverage has increased 4% in 2021 over the previous year, 22% over the last five years, and 47% over the last 10 years. Segal shared similar findings in their survey; health plan cost trends have increased between 5-7% each year for the past 10 years. While we don’t know what the finalized rates for next year will look like, we can certainly follow the trend line.

The Inflation Antidote

One thing that’s certain is that our economy is perpetually in a state of flux; the best course of action is to implement business strategies that will help your client be agile and resilient. Imagine if you could take your client’s current benefits spend and instead of investing in a group plan, your client simply gave it to employees as a tax-free allowance and they could buy something equal to or better than what your client has provided in the past. Good news! ICHRAs do exactly this; they allow your client to set a budget that works for them and their employees can purchase an individual health insurance plan that works best for their family. Not only are these HRAs tax-advantaged, employers won’t need to worry about how inflation will affect their rates or participation requirements. They’re effectively turning off risk, and what’s more, we see most of our clients save 15% right off the bat by switching to ICHRA from their group plan.

Inflation-resistant by design

In contrast to group plans, the individual health insurance market — whether employees are shopping on Healthcare.gov or on their own state exchanges — is inflation-resistant by design. Not only does the individual health insurance market have increased competition, the networks are designed to control costs, they’re subsidized by the government (instead of your client), and there’s a larger risk pool — 14.5 million instead of the size of your client to balance out that risk. Because of these trends, the individual health insurance market is cheaper than the group market in many areas, meaning that your clients’ dollars will stretch further with an ICHRA.

Preparing for the What Ifs

Given high inflation and low unemployment, history tells us that we could be on the cusp of a recession. It’s hard to predict, but many economists believe that the recession is not a matter of “if” but “when.” With the recent announcement from the National Bureau of Economic Research showing a second quarter of economic decline, it’s certainly on everyone’s mind. Coincidentally, the defined benefit model of health insurance helps business owners navigate recessions as well, and we saw that firsthand in 2020. A couple of years ago, we witnessed HRAs show off their resiliency compared to traditional group plans, allowing our clients to make strategic decisions quickly. With group plans, there just aren’t many levers to pull. A company can either cancel their group plan or not; their employees are either part of the group plan or they are not.

Creating a game plan

The biggest indicator of a company’s ability to navigate economic uncertainty with finesse is having a game plan. Guiding your clients on benefits spend and strategy will contribute to how they’ll fare during inflation and a potential recession, whether it’s failing, merely surviving, or coming out even stronger on the other side.

Read more: Voluntary benefits and gas prices

As you approach your renewal conversations, don’t believe the bold-faced lie that your client has to swallow a double-digit renewal. In the midst of high economic uncertainty and inflation, businesses everywhere are looking to control costs and minimize volatility. Nothing answers those two things better than ICHRA.

Jack Hooper is the CEO and co-founder of Take Command, a Dallas-based SaaS that offers health reimbursement arrangement administration. He currently serves as Chairman of the Board for the HRA Council. He is a graduate of the Wharton School of Business and has been featured in The New York Times, BenefitsPro, Dallas Morning News, Bloomberg, Employee Benefit Adviser, and more. His motto? “Health insurance was never meant to be this complicated.”