Individual coverage health reimbursement arrangements, otherwise known as ICHRA, are enjoying a surge in popularity.
The insurance option became available in 2020, and while the current market is relatively small, the Department of Labor forecasted in 2019 the program would one day grow to more than 11 million employees. By 2032, about two million people could be enrolled in ICHRA, according to Congressional Budget Office projections from 2022.
Increasingly, venture capital firms are looking for a piece of the pie.
"We are always looking for a 'Why now?' factor for a sizable market," said Victoria Zuo, principal at fintech VC firm QED Investors. "There's a very strong tailwind now. We think there's a very strong likelihood that ICHRA becomes a big category despite its infancy."
QED Investors' portfolio has encompassed 225 investments across 19 countries, including 28 unicorns like Credit Karma, Nubank, Flywire and SoFi. It currently has no investments in ICHRA, though it has invested in health companies Decent, Finch and EasyHealth.
ICHRA explained
Under ICHRA, employers set a defined monthly contribution, allowing employees to choose a health plan that fits its needs through the Affordable Care Act (marketplace. It's usually offered as an alternative to traditional group insurance or as a supplemental benefit, said Vanessa Kruze, CEO and founder of Kruze Consulting, in a blog post.
ICHRA is popular among small employers, "primarily because it's the group most battered by affordability in small group plans" said Zuo.
"The ACA in certain states started requiring community ratings for a lot of small group plans," she explained. "That has cost a lot of plans to rise in price because carriers can no longer underwrite based on a risk basis."
Among its advantages, ICHRA ensures continuous coverage that is not tied to employment status, gives individuals more control and increases competition in the insurance marketplace. It reimburses employees for premiums and expenses tax-free, a white paper authored by Larry Cass, a explains. Additionally, there is no maximum limit imposed on employers, and plans can be tailored to fit various job classifications.
A Pew Research Center survey from 2022 found that 43% of people reported not having good benefits or paid time off as a factor in choosing to leave a job.
"For employers, ICHRAs offer notable advantages as well," he said. "The flexibility in defining contribution amounts allows for better budget control and predictability in healthcare spending."
Other early adopters include tech companies that have gone fully remote. ICHRA is flexible enough to manage employees in multiple states with different coverage networks, said Zuo.
Demographically, ICHRA's popularity extends to a younger employee population looking to customize health insurance so it works for them
"This increase of younger, generally healthier individuals into the ACA marketplaces can stabilize premiums and risk pools, making it more enticing for health plans to consider expanding into ICHRA," said Nicole Lieberman, senior vice president of sales for W3LL, an insurance solutions company for brokers, employers and employees, in a recent post.
That's not to say ICHRA isn't without its limitations. Members with ICHRA plans may notice a limited network and confusion on what insurance choices are best for the individual. Employers can struggle with settling on a contribution amount that works for the majority of its workers, and administrative complexity is coupled with broker resistance to the plans.
Brokers often don't understand the new space and worry the plans are coming for their commissions. In turn, they are less likely to recommend ICHRA to clients. QED Investors advocates for a market education for brokers alongside employers to help both groups succeed together.
The VC mindset
After evaluating the health benefits space, Zuo said there is a mental checklist she's running through when learning about various ICHRA startups.
First, she's seeking (as are employers) startups that make direct enrollment easy for employees, allowing members to take the guessing out of benefits selection.
"An example would be taking your bioinformation and key medications you need and then automatically recommend the top three to five plans that the software thinks would be a good fit for the specific employee, instead of just asking them to go on healthcare.gov and figure it out," she explained.
The firm is also looking for startups that do the boring work for employers—completing the administrative backend work, handling contributions through direct payroll deductions and creating systems that deal with eligibility verification, claims reimbursement and compliance requirements.
The space is crowded. In January, Oscar Health CEO Mark Bertolini said the company will use ICHRA as a hedge for employers trying to control the rising inflation, but declined to give plan projections, Fierce Healthcare reported.
Centene CEO Sarah London believes the ACA is here to stay, leaving room for individual products. The company, targeting small employers and gig workers, announced a partnership with health benefits platform Take Command to deploy ICHRA plans to Indiana employers.
Other players are jumping into the game, too. Companies like Venteur Health, Thatch, benefitsbay and StretchDollar are all jostling for market share and backed by multi-million dollar funding rounds. VC firms behind those organizations include a16z, GV, GSR Ventures, Right Side Capital and LiveOak Venture Partners.
Single-payer system
Even in the infancy of this market, some are foreseeing how ICHRA, if it succeeds, could lead to systemic change down the line. They say the shift toward insurance competition and growing individualized coverage has the potential to change insurance in the country.
"I think we're building a data foundation and an employee acceptability foundation toward a potential single-payer system," said Zuo.
"The ICHRA model could serve as the backbone of an unofficial universal health care system, characterized by flexibility, choice and inclusivity," Cass added. "By empowering individuals with the ability to choose their coverage and leveraging employer contributions, we can create a more resilient, responsive and equitable health care system for all Americans."
Of course, it's unlikely a single-payer system will catch hold in the U.S. anytime soon, particularly as even bipartisan agreement like pharmacy benefit manager reform and price transparency has stalled in the halls of a divided Congress.
For now, ICHRA represents market possibilities for employers and investors.
"A lot of the companies in this current generation of ICHRA vendors haven't started going to market until early 2023, so it's a very opportune time for startups right now," said Zuo. "The market, environment and economy has shown some signs of coming back alive. I think a lot of vectors are converging for ICHRA startups in 2024."