A new approach to health insurance could unlock benefits for millions of American workers

This Labor Day, one of the best things an employer can do for their workers may be something they allow employees to do for themselves: buy their own health insurance.

In an “everything old is new again” twist, the next health insurance trend could be one that’s been around for decades. “Defined contribution” plans allow employees to purchase their own health insurance with funds provided by their employer rather than enrolling in a “defined benefit” plan, health insurance plans with fixed benefits that the employer has chosen.

Ten years ago, experts predicted that rising healthcare costs and new health insurance market options would finally usher in the era of defined contribution healthcare. Others have argued that the time for defined contributions in health insurance has arrived. This was not the case.

Despite obvious advantages, such as the ability for employees to obtain a plan that meets their specific needs and for employers to limit their financial exposure to the ever-increasing costs of health insurance, defined benefit plans do not have not been widely adopted.

eHealth (NASDAQ: EHTH), a private online health insurance marketplace, hopes to change that this time around. The company announced last week that it now offers Individual Health Coverage Reimbursement Arrangement (ICHRA) products in addition to traditional health insurance plans.

ICHRA is a relatively new form of defined contribution plan that allows companies to set a fixed financial contribution that employees must use to pay for health insurance expenses. Employees select and purchase their own eligible health insurance plan and the employer (or its third party administrator) reimburses the employee for the approved amount. These funds are tax exempt for qualifying expenses, such as monthly insurance premiums and co-payments.

Businesses of any size can offer ICHRA, but it can be especially attractive for small businesses that want to offer health benefits but can’t afford it. Especially in a tight labor market amid the Great Resignation, ICHRA can help employers compete for workers in a financially manageable and predictable way.

There is no maximum employer contribution under ICHRA, and all employees can participate in an ICHRA plan, including part-time workers who may not be eligible for traditional health benefits in most businesses. Staff who have not satisfied a waiting period for benefit eligibility may also participate in an ICHRA plan.

For employees, ICHRA represents a new way to get help paying for health insurance, making health coverage more accessible and easing financial stress and anxiety about health care costs. Additionally, ICHRA allows for employee mobility, as the employee can keep the plan if they leave the employer, rather than being tied to a specific company for health benefits (a phenomenon known as job lockout).

According to Anthony Lopez, general manager of individual, family and small business plans at eHealth, full-time and part-time employees who would otherwise not get any help paying for health insurance would benefit the most from ICHRA. But, he says, there are also broader benefits that any employee can appreciate.

“If you’ve ever had traditional employer-sponsored health insurance, you might remember being given one or two or maybe three plan options to choose from. It can be restrictive because everyone’s coverage needs are different,” Lopez said. “The ICHRA generally allows you to choose from a wider range of options and find the one that best suits your needs and budget, while benefiting from the help of your employer to reduce your monthly premiums.”

The specific federal rule governing ICHRAs went into effect in August 2019, for health plan years beginning on or after January 1, 2020. But according to Lopez, ICHRA is just getting started.

“It took some time for the coordination between the financial and insurance parts of the program to develop,” he said.

According to government estimates from June 2019 (when the final ICHRA rule was published), as many as 800,000 employers could eventually offer these options, benefiting as many as 11 million workers and their families. The government has also estimated that 800,000 previously uninsured people could gain access to health insurance.

While it’s too early to tell how accurate those projections will turn out, Lopez sees significant growth potential ahead.

“Besides the lack of familiarity with ICHRA, there really aren’t any barriers to more widespread adoption,” Lopez said.