Summary
For decades, health policy analysts and employers alike have explored the idea of shifting from a traditional health benefits arrangement to a defined contribution (DC) approach — giving employees a fixed amount of money with which to purchase health coverage themselves. While this idea gained traction conceptually, its practical application remained limited due to regulatory, market, and administrative hurdles. However, the emergence of individual coverage health reimbursement arrangements (ICHRAs) may finally offer a scalable vehicle for that long-anticipated shift.
This Issue Brief explores the history, policy development, and current landscape of HRAs and ICHRAs, and evaluates their potential to reshape employment-based health benefits. Originally introduced in 2002 as a tax-advantaged way for employers to reimburse employees for out-of-pocket medical expenses, HRAs evolved significantly following the Patient Protection and Affordable Care Act of 2010 (ACA) and a 2019 federal rule that permitted stand-alone ICHRAs for workers to purchase ACA-compliant individual coverage.
Key takeaways include:
- Slow but Steady Uptake, Mostly Expanding Among Non-Offering Employers: Despite predictions that ICHRAs would rapidly gain ground, adoption has been far more modest. Interestingly, most employers offering an ICHRA had not previously provided health benefits. This suggests that ICHRAs are playing a role in expanding access to health coverage, particularly among small businesses, rather than displacing traditional group plans among larger firms.
- Barriers to Broader Adoption: Larger employers remain cautious. Concerns include administrative complexity, especially with ACA affordability requirements varying by geographic region; reluctance to relinquish control over plan design; and uncertainty about the individual market’s long-term stability. Behavioral economic concerns about overwhelming employees with choice further complicate the appeal.
- Potential for Systemic Change: ICHRAs offer a model analogous to the retirement system’s transition from defined benefit to DC plans. They could provide more predictable benefit costs for employers and potentially more choice of health plan for workers. But systemic transformation will likely require more than regulatory permission — it will depend on shifts in market dynamics, labor market pressures, and willingness of employers to be early adopters.
- What to Watch: A future recession could be a pivotal moment. For the first time, employers would face an economic downturn with the ACA’s guaranteed issue protections and federal subsidies in place. That combination could encourage some employers to finally abandon group health coverage in favor of DC models like ICHRAs.
While ICHRAs have not (yet) revolutionized the employment-based health system, they represent a potentially transformative tool — especially if the individual market matures and employers become more comfortable navigating affordability and compliance requirements. Whether ICHRAs will become the dominant model for employment-based health coverage remains to be seen, but they have clearly re-opened the conversation about defined contribution health benefits in a serious way.