Do you remember making a “mixed tape?” You know, this was when you bought an album and then copied over only the hit songs you wanted (for your sweetheart or for you)? If I went through my old things and pulled out a cassette tape, it would draw laughs and quizzical looks from my kids. They would say something like, “You listened to songs with that?”

A more contemporary illustration of this playing out would draw our attention to the cable industry. There is a trend of households abandoning traditional pay TV subscriptions in place of over-the-top (OTT) services such as Netflix, Hulu, HBO Go, and the newly launched Disney+. A recent study by eMarketer published in Aug 2019(1) shows the continued decline in pay TV subscriptions. They have also projected that by 2023 the number of OTT households will be almost the same as pay TV.

There is an interesting insight the lurks below the surface—it is that there hasn’t been a pronounced shift from bundled services to unbundled ones. Consumers have simply traded out the old taxonomy of traditional TV cable packages with the purchase of multiple streaming services. According to a study by streaming media, 46% of all households now have multiple streaming subscriptions(2). Companies like Facebook and Amazon are great at bundling, they just didn’t adopt the traditional taxonomy of the advertising and retail industries they disrupted. At the end of the day, they know that consumers purchase based on the perceived value of what they are buying (and they focus on this relentlessly).

Healthcare consumers are increasingly being shaped by their personal experiences with companies such as Amazon. Almost 50% of consumers will tell you that they would like healthcare to feel like the Amazon experience(3). This is why m4 innovation spends countless hours counseling executives to stop looking for disruption. Instead, they should be looking for new growth areas through consumer-oriented practices that they identify before others do. Market change comes through realized growth that meets evolving preferences—not some disruptive silver bullet.

It’s impossible to start a conversation in healthcare without raising the issue of cost. Affordability of care has reached a fever pitch, and it is at the top of nearly every American’s mind. Heading into the 2020 election cycle, 80% of Americans say healthcare is very or extremely important for their vote according to a recent Gallup survey(4). Rasmussen goes on to say that 54% cite cost as the key issue(5) over coverage or access. The latest 2018 government survey published by the census bureau also shows that ~92% of Americans had health insurance coverage(6), but only 20% are satisfied with the cost(7).

Cost is being labeled as the culprit, and the evidence frequently points to the increasing burden people have with paying their premiums, deductibles, and out of pocket healthcare expenses. The president of the Kaiser Family Foundation, Drew Altman, said, “When you have 90% of the American people covered and they are drowning in their health care bills, what they want to hear from politicians are plans that will address their health care costs, more than plans that will cover the remaining 10%.”(8)

What is startling is the growing number of people who have access to coverage but have opted out from purchasing. m4 innovation calls them “underinsured.” A recent report by the Commonwealth Fund reported that 44 million Americans were underinsured in 2018—an increase of 52% from 2010. The big surprise is this growth is driven by working adults who have access to health insurance through their employer. This number has grown from 17% in 2010 to 28% in 2018. It was the only category in the report to see an increasing underinsured rate from 2016-2018(9).

The issues are also evident in the individual market. 10% of that market that can’t access subsidies dropped coverage in 2019(10). This is even more pronounced in states that did not expand Medicaid under the ACA for households in the 43-100% FPL range, which is a big contributor to the 5% decline of the overall individual market.

The primary message is this: consumers are struggling more and more to see the value of risk-based products in healthcare in their current form. For growth-minded thinkers, this creates a set of new opportunities. If consumers feel the current market options are either pricing them out or not effectively targeting their specific preferences, then maybe it’s high time to be building the Disney+-like options for our industry. Maybe it’s not just cable that is dying a slow death in the face of growth pathways happening elsewhere?

We see many parallels in the group benefit insurance market to what was offered through traditional TV. Group-based health insurance solutions are largely dumb, non-specific instruments meant to meet the needs of the masses at the mean. These products are highly similar to the cable bundles being systematically attacked by more targeted, consumer-friendly approaches. Healthcare is local, but health insurance is not. This is a problem. The natural fragmentation that comes with healthcare delivery is also the pathway for more personalization. Trying to fit a local approach into a “scaled” model is what contributes to the growing levels of administrative burden on employers and brokers. It underdelivers on healthcare cost reduction and rate stability. It is no surprise that employees are finding it difficult to rationalize the cost versus value tradeoff. A recent survey has said that 56% of employees do not understand the full value of their healthcare benefits(11). It goes on to say that “87% of employees are more willing to purchase benefits if they have a better understanding of what those benefits are.” m4 innovation will go a bit further: individuals want to clearly know what’s in it for them.

The Individual Coverage Health Reimbursement Account (otherwise referred to as ICHRA) represents a big shift in market thinking to delivering on consumer value. It brings long-desired tax parity between the employer-sponsored insurance and individual markets. It brings the ability to create more local-based plan flexibility and customizations. It might bring forward the launch of a series of on-demand ancillary services that are covered under IRS Publication 502. It allows for employers big and small to begin challenging the value of employer-sponsored solutions through full-replacement and class-based models.

Launched on January 1st, 2020, this new model enables employers to fund an HRA that employees use to purchase insurance on or off exchange. It gives the consumer the opportunity to purchase a product that delivers for precisely what she or he needs.

Are there challenges to this model? Of course. Employers have a difficult time making changes without a lot of certainty. And, the biggest friend to the preservation of the status quo is uncertainty. The legal challenge of the Affordable Care Act’s constitutionality working its way through the courts brings plenty of that. It also matters how insurers respond by either widening or closing the gap with affordable solutions. Smaller employers might show more pent up demand to use ICHRAs if they are convinced a stable, competitive market exists. This market would have to be in the ballpark of competitive (but not necessarily at parity) with how the small group pools are priced today.

Despite the desire to keep the status quo, that is not a growth mindset. The rates of employers offering coverage continue to decline across all group sizes. This is most pronounced amongst small employer sizes. Between 2010-2018, 20% of firms with 3-9 workers dropped coverage. Only 4% of firms with 50-199 employees(12) did so. ICHRA offers a new and better way for business owners to offer their employees coverage. This is especially meaningful for smaller employers that struggle to support the growing administrative burden brought on by group health benefit plans. The federal government has projected that 800k employers will offer an ICHRA option to cover roughly 11m lives(13).

While a sizeable number above, we at m4 innovation believe there is a potentially larger true market potential. For instance, the 11 million lives figure does not take into account the large number of underinsured employees that have access to coverage but don’t opt in. They are part of the ranks of the working uninsured that is growing throughout our communities. Factoring in the employers that “switch” from traditional group to ICHRA across all sizes, in turn enabling employee’s to “opt-in” to purchasing coverage, the potential number of participants swells to 35 million lives. This is a sizable market deserving of its own growth-based solutioning in the coming five years for top healthcare executives to tackle. Independent of the outcome surrounding the Affordable Care Act, the issue of bringing new, targeted solutions to small businesses and the working uninsured is not going to go away.

Employers have the ability to customize their approach to meet specific needs. There are four primary levers to be aware of in this process: reimbursement, employee classes, regulatory compliance, and affordability.

Employers are not limited to how much can be contributed into an ICHRA as a pre-tax benefit. They will have the ability to designate these dollars to reimburse for medical premiums, qualified medical expenses, or both. In addition, contribution approaches can be structured to vary based on other factors such as age & family size.

There are a number of regulatory issues around ICHRAs that we will not deeply address in this paper. These include defining eligible classes, payment reconciliation, attestation statements that consumers are foregoing access to subsidies, and more. This is where a good attorney can help.

If market incentives align around this opportunity, there are opportunities for:
• Small employers to use ICHRAs as a full-replacement option for their current benefits program
• The advancement of cash-based, on-demand ancillary services covered under IRS 502
• Middle market & larger employers leveraging a classing strategy to extend coverages to employees
• Employers to offer more localized options to geographically distinct employees (their virtual workforces)

One major consideration is the difference in plan quality between the small group and individual markets. An example is found in the 2018 Small Business Health Insurance Report. It details that the national average for a small business plan deductible was 31% lower than the average deductible for individuals ($3,140 vs $4,578(14)). We believe this is based on premium levels in the individual market that drive higher deductible decisions. Plus, it continues to shine a light on how consumers shop when it’s their “own money.” Bridging the gaps in solution quality and affordability are major accelerants to the adoption of the ICHRA model.

There are already opportunities to drive the ICHRA approach in 2020-2021. Several states like Alaska, Ohio, Minnesota and New Mexico (to name a few), have 2020 market dynamics in play where small group insurance premiums are higher than those in the individual market(15).

Over time, will more follow? And, might the opportunity of ICHRAs drive more 1332 waiver innovation to lower individual premiums? Alaska serves as one example of this, which has helped with the relative affordability of their individual products.

The biggest drivers for these benefits are: tax parity, granting access to coverage to employees on their terms, eliminating the annual plan selection and enrollment dance that most employers despise, and shifting some of the compliance burden. There is a lot to think about here, and employers will have to weigh the advantages in evaluating if ICHRA is the right solution for them with their insurer, legal advisor and/or benefits consultant.

Insurers, brokers, ancillary companies and new entrants that position themselves for success in the individual market (built on the belief they can be viable in this market) will capitalize on the ICHRA growth opportunity. There are 44 million lives currently on the sideline looking for a viable alternative to traditional health benefit solutions. This is a big number and an attractive growth opportunity.

Insurers that are focusing on the individual & sole proprietor markets like Bright Health, Oscar Health, Devoted and many regional insurers are positioned well to attract new members switching from traditional group plans. Some insurers have consumer-centric brands that already resonate with the market. Their investments to enhance customer experience are noteworthy. Others looking to attack this market will have to modernize their strategies away from group-first thinking to catch up.

Success—looking forward—will be determined by an insurer’s ability to deliver unique & segment-targeted products that will up the level of affinity and value with consumers (one-on-one). It will also force insurers to wake up their sleepy distribution strategies and analytics monitoring capabilities to ensure employers are educated and primed to see the full value of the ICHRA strategy. This could mean finding new, non-traditional distribution partners. It also might mean focusing more efforts on market education strategies and early-stage direct lead generation to more closely monitor the early innings of any ICHRA market strategies. It could lead to creating segmented distribution models where early access is granted to specific consulting partners to reward top producer relationships with access to a potential growth market.

Rationality says that it will be the new, hungry insurance organizations that will attack this opportunity first. m4 innovation feels it’s important for established players to work through their options, too. It may be easy to try and brush aside any market movement to keep all group options intact. That line of thinking existed when group Medicare was being pressed by (then) upstarts like Extend Health and by changes to the balance sheet liabilities of companies that offered group approaches. Given a long enough time period, market demand and regulatory shifts driven by consumer groups typically have an impact. In small group, established books of business have been under attack by novel self-funding strategies for several years. Does the ICHRA approach serve as a way to continue to compete for risk-based business where contribution margins are more favorable? Does finding a way to get closer to the consumer of medical services open up other untapped business model opportunities?

Partnerships will emerge with ICHRA administrative tools such as Take Command Health, and we anticipate that the market will see some insurers investing to build the functionality in-house. Not all will, though. Some insurers learned specific lessons about internal buildouts during the rollout of the Affordable Care Act. Those executive teams might opt for market partnerships with better access to capital to help them attack this opportunity.

HSA administration companies such as WEX Health & Alegeus have developed the operational components required to deliver on this type of product. A strategic partnership with these companies would accelerate an insurer’s ability to launch and sustain a viable solution in the market. There are also lead generation companies, online brokerages, regional/national benefits firms with their feet still in small group. Data clearinghouses, supplemental insurers & administrators and many other partner levers could also be pulled as part of each unique strategy to be deployed for this market opportunity.

Brokers & consultants that have a proven record of success in the small group market, along with strong commission structures in place with existing insurers, will be in a leading position to accelerate their growth of new business through ICHRAs. These firms will have to explore how they build or partner to connect strongly to individual market offerings. They will have to explore impacts to their compensation models to help with the migration. Much of this will need to be explored in partnership with insurers and designated plan entities offering solutions in the individual and ancillary markets. The volume of small groups poised to begin offering benefits through ICHRAs is sizable, with almost 25% of employers not offering benefits(16). Insurers will need to evaluate their relationships with brokers and improve their ease of doing business with them. Most importantly, this will require getting creative with commission structures in order for all parties to succeed.

As with any new growth market potential, success is accelerated through timing the market opportunity along with the partnerships, investments, and business model alignments needed to capitalize on it. Insurers, brokerages, product manufacturers and technologists that want to lead this growth opportunity have access to a community that vets and builds upon timely opportunities together through m4 innovation. Will you sit on this opportunity, or are you exploring it to make sure your organization doesn’t get left behind?

In a recent blog post, James Clear pondered why we see so few companies aggregate such outsized rewards. In it he says, “If one business has a technology that is more innovative than another, then more people will buy their products. As the business makes more money, they can invest in additional technology, pay higher salaries, and hire better people. By the time the competition catches up, there are other reasons for customers to stick with the first business. Soon, one company dominates the industry.”(17) This is one of those moments, ICHRA is a catalyst that you shouldn’t ignore. The company that creates the competitive advantage will not just win. It will dominate.

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