There are now more than 20 million Americans enrolled through the individual health insurance exchange marketplace (HIX) and growing. A product originally designed to provide coverage for the uninsured and those caught between having too much to qualify for Medicaid, but not quite enough to afford commercial coverage, is now setting its sights on the small group commercial market through ICHRA, or an individual coverage health reimbursement arrangement. This has the potential to be incredibly disruptive to providers given the negative impact this shift could have on overall reimbursement and provider margins.
Payers have effectively negotiated discounts off commercial rates for the past decade from providers for their HIX products — arguing that it was not commercial business — it was coverage for the uninsured. There was merit to that argument at the time. In response, many providers significantly discounted their commercial rates for HIX products.
Fast forward a decade, and payers are now looking at the small group commercial segment as the next growth opportunity for the exchange through ICHRA. This should be of great concern for providers given this shift could come quickly as risk pools deteriorate in the small group pool and ICHRA plays out the way many are predicting. The large discounts many providers gave payers for HIX products could now come back to bite them, especially those who were overly generous. In other words, the bigger the discount between commercial and HIX rates, the faster the cannibalization of providers' commercial revenue. It's a simple fact that those discounts are now working to the disadvantage of providers and could serve to accelerate the shift under ICHRA of small groups from the commercial products to the exchange products.
Several large payers have signaled that they see significant growth opportunities in ICHRA. It's no secret that small employers continue to struggle to afford health insurance for their employees. ICHRA creates a path for small employers to shift the burden of purchasing health insurance to the individual employee with the assistance of a "bag of tax-free money" provided by their employers. The ACA was originally designed for the uninsured. With 20 million Americans now enrolled, it is poised to become the primary coverage option for small employers.
What is ICHRA?
CMS defines ICHRA as "an alternative to offering a traditional group health plan to your employees. It’s a specific account-based health plan that allows employers to provide defined non-taxed reimbursements to employees for qualified medical expenses, including monthly premiums and out-of-pocket costs, like copayments and deductibles. Employees must be enrolled in individual health insurance coverage (like a plan they bought through the Marketplace) to use the funds."
Why is that attractive to employers? The cost of healthcare and the burden associated with administering employee health plans is a significant challenge for most employers who feel a sense of hopelessness and frustration as each year costs continue to rise. The only effective strategies employers have to control their costs are to cap their contributions and reduce benefits to employees. Both of those strategies position the employer as the "bad guy" that is taking something away from their employees. ICHRA is the "out" that many employers will find attractive and educate their employees about. This is the final step in the transition of employee benefits from an employer-sponsored action to an employee-driven decision, not dissimilar to what occurred with retirement planning and the phasing out of traditional pension plans in favor of employee-driven, -owned and -controlled 401k plans.
What are payers thinking?
Growth and membership gains has always been a top priority for every payer — healthcare is a scale business and the cost pressures to run a plan require continued top line expansion. The HIX represents both an opportunity and a threat to payers. The opportunity is greatest for those payers who don’t currently participate in the employer group commercial space. These organizations view HIX and the rapid adoption of ICHRA plans in the small group commercial space as a significant opportunity to grow their membership. The commercial payers see ICHRA as both an opportunity (assuming they offer HIX plans) and a material threat as they will face increased competition for that small group market segment.
How are payers positioning themselves for ICHRA and future HIX growth? It's fair to say that early market entrants into the HIX were a mix of those focused on the Medicaid population as well as some smaller startups. Their strategy was largely built around a limited panel strategy to prioritize cost controls over broad marketable networks, not dissimilar to the Medicaid space where network adequacy trumps network marketability. That strategy worked in large part due to enrollees largely not having prior coverage and/or long-standing relationships with providers.
However, if the HIX products are going to be attractive to the commercial market, that dynamic must change. Commercially-covered populations have existing relationships with providers and they will likely resist any requirement to "switch physicians" under a new plan. Enrollees will shop for those plans with broad access to all their providers, much in the same way seniors shop for Medicare Advantage plans. Simply put, primary care is in short supply, so finding a new physician is both challenging and something few will embrace to save a few dollars on their health insurance premiums. History has taught the insurance industry a simple lesson — limited panel plans don't sell in the commercial market.
As the large national payers look to grow their HIX market and leverage ICHRA, they bring a new dynamic to the HIX market: large and robust commercial networks that small employers will find attractive. Commercial members are accustomed to large/broad networks and demand access to their doctor. This will give the national, commercial payers in the HIX a marketing advantage under ICHRA. It will pressure payers with limited networks to find ways to expand but to do so in a way that continues to position them with competitive rates.
It also means that price will be a driving factor in network expansion and payers will look to pressure providers for deep discounts to support their growth goals. Providers must avoid this pressure and be ready to walk away from some volumes in the short term to preserve long-term margins and fair reimbursements.
What should providers be thinking?
Providers need to learn from the past and lessons from the impact of reimbursement cuts in Medicare Advantage. Providers need to have a robust strategy around HIX contracting and be very selective on who they contract with and at what rates. This may mean that limiting the number of HIX plans they contract with is something that should be part of their long-term strategy around HIX contracting.
It’s important for providers to remember a couple of key facts:
1. The ACA is a commercial product.
2. Low-income individuals benefit from the HIX marketplace through significant government subsidies.
3. Providers already provide additional "subsidies" through reduced payment levels driven by downcoding, denials and bad debt.
Subsidies from providers are not necessary to maintain affordability and only further hurts those remaining in the group commercial products by exacerbating the further need for cross subsidization, or higher commercial rates to offset low government program rates. Providers need to consider weighing their options as payers push to keep and grow the HIX discount gap to improve their competitive position and margins. They also need to be proactive in their approach to HIX contracting and act now to avoid a “race to the bottom." Providers need to be prepared to possibly walk away in the short-term from incremental, low-margin business to preserve commercial margins in the long-term.
Recommended strategies for providers:
1. Negotiate higher HIX rates with the goal of getting full commercial rates by 2027.
2. Reduce the number of HIX plans they contract with to consolidate leverage.
3. Closely examine HIX yields and impact of down coding, denials and bad debt.
4. Don’t allow payers to exclude your health system from their HIX network, and use your leverage to be included at the rates you require.
The bottom line: Providers need to take proactive steps now to address what is sure to be the next big fight with payers over reimbursements.
Scott Ellsworth is the president and founder of Ellsworth Consulting. Prior to starting his consulting business in 2022, Mr. Ellsworth was a senior executive at Centene, UnitedHealth Group's Optum, and Excellus Blue Cross Blue Shield.