Breaking down the ABCs of rising alternative health plans

A is for alternative health plan

More employers are asking their payer partners about alternative strategies to reduce their growing healthcare costs.

Employers started the year at a cost disadvantage, according to the "2026 Employer Health Care Strategy Survey" from the Business Group on Health. The previous two years had the highest consecutive increases in healthcare costs over the last decade.

With back-to-back healthcare cost increases, the survey showed that costs are projected to be 62% higher than in 2017. This "unfavorable environment" prompts "bolder moves to address health care costs," like alternative health plans, the Business Group on Health explained.

Alternative health plans are generally "newly created or reimagined health insurance plan designs that really aim to provide affordability and simplicity in today's really complex and increasingly costly healthcare environment," according to Scott Burton, commercial market president at Providence Health Plan.

Payers and employers are currently at a "real breaking point" as healthcare costs continue to rise.

"For those of us in the industry, it really is a moment to look in the mirror and say, 'What does this tell us about the path we're on relative to sustainable costs and access to healthcare for employers and their employees,'" he stated.

Payers need to understand what these alternative health plans are, what employers are considering and how to communicate these arrangements.

Rising popularity of AHPs, IHCRAs

Two types of alternative health plans are becoming more popular: association health plans and individual coverage health reimbursement arrangements.

Association health plans

AHPs bring together smaller companies and self-employed individuals to access health insurance options -- and savings -- typically only available to large group health coverage. Small employers have been able to do this for decades, but recent regulations have facilitated robust adoption of AHPs.

With an AHP, employers and their payer partners can realize more stable cost management through larger risk pools. Smaller employers can also access greater benefit customization that is typically not available in small group markets, according to Burton.

"If you go it alone, it is often more challenging to get the types of benefits that you'd want to access at the price that's affordable," he said.

Research shows that large group plans save 8% to 18% on similar benefits in small group policies. Large group plans achieve greater savings because of that large risk pool, but also greater negotiating power because of employer size.

Enrollment in AHPs is growing, Burton pointed out, as more small employers leave the small group markets to address affordability challenges. However, employers may not have access to some benefits, like those required by the federally controlled marketplaces. Employers need to carefully consider what benefits they need for their employees before leaping to an AHP, he warned.

Individual coverage health reimbursement arrangements

ICHRAs are employer-funded group health plans that provide tax-free funds to employees to cover the cost of individual health insurance premiums or other qualified medical expenses.

Only between 350,000 and 700,000 workers and their dependents are currently covered by one today, the EBRI estimates. However, there is growing interest or traction in this space now. Investment banking firm Bailey and Company projects 60% year-over-year growth in the ICHRA market, with the most rapid growth in the large employer segment. Several key ICHRA players will also come to market with funding rounds this year, with at least three to four companies expected to break even or be profitable by 2026, they reported.

Burton is watching the space very closely. Coverage under these plans could grow exponentially as federal and state policies support ICHRA adoption. ICHRA companies also tout their use of technology to support small employers with the administration of plans.

However, Burton pointed out that employees may have limited individual plan options if their employer offers ICHRAs versus small or large group plans.

"For health plans, as we're thinking of it as carriers, I'm certainly looking at it as: Is this just arbitrage of moving members from one pool to the other and is that financially sustainable for our business or not? Or is there something bigger here if I'm taking a member out of my small group pool and moving it over to my individual pool," he asked.

More answers should come as the market undergoes consolidation, Burton clarified.

"There are a lot of vendors coming in; they're all trying to compete for market share," he explained. "Some will survive and some will not, and that consolidation event just hasn't happened yet. So, the winners will emerge at some point, and the question then becomes, are you aligned with them as a carrier or as an employer? Or are you going to have to go through a transition when that consolidation occurs and find new partners? It's just still very early."

Variable copay plans emerge

AHPs and ICHRAs are taking the spotlight lately, but Burton has noticed an emerging trend in alternative health plans: the variable copay design.

Creating clear cost measures and cost requirements for the consumer through these plans can be helpful to simplify the healthcare environment.

"Some have been around for a minute and some are brand new, but when we talk about addressing complexity for the consumer and affordability, I think these variable copay plans are designed to support that," he said.

In a variable copay plan, out-of-pocket costs vary based on different factors, such as provider cost and quality. The idea is to incentivize beneficiaries to go to high-value providers, leading to cost efficiencies and quality care.

The plans simplify the complexities of healthcare costs, particularly the confusion around how much a beneficiary owes when they show up to a provider's office, Burton explained.

"When you go to a provider, sometimes you know how much you owe, sometimes you don't. It can often be fairly opaque, and it can vary by provider," he explained. "Creating clear cost measures and cost requirements for the consumer through these plans can be helpful to simplify the healthcare environment. It can also drive cost savings not only for the consumer, but also for the system in general, because we're starting to see healthcare consumers or employees going to more affordable environments versus going to the nearest provider, and not knowing what they are paying."

But not all beneficiaries have the health literacy to navigate the complex system, even when cost requirements are clear. Some beneficiaries may also find networks of these lower-cost providers too narrow for their liking. For these reasons, communication and education are key to the success of alternative health plans.

Working through change

Employers are savvier about their health insurance options in the face of unsustainable costs. However, this is allowing employers and payers to work a little closer to innovate.

"Over the last couple of years, what I've observed is employers, particularly HR teams, moving from conversations around what the benefits package is to really becoming healthcare population strategists, working with their consultants, working with their carriers to put together an entire benefit strategy that not only meets the physical and medical needs of their population, but also the mental and behavioral health care needs of their population."

This is leading to an increase in education and awareness, as well as a more strategic approach to health benefit design strategy.

"It creates more opportunities for dialogue, which begs the question: How do we better communicate not only any benefits changes, but the value of the investments that the employers are making to their benefits packages for their employees? Again, these are huge investments, oftentimes amongst the top three expenses for an employer. So, they want to see their employees understand and utilize their benefits," Burton said.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.