Starting in January, businesses have a new way to provide health coverage for their employees. Called an Individual Coverage HRA (ICHRA), this health reimbursement model will benefit hundreds of thousands of businesses and millions of workers.

Employers in some cities face more conducive conditions that make ICHRAs a better deal for their employees. According to research findings by Vericred and Take Command Health, Minneapolis, Los Angeles, Providence, Boston and Philadelphia top the list for cities with market conditions that will likely lead ICHRAs to be more successful. The analysis compared the top 50 metro areas in the country for individual plan affordability, individual premium cost relative to the cost of a small group plan, availability of a broader set of plans, insurer competition, and the premium trajectories.

An apt analogy for the impact of the ICHRA is how 401(k) and 403(b) plans revolutionized retirement savings for both employers and employees. These retirement vehicles gave employers more predictable costs and gave employees greater control over how to invest their retirement savings.

With an ICHRA, the employer decides how much money to contribute each month, provides their employees with standard information about how the HRA works, and outsources some administrative functions like verifying coverage. Then, the employer has predictable costs for their employees' coverage, can remove the hassle of selecting and managing a group plan, and is effectively out of the health insurance business.

Workers will also benefit. HRAs are tax-free, so workers don't pay any income or payroll taxes on the funds. The ICHRA provides workers with greater choice and control over their health care.

Most employers that offer coverage, including almost all small employers, only offer a single type of plan. As a result, workers have substantially fewer choices over how to finance their health care than they do over just about anything else they purchase. Employers that use the new HRA will expand their workers' ability to choose coverage that better meets their needs and those of their families.

What's more, between 2010 and 2018, the proportion of workers at firms with three to 49 workers covered by an employer plan fell by more than 25 percent. The rise in ICHRAs should help reverse the decline by offering employers another way to provide their workers with health benefits.

The employer offer does not need to correspond to a calendar year; they can offer the ICHRA any time after January 1. Employers can offer as much or as little as they want, although for employers with more than 50 full-time workers a minimum HRA must be offered to avoid the employer mandate penalties.

The rule allows employers to offer higher contributions for older workers and workers with more covered family members as well as make different offers, subject to certain conditions, to workers in different classes, such as salaried workers versus hourly workers.

While employers will likely want more information, they should be careful where they get feedback. Some brokers, for example, may have a financial incentive for employers to continue offering a traditional plan.

For employers that don't currently offer coverage, the individual coverage HRA provides a way to provide health benefits and boost after-tax total compensation for workers. This should help attract employees to the firm in a very competitive labor market.

For employers that currently offer a traditional group plan and who are ready to exit the health insurance business and concentrate fully on their actual business, the individual coverage HRA may be the right way forward.

While this health insurance revolution won't happen overnight (and the individual market still needs reform to expand affordable options), the federal government estimates that in about five years, 800,000 employers will offer individual coverage HRAs. Almost 90 percent of these employers will have fewer than 20 employees. An estimated 11 million workers will use this HRA to purchase a plan in the individual market—a critical factor for creating a stronger market. Business owners across the country, and particularly in areas with a healthier individual market, should take a close look.

Brian Blase, PhD, served as a Special Assistant to President Trump at the National Economic Council focused on health care policy from January 2017 through June 2019. In that capacity, he oversaw the development and implementation of the HRA rule. He is now president of Blase Policy Strategies.

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The conditions are right for individual-coverage HRA adoption

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