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Executive Summary
- Healthcare premiums for small and midsize businesses (SMBs) are reaching crisis levels. Annual price hikes of 7–9% – and sometimes far more – are pushing many employers to spend over 10% of their revenue on benefits. Yet despite this exorbitant outlay, SMBs remain tethered to fully-insured group plans, with few practical alternatives and little bargaining power.
- In the face of these rising costs, Individual Coverage Health Reimbursement Arrangements (ICHRAs) present a clear opportunity for disruption. Since taking effect in 2020, ICHRAs have grown steadily, helped by increasingly distributed workforces, new entrants like Oscar and Centene, and a relatively stable Affordable Care Act (ACA) marketplace. We believe these factors collectively position ICHRA as a potent and scalable option for employers desperate to rein in benefits spending.
- Still, significant barriers remain. Brokers remain the largest hindrance to scale. Current incentive structures lead brokers to favor renewing high-margin group plans, leaving ICHRAs at a disadvantage. ICHRA administrators must find ways to align broker economics for this market to reach exponential growth.
- With the right innovations, ICHRA can deliver a much-needed overhaul of SMB benefits, and we invite visionary founders to join us in making it happen.
State of the Market & Key Challenges
General Market Overview
If you’ve followed employer benefits at all in the last few years, you’re already aware that healthcare premiums continue to rise at unsustainable rates. In 2023, employer-based health insurance premiums reached averages of $8,435 for single coverage and $23,968 for family coverage – increasing by 7% from the prior year. Smaller businesses, especially those under 500 employees, have been hit even harder, with reported hikes of 9% or more.
Several underlying issues fuel these rising costs:
- Community Rating and State Mandates: In many states, small employers pay community-rated premiums (tied to regional risk rather than firm-specific claims), and mandatory coverage requirements often push costs higher by including benefits some businesses don’t need.
- Administrative Burden: Carriers frequently pass higher overhead costs on to smaller groups, and SMBs, who lack robust benefits teams, often default to fully-insured plans as the “simplest” route, even when more expensive.
- Misaligned Incentives in the Broker Channel: Brokers typically earn higher commissions from renewing fully-insured group plans, making them less inclined to promote potentially more cost-effective alternatives like self-funding, level-funding, or ICHRAs.
As a result, SMBs remain heavily tethered to high-cost group plans, often unaware of newer options that may better align with their needs.
State of the ICHRA Market – from Niche to Noteworthy
Since ICHRAs were approved in 2019 (and took effect in 2020), the market has expanded quickly but remains relatively small. Estimates hover around 500,000 covered lives in ICHRA arrangements nationwide, which grew by roughly 30% from 2023 to 2024. Oliver Wyman projects that it could grow 80% year-over-year if current trends hold.
While the market is still fairly nascent, we can see a strong case for continued growth:
- Relentless Premium Increases: As group plan costs soar, employers seek ways to cap and predict annual benefit expenditures.
- Distributed Workforces: The pandemic accelerated remote work, making a single group plan less appealing. Employees located in different states and rating areas often benefit from choosing their own local coverage.
- Incumbent Endorsements: Health insurers like Oscar and Centene are actively investing in ICHRA-focused products and platforms, stabilizing the individual market and making it more competitive.
- Policy and Regulatory Stability: The Affordable Care Act marketplaces have grown from 12 million to 21 million enrollees between 2020 and 2024, offering more choice and less risk than in prior years.
However, as several others who have written on the topic note, it’s still not clear if this market will reach the growth necessary for venture-backed businesses to succeed. We believe it’ll be difficult to see exponential growth until key headwinds are addressed:
- Broker Incentives
- The single largest obstacle. Without higher commissions or easier administration, brokers feel little motivation to sell ICHRAs over tried-and-true group plans.
- Awareness & Perception
- Some employers see ICHRAs as a “lesser” benefit, fearing employees will dislike navigating individual exchanges or narrower HMO/EPO networks.
- Affordability for Employees
- Lower-wage employees might lose out on generous federal subsidies once an employer-funded ICHRA kicks in.
- Premiums in the individual market can be 10–20% higher in some geographies than comparable group plans.
- Regulatory Uncertainty Post-2025
- Enhanced federal subsidies (from the American Rescue Plan Act and Inflation Reduction Act) could expire at the end of 2025, adding to market uncertainty.
Why It Matters (And To Whom)
ICHRAs aren’t for everyone. As we’ve mentioned, there are mixed perceptions on the value and drawbacks to key stakeholders:
Under the right conditions, however, ICHRA can be a highly attractive option for employers. Here’s how we view the ideal customer archetype:
More Likely to Adopt If
(+) Based in an ICHRA friendly state: Located in one of the 16 states with an approved Section 1332 Innovation Waiver. These waivers are often used to support reinsurance programs, making individual premiums more stable and competitive
(+) Has a high percentage of part-time or temporary employees: The flexibility of ICHRAs to customize contributions for different employee classes makes it appealing for companies with high percentages of part-time and temporary employees
(+) Has a distributed or remote workforce: Regional individual plans can often be a better option across both cost and access for employees
(+) Never offered insurance before: Companies entering the benefits space for the first time may find ICHRAs as a simpler and more approachable option compared to traditional group plans. It may also enable them to have leaner benefits teams
(+) Most employees fit in the subsidy “sweet spot”: The employer’s workforce largely consists of moderate earners who do not qualify for sizable federal premium tax credits but also don’t demand top-tier, heavily subsidized group plans. This mid-range income bracket often stands to benefit the most from ICHRAs
(+) See themselves as new and innovative: These employers actively embrace cutting-edge solutions and aren’t afraid to deviate from industry norms. Adopting an ICHRA aligns with their brand identity as forward-thinkers
And What About Brokers?
Despite a compelling value proposition for certain employers and employees, brokers often remain unconvinced. Selling ICHRAs can be less financially rewarding than renewing group plans – not only are commissions typically lower, but many ICHRA platforms also become the broker of record after the first year, limiting the broker’s long-term revenue. On top of that, mastering a new product requires additional training and client education, which most brokers won’t undertake unless there’s a clear financial upside. Until these economic realities change, brokers are likely to stick with the status quo, and for good reason.
Existing Solutions
Over the past few years, a crop of ICHRA administrators and technology platforms have emerged to simplify contributions, reimbursement, and compliance. The key venture-backed players in the space we’re monitoring include:
They generally have a range of services, outlined below:
Depending on the level of service, ICHRA administrators may charge anywhere from $5 to $85 per employee per month (PMPM). Players like Thatch and Venteur typically fall in the $20–$30 PMPM range, and some administrators also assess a one-time setup fee. If sold through a broker, that broker often adds their own PMPM fee on top.
To date, most ICHRA sales have been direct-to-employer. There are three primary reasons for this:
- No Broker of Record: Many employers adopting ICHRA have never offered benefits before, so they don’t already have a broker relationship.
- Broker-Like Services: ICHRA administrators often provide consultative support similar to that of traditional brokers.
- Lack of Incentives: Brokers haven’t historically had strong financial reasons to promote ICHRAs to their clients.
Considering there are 6+ million U.S. firms with fewer than 500 employees, this is far from a winner-take-all market. We see a substantial opportunity for growth, particularly through bringing more brokers into the fold.
As with most crowded markets, we believe true differentiation hinges on distribution (especially broker relationships), integration (payroll, HRIS, etc.), and employee experience (helping end-users navigate plan choices confidently).
Opportunities for Innovation
Our Thematic Near-Term Outlook
In the short term, we anticipate heightened momentum for ICHRA solutions as companies begin to see brokers as partners rather than adversaries. While direct-to-employer sales have been the norm, forward-looking vendors will increasingly rely on broker-centric go-to-market strategies. We expect to see:
- Broker-First Platforms: Vendors will invest in robust technology and streamlined processes specifically tailored to brokers, aiming to reduce administrative burdens, simplify plan setup, and provide meaningful incentives. In doing so, they’ll transform brokers from passive observers into active evangelists for ICHRA.
- Larger Enterprises Enter the Fray: Thus far, SMBs have led ICHRA adoption. However, larger employers will look to ICHRAs to cover contingent or part-time employees who previously wouldn’t have qualified for group plans. This could pave the way for hybrid benefits strategies, blending traditional group coverage with ICHRA offerings for specific worker segments.
Despite this enthusiasm, near-term challenges include limited broker awareness and the persistent perception that ICHRAs are “lesser” benefits. Overcoming these hurdles requires significant broker training, compelling ROI stories, and creative distribution arrangements that align all stakeholders’ incentives.
In the Medium-to-Long Term
Looking further ahead, we expect ICHRA solutions to evolve in step with broader market dynamics. Key developments may include:
- Proliferation of ICHRA-Specific Plans: If early adopters like Oscar and Centene see success in 2025 and beyond, other carriers will likely introduce marketplace plans tailored for ICHRA. These carriers may choose to partner with “winners” in the ICHRA administration market to help drive plan awareness and sales.
- Expansion Beyond Core Admin: As ICHRA wedges open the door to employer relationships, vendors will seek new ways to add value and diversify revenue. Potential opportunities include:
- Care Navigation: Partnering with carriers to guide employees through provider networks, telehealth, and chronic care management, opening the door to new business models.
- Add-On Benefits: Bundling ancillary services (e.g., dental, vision, mental health) or adjacent products (e.g., FSA, HSA).
- Deeper Integration Across the Benefits Stack: Over time, successful ICHRA platforms may evolve into full-spectrum benefits hubs. By integrating payroll, HRIS, and vendor marketplaces, they can deliver a unified benefits interface, especially attractive to larger, multi-state employers seeking a seamless experience for both brokers and employees.
The sustainability and growth of these long-term opportunities will hinge on carriers’ willingness to innovate around ICHRA, as well as on the policy environment remaining stable enough for employers to place long-term bets on individual-market-based benefits.
Risks
While the opportunity is substantial, we’ve identified several key challenges where innovative founders can make a meaningful impact, and we’re particularly interested in hearing their perspectives on addressing these critical areas:
Risk Factor #1: Broker Resistance Persists
Despite ICHRAs’ potential, much of the market remains in the hands of brokers who don’t have a financial reason to champion them. If broker incentives never align, adoption could stall, limiting the pace of market growth required for venture-scale success.
Key Question: How do you meaningfully incentivize brokers to mobilize and sell ICHRA, and how do you become the go-to platform they use for this new model?
Risk Factor #2: Commoditization
As more players rush in with look-alike offerings, ICHRAs risk a race to the bottom on pricing. If everyone provides nearly the same administrative services, vendors will struggle to stand out on value or margins.
Key Question: If ICHRA is merely a wedge into the customer base, what additional products or services can you layer on to diversify revenue, build defensibility, and avoid commoditization?
Risk Factor #3: Policy Shifts
Regulatory and policy changes – such as the expiration of enhanced federal subsidies after 2025 – could reshape the individual insurance landscape. A less stable exchange market or new legislative priorities might weaken the ICHRA value proposition for employers and employees alike.
Key Question: How can a venture-backed ICHRA solution remain nimble in the face of shifting regulations, ensuring sustainable growth and relevance even if the policy environment evolves?
Conclusion
As healthcare costs continue climbing, more employers are actively seeking better, more flexible options, and ICHRAs could be just the alternative to finally break the cycle of unsustainable price hikes. But seizing this opportunity goes beyond merely offering a new plan design. It demands rethinking broker incentives, simplifying plan selection for employees, and navigating a fluid regulatory landscape.
We believe there’s a tremendous opportunity to forge this new path, but it will require a willingness to tackle the toughest obstacles—particularly around broker incentives and market perception. If you’re a founder who sees both the urgency and the untapped potential in this market, we want to hear from you. Let’s chart the future of ICHRAs together.
The information contained here is based solely on the opinions of Redesign Health, and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not be relied on in any manner as legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Redesign Health or any other Redesign entity.
This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build their businesses and not recommendations or endorsements of any particular business.
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