Good morning!
Rising healthcare costs continue to be a huge issue for employers and HR leaders, especially as companies look for avenues to cut costs. It’s an issue hair restoration company HairClub (previously Hair Club for Men) knows well.
The company was struggling with high medical costs for its roughly 140 employers, and last year, premiums alone were costing it around $115,000 per month. And its previous healthcare provider said renewal costs could go up another 20-30%, due to the company’s somewhat older population, says Yadira Irizarry, director of Staff accounting, at HairClub. That kind of increase would have been “unsustainable,” she says.
“We knew that if costs were going up that much, employees would possibly have to choose between getting healthcare or getting other benefits, but not both,” says Irizarry, “and that’s not a position we wanted to put our people in.”
So in August 2024, HairClub ditched its healthcare plans, and instead offered all of its employees individual coverage health reimbursement arrangements (ICHRAs) through Zorro, a startup founded in 2022 that works with companies like HairClub to help them set up and run these offerings for employees.
Irizarry says switching to an ICHRA model reduced premium costs by 53%, and also led to a 40% reduction in plan renewals, or the costs associated with continuing healthcare plans into a new enrollment period. All this was despite 20% more employees participating.
These more tailored healthcare benefits, which first became available in January 2020 following some federal rule changes, allow workers to reimburse medical expenses (like premiums, deductibles, and copayments) using pre-tax dollars placed into individual healthcare spending accounts. This allows employers to customize benefits to their workers, potentially saving them money. Employees can choose individual health plans from any carrier, offering greater control over their healthcare.
That said, there are many reasons why companies are so hesitant to transition to a more individualized healthcare model. Irizarry says switching to the plan did take some time, and some education for employees around how their benefits were changing, which can cause some anxiety, naturally, especially as many had limited options until the switch to ICHRAs.
“There was some confusion because employees get their own plan, they get to choose what they want and many people haven’t had that option before and don’t understand how it could be more affordable,” says Irizarry.
However, successfully switching to ICHRAs means HR leaders will have to manage multiple plans at once, sometimes hundreds, and without software or consultants available to help, it can be tedious, Maya Perl, co-founder of Zorro, tells Fortune.
“Oftentimes, the question that we run into is not why an employer should switch to ICHRAs, because they understand the potential savings, but how they’re going to manage the plan, which is the real problem here.”
Brit Morse
brit.morse@fortune.com
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