ACA Marketplace Quality by State: Why It Determines Whether ICHRA Is a Real Alternative

LFP-07.05 | Sharp Analysis | Series 07: The Geography of Level Funded

ICHRA is a funding mechanism, not a coverage product. The employer sets a monthly reimbursement amount. The employee takes that money to the individual market and purchases a Qualified Health Plan. What the employee receives in exchange depends on what is available in their local rating area: how many insurers are competing, what their networks include, and what the benchmark premium costs relative to the reimbursement the employer provided. The employer has no control over any of those variables. ICHRA’s coverage adequacy is entirely downstream of the individual market’s local quality. In markets where that quality is high, ICHRA provides a genuine alternative to level funded for small employer groups. In markets where it is low, the same reimbursement amount buys materially less coverage than a comparable level funded plan, and the employer who recommends ICHRA is substituting administrative convenience for member welfare.

How ICHRA’s Coverage Quality Is Determined

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The regulatory framework for ICHRA was established through Treasury Department regulations finalized in June 2019 and effective for plan years beginning January 1, 2020. Under those regulations (26 CFR 54.9802-4), the employer reimburses eligible employees for individual market premiums up to a designated monthly amount. Affordability for ACA employer mandate purposes is tested by comparing the employee’s share of the lowest-cost silver plan premium in their rating area against a percentage of household income: 9.02% for 2025 and 9.96% for 2026. CMS publishes the ICHRA Employer Lowest Cost Silver Plan Premium Look-up Table for that calculation, keyed to rating area and employee age.

The look-up table reveals geographic variation immediately. A 45-year-old employee in Arkansas might face a lowest-cost silver plan premium of $479 per month. The same employee in Florida faces a different premium, and in parts of rural Wyoming or Montana, the benchmark runs materially higher still. The same employer reimbursement amount produces a different coverage outcome in each location because the premium anchor is local, not national.

The HRA Council’s fourth annual report, published for 2024 to 2025, documented that ICHRA adoption among small employers grew 18% year over year, with more than 83% of adopting employers reporting they had not previously provided health coverage. That adoption trajectory is real. Whether the resulting coverage is adequate depends on the rating area, and that question the HRA Council adoption data does not answer.

Marketplace Quality Variation by State and Rating Area

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The Urban Institute has documented premium variation between rural and urban rating areas using ACA marketplace data. In 34 states, average benchmark premiums in rural areas exceed those in urban areas. In 18 states, rural benchmark premiums exceed urban premiums by more than 10%. In 12 states, the gap exceeds 20%. California provides a concrete example from published Urban Institute analysis: the average rural benchmark premium for a 40-year-old nonsmoker was $519 per month compared to $413 in urban California, a 26% gap. In Arizona, the rural-urban difference is similarly pronounced. The implication for ICHRA is direct: an employer setting a uniform monthly reimbursement for all employees produces a coverage outcome that is materially better for urban employees than rural ones, because the urban employee’s premium anchor is lower.

Insurer participation data reinforces the picture. The Peterson-KFF Health System Tracker shows that the individual market has grown more competitive since 2020 as ACA marketplace enrollment reached 24.2 million in 2025. That aggregate improvement in competition concentrates in metropolitan markets. Urban Institute analysis of 2022 to 2023 marketplace premiums found that benchmark premiums in markets with only one participating insurer ran approximately $128 per month higher than in markets with five or more insurers. Rural markets typically support two to three insurers. Urban markets in competitive states often support six or more. The Rural Health Information Hub and KFF have documented that rural counties in HealthCare.gov states consistently have fewer participating insurers than metro counties in the same state.

Network quality inside the marketplace plans varies as well. Most benchmark plans in rural markets are HMO products with narrow networks. Medicaid-managed care insurers and provider-sponsored plans have driven competition and lower premiums in urban markets by offering narrow-network products priced below the regional Blue Cross plan. Those same insurers frequently do not operate in rural rating areas because the provider density needed to build a functional HMO network does not exist in those geographies. The employee in rural Wyoming who receives an ICHRA reimbursement and goes to the marketplace may find one carrier, one plan design, and a network that mirrors the access gaps documented in LFP-07.03: a narrow plan in a geography already designated as a Health Professional Shortage Area.

The Adequacy Threshold: When ICHRA Buys Comparable Coverage and When It Does Not

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The question of whether an ICHRA reimbursement produces coverage comparable to a level funded plan is not answerable at the national level. It is answered county by county, using benchmark premium data, network maps, and the employer’s specific reimbursement amount.

In strong markets, the comparison can favor ICHRA. A 35-person professional services employer in Columbus, Ohio, operates in a market with multiple carriers competing in 2025, including Medicaid-sponsored insurers whose narrow-network products drive benchmark premiums below $400 per month for working-age employees. An employer who sets a reimbursement at $450 per month for a standard-age employee can likely fund a benchmark silver plan entirely. The employee selects their own plan, the employer carries no claims risk, and administrative complexity falls relative to the level funded alternative. ICHRA is a defensible recommendation in that market for that employer profile.

In weak markets, the comparison reverses. A 20-person manufacturing employer in rural Tennessee with employees across three counties outside Nashville and Knoxville faces a different calculation. Rural Tennessee benchmark premiums in 2025 exceed the urban Tennessee average. The plans available in those rating areas are narrow-network HMOs with deductibles at or near the ACA out-of-pocket maximum, networks that exclude regional hospital systems employees would likely use, and premium anchors that leave material employee shortfall after a $500 monthly ICHRA reimbursement. A level funded plan structured around the same $500 monthly employer contribution would deliver stop loss protection, claims transparency, and potential year-end surplus. The employee with ICHRA in that market has premium exposure and cost-sharing risk that the ICHRA reimbursement does not cover.

The enhanced premium tax credits enacted by the American Rescue Plan Act in 2021, extended through 2025 by the Inflation Reduction Act, significantly improved ICHRA’s effective adequacy in many markets by reducing the employee’s net premium burden below the benchmark premium. Those enhanced credits are expiring in 2025 absent congressional action. The Urban Institute projects that 24.2 million marketplace enrollees in 2025 could face an average out-of-pocket premium increase of $624 per year if enhanced credits are not extended, with rural enrollees facing increases 25% higher than urban ones on average. An ICHRA offer calibrated as adequate under the enhanced credit regime may become inadequate in 2026 in markets where the benchmark premium rises as healthy enrollees exit.

The Strategic Implication for TPAs

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A TPA offering both level funded and ICHRA products without a geographic adequacy map is providing undifferentiated recommendations. The product recommendation should follow from the geography.

In markets where the individual market produces adequate coverage at the employer’s intended reimbursement level, ICHRA may be the right recommendation for specific employer profiles: those below 10 employees where level funded actuarial credibility is marginal, employers with high workforce turnover where ICHRA’s portability benefit has real value, or employers who have tried level funded and experienced renewal volatility they cannot manage. In those markets, recommending level funded universally leaves the TPA open to selling a more complex arrangement where a simpler one would serve the employer better.

In markets where rural benchmark premiums are 15% or more above the employer’s reimbursement floor, fewer than three carriers participate, or available plans carry deductibles near the ACA out-of-pocket maximum, ICHRA transfers coverage risk to the employee, not benefit. The employer who adopts ICHRA in that environment may satisfy ACA affordability technically while delivering coverage that employees cannot meaningfully use. Level funded in those markets, where the regulatory environment and stop loss market permit it, delivers more predictable coverage at a comparable cost.

The geographic adequacy analysis is not a one-time exercise. Individual market carrier participation changes annually. A market where ICHRA was adequate in 2024 may face a carrier exit in 2025 that changes the benchmark premium and network quality picture. TPAs positioning ICHRA as a durable solution in markets they have not audited annually are making a product recommendation on stale geography.

The expiration of enhanced ACA premium tax credits adds urgency to the annual review requirement. The Urban Institute projects that if Congress does not extend the enhanced credits beyond 2025, gross marketplace premiums will increase and a significant share of current enrollees, particularly healthy individuals priced out at higher premiums, will exit. That enrollment decline deteriorates the risk pool, which drives further premium increases, which reduces insurer participation in marginal rating areas. An ICHRA that was adequate in 2025 in a borderline rural market could become inadequate in 2026 through no change in the employer’s contribution amount, purely through credit expiration and risk pool deterioration. The broker or TPA who designed an ICHRA in 2024 without building an annual review obligation into the client relationship is carrying undisclosed product risk.

For employers evaluating ICHRA as an alternative to level funded, the practical analysis sequence is geographic before financial. First: in what rating areas do employees reside, and how many carriers participate in each? Second: what are the benchmark silver plan premiums for the relevant employee ages at the local LCSP? Third: does the proposed reimbursement amount fund at least the benchmark premium for typical employee ages, or does it leave a material employee shortfall? Fourth: do the network plans available in those rating areas include the provider categories employees are likely to need? Only after those questions have concrete answers does the cost comparison between ICHRA and level funded become meaningful. The employer who skips to the cost comparison and works backward is designing benefits on a financial model without grounding it in what the coverage will actually deliver to the people it covers.