Steve Davis | October 2015
President Obama on Oct. 7 enacted the Protecting Affordable Coverage for Employees (PACE) Act (HR 1624). The legislation changes a provision of the Affordable Care Act (ACA) that was slated to expand the definition of a “small group” — from 50 or fewer workers to 100 or fewer — for plan years beginning in 2016. Expanding the definition would have negatively impacted an estimated 150,000 employers.
But with small-group rates already in place for Jan. 1, health plan actuaries and underwriters will need to scramble to adjust pricing and refile rates for products that go into effect at the beginning of the year. Maintaining the current small-group definition also could create challenges for state- and federally run Small Business Health Options Program (SHOP) marketplaces.
While PACE gives states the option of expanding the small-group definition, most states are expected to maintain the status quo, according to the Congressional Budget Office (CBO). The bipartisan fix could signal a shift among Republican lawmakers to target and improve provisions of the ACA rather than try and tear down the entire law.
The ACA envisioned that by expanding the definition of a “small group” in 2016, the overall risk pool would improve as more covered workers were added. Having more employers would translate to lower rates for coverage sold inside and outside of SHOP exchanges because mid-sized small employers would become part of the expanded single risk pool.
Maintaining the current small-group definition, however, means fewer employers will be eligible to buy coverage through the struggling SHOP, where participation is restricted to the small-group market. In July, CMS reported that just 85,000 people — through 10,700 small businesses — had coverage through federally run SHOP exchanges in 33 states. The figure doesn’t reflect enrollment among state-operated SHOPs.
In a Sept. 15 note, CBO concluded that expanding the small-group definition to 100 or fewer might mean more employer participation in SHOP, which in turn would attract more insurers, which would reduce premiums by boosting competition. However, with the enactment of HR 1624, the small-group market won’t expand and fewer carriers might want to sell coverage there, according to CBO. However, CBO also concluded that not expanding the small-group definition would save $400 million over the next decade because it would allow midsized employers to offer less expensive coverage, which would reduce the share of the employees’ non-taxable compensation spent on insurance.
Rates Would Have Jumped 18% for Some
In response to a request from the Blue Cross and Blue Shield Association, actuarial consulting firm Oliver Wyman examined the potential impact of the definition expansion and estimated that 64% of employers with 51-to-100 workers would see premiums increase in 2016 as a result. The average increase for those employers was pegged at 18%. Moreover, beginning on Jan. 1, those employers, which now fall under the definition of “large group,” would have been reclassified as small group and would have had to comply with small-group market reforms, such as the inclusion of essential health benefits in the coverage they offer workers. And insurers would no longer base rates on an employer’s claims experience as they do now with large employers.
While moving the midsized groups to the small-group market would likely have caused some rates to increase dramatically, it probably wouldn’t have had much of an impact on rates charged to employers with fewer than 50 workers, says Timothy Jost, a law professor at Washington and Lee University. Moreover, some insurers don’t write policies in the small-group market, which would have forced some mid-sized employers to switch carriers.
The ACA’s small-group-expansion provision had faced criticism from employer groups, insurers and state regulators, and Congress had been under pressure to address it. State insurance commissioners have advised against it since the law was enacted and saw little need for rate regulation for mid-sized employers, says Joel Ario, managing director at Manatt Health Solutions and former insurance commissioner for Oregon and Pennsylvania. If the small-group market had been expanded, midsized employers with higher-than-average risk would likely have remained in the small-group market, which wouldn’t have improved the overall risk pool. And employers with a younger workforce and better-than-average risk would have had a financial incentive to self-insure, he says. While the legislation gives states the option of expanding their small-group definition, Ario says few state regulators would be in favor of such a move. “A few states may expand, but I would expect them to have problems,” he says.
As Oregon’s insurance commissioner, Ario pushed to expand the small-group definition — for rating purposes — from 25 or fewer workers to 50 or fewer. The expansion was approved in 2007 and helped to stabilize insurance rates and minimize pricing volatility among the state’s smallest businesses. However, some companies that fell under the expanded small-group definition faced sizable premium hikes as a result.
“I got calls years later, when I was commissioner in Pennsylvania, from Oregon business owners that complained that the rate regulation caused a big increase in their rates,” he says. Small group has been defined as 50 or fewer in all states since HIPAA was enacted in 1996, but states controlled rate regulation and Oregon only went to 25 for that purpose.
If the definition would have expanded on Jan. 1 as called for by the ACA, there would have been more losers than winners — “that’s just how it would play out. I think the White House knew that and is why the administration is supportive of this,” adds Christopher Condeluci, a principal at CC Law & Policy in Washington, D.C. Condeluci was worked for the Senate Finance Committee during the drafting of the ACA.
Many Already Have Transitional Policies
Many midsized businesses already have transitional policies and wouldn’t have had to abide by the small-group expansion requirement until after October 2016. Other employers have scheduled renewal of their 2016 policies on Dec. 1 to side-step the definitional change.
Thirty-four states allow transitional policies, which allow mid-sized groups to remain a part of the large-group market until October 2016. Nine states — California, Colorado, Connecticut, Maryland, Minnesota, Nevada, New York, Vermont and Washington — prohibit noncompliant policies across all markets, while eight states have not yet provided publicly available guidance to insurers, according to a paper published in June by the Commonwealth Fund.
Carriers are expected to welcome the change because it will be less disruptive to their midsized employer clients. However, while the rates are set for small groups that renew on Jan. 1, small employers tend to renew coverage throughout the year, which will give health plan actuaries time to recalculate rates.
About 1.7 million businesses that offer health coverage to employees have 100 or fewer workers. More than 90% of those fall into the 50-or-fewer category. Carriers have not made significant adjustments to their small-group rates to accommodate the 51-100 size employee groups, says Jon Kingsdale, Ph.D., managing director at Wakely Consulting Group and founding executive director of Massachusetts’ Commonwealth Health Insurance Connector Authority.
Source: AIS Health