A recent, rare act of bipartisan unity has led to a change in the Affordable Care Act (ACA) that could impact the affordability and availability of health plans for small and midsize employers. As originally enacted, the ACA expanded the definition of small employer from one with 50 or fewer employees to one with 100 or fewer, starting in 2016. However, state regulators, as well as insurer and business interests, raised various concerns about the expanded definition and Congress passed the Protecting Affordable Coverage for Employees Act (PACE Act) in the fall of 2015. The PACE Act generally defines a small employer as having 1 to 50 employees, but allows states to elect to extend the definition of a small employer to 100 employees.
Small-Group Market Expansion: Potential Benefits and Risks
The ACA’s original language—redefining the small-group market to include employer groups of up to 100 employees—would have been a significant change. Proponents of expanding the small-group market argued that a bigger pool of employers in the small-group market could lead to lower and less volatile premium rates. Others felt that it was important to extend the ACA’s small-group market protections—including a ban on gender and health status rating discrimination and the requirement to cover a minimum package of essential health benefits—to larger employers. Supporters of the ACA’s small business or “SHOP” marketplaces also hoped that the influx of larger businesses could boost overall enrollment and help ensure the program’s sustainability.
However, as 2016 approached, some stakeholders began to lobby for repeal of the expanded definition, citing concerns about market disruption. One study commissioned by the Blue Cross Blue Shield Association estimated that premiums for midsize employers with between 51 and 99 employees could rise by as much as 18 percent, an increase that would largely be borne by employers with younger and healthier workers who benefit from the preferential rates permitted in the large-group market. Such increases could, in turn, give employers with relatively young and healthy workers a greater incentive to self-fund their plans. Self-funding (taking on the full risk of paying employees’ health claims) could help these businesses lower their costs, but their plans also would be exempted from most federal and state insurance rules that would otherwise apply to health insurance sold in the small-group market. If that happened in significant numbers, employers remaining in the regulated small-group market would be in an older, sicker risk pool. This could lead to even greater premium increases over the long term.
State Decisions on Small-Group Market Expansion
States are often referred to as the laboratories of democracy. In this case, because the PACE Act has given them flexibility to set the size of their small-group markets, their decisions can help test whether concerns about price increases and self-funding will come to fruition.
To date only four states—California, Colorado, New York, and Vermont—have expanded their small-group market to include groups of 100 or fewer employees. All other states have chosen to return to the small-group market definition of 50 or fewer.
The four states that expanded their small-group markets did so in part because the provision was incorporated into their state law. These states were among those that, in the wake of the ACA, enacted legislation integrating the suite of new market reforms into their state insurance code. As a result, rolling back the ACA’s small-group market expansion requires legislative action. For example, Virginia was among the states that had a state law expanding the market to 100 at the start of 2016, but the legislature enacted emergency legislation in January to bring the market size back down to groups of 50 or fewer.
At present, the impact of states’ decisions to expand, or not to expand, their small-group markets is uncertain. In the four states expanding their markets, dire predictions of large rate increases do not yet appear to have come to pass, with average premium rates generally rising at levels consistent with pre-ACA trends. For example, in Colorado, average small-group market premiums increased only 3.17 percent over 2015.
Going forward, it will be important for state and federal officials to closely monitor changes in premium rates for small and midsize businesses in states that have expanded their small-group market, as well as to document whether and what types of small businesses are self-funding. However, this latter concern is likely mitigated, because all four states have laws that significantly limit the availability or attractiveness of self-funding for small employers.
At the same time, officials can track how many workers in midsize companies will benefit from the extension of the ACA’s consumer protections. As these four states take the leap into an expanded small-group market, they can help other states better assess both the risks and benefits of doing so.