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Achieving Universal Coverage



Countering Threats to the Small-Business Health Insurance Market

Countering Threats to the Small-Business Health Insurance Market

The economic recession caused by the COVID-19 coronavirus pandemic is hitting small businesses especially hard. Many may not survive. Those that do will find it even more difficult to offer health insurance, at a time when having health insurance is more important than ever.

Up until 2020, market conditions established by the Affordable Care Act (ACA) were encouraging for small-group health insurance.1 But increasingly there is cause for concern. Insurers report in mid-2020 that small firms under financial distress are unable to pay their premiums and are starting to drop their coverage, even before annual renewal time. Insurers themselves face uncertainty about the pandemic’s effect on medical costs.

Regulatory measures can help stabilize the small-group market. In this blog post, we focus on two: restricting self-insured plans and transitional plans.

Self-Insured Small Firms

The ACA’s market reforms require small-group insurers to cover preexisting conditions and certain essential health benefits and to set premiums without taking into account enrollees’ medical conditions. These regulations do not apply, however, to employers that self-insure by directly paying most medical claims rather than purchasing insurance. Self-insurance is attractive mainly when employees are healthier than the marketwide average; if so, self-funding costs are less than the cost of “community-rated” premiums. However, allowing small firms to self-insure makes the risk pool in the regulated market sicker and more expensive to insure. That is why more than a dozen states limit or prohibit smaller firms from self-insuring. Our prior research showed that doing so improved the risk pool in the regulated market in the ACA’s early years.

Transitional Plans

Some small businesses have avoided ACA market regulations by keeping “transitional” plans. These are plans purchased in 2010–2013 — after the ACA was enacted but before it took full effect. Where they exist, transitional plans are exempt from full ACA requirements. In about a third of states, regulators or insurers do not allow transitional plans, instead applying the ACA’s rules to all post-2009 plans. In states that allow them, although firms cannot newly purchase these plans, those who have them can hold on to them to avoid ACA regulations.

Impact on Market Health

To estimate the effects of noncompliant health plans — such as those created by transitional and self-insured arrangements — on the regulated market, we developed “risk scores” that measure the overall health status of each state’s small-group market. These risk scores measure expected costs for the pool of people in a given market compared with the average population. A higher number indicates a less healthy, more costly pool of enrollees.

From 2015–2019, risk scores have improved more in states that restrict self-insured and transitional plans than in those that do not. During this time period, risk scores improved for the small-group market in almost all states. However, at the median, this improvement was noticeably stronger — by 30 percent (0.12 vs. 0.09) — in the 18 states with few or no transitional plans compared to states that allowed transitional plans. Improvement was even greater — by 60 percent (0.16 vs. 0.10) — in the 11 states with the lowest proportion of self-insured small firms. Strongest of all were the eight states with both regulatory protections compared to the 25 states with neither (0.16 vs. 0.08).

Because we did not control for other factors that might be causing these differences, we cannot be certain that these two regulatory policies are the primary drivers of higher risk scores; certainly, other factors are involved. However, other research indicates that these regulations have had at least some discernable effects on the ACA’s small-group risk pool.

Lessons for the Future

Although transitional plans will become less relevant as time passes, other forms of noncompliant ACA plans can have a similar impact. Experts worry, for instance, about “association health plans” created by trade groups and others to sell insurance that is not compliant with the ACA. These plans could draw disproportionately healthier subscribers, leading to higher premiums in the regulated small-group market. Fortunately, some states have imposed stricter standards and others are considering doing so, to avoid harm to the existing market.

The small-business sector is facing its greatest economic threat since the Great Recession, and the small-firm workforce is facing the greatest health threat of a lifetime. The initial years of ACA market regulation teach us that keeping the small-group market from fragmenting can help to stabilize it and make available coverage more affordable at a time when many small businesses are struggling to stay afloat.


1. Small groups are those with up to 50 full-time workers (or up to 100 workers in California, Colorado, New York, and Vermont).

Publication Details



Mark A. Hall, Fred D. & Elizabeth L. Turnage Professor of Law, Wake Forest University School of Law

[email protected]


Mark A. Hall and Michael J. McCue, “Countering Threats to the Small-Business Health Insurance Market,” To the Point (blog), Commonwealth Fund, Aug. 25, 2020.