Small Group Market Expansion: If California Forges Ahead

In 2016, many midsize Calif. businesses will fall into the small group health insurance market

By Bryan Bate November 12, 2015

Bryan Bate, vice president of Burnham Benefits Insurance Services in Orange County, Calif., has 17 years of experience in the employee benefits industry.

On Oct. 7, 2015, President Barack Obama quietly signed into law a bipartisan change to the Affordable Care Act (ACA) that will allow individual states the discretion to define what constitutes a small-group employer. With overwhelming approval in both GOP-led chambers of Congress, the new law, the Protecting Affordable Coverage for Employees (PACE) Act, repeals the existing ACA provision that would have, as of Jan. 1, 2016, changed the definition of a small employer from one that has 50 employees or fewer, to one with 100 employees or fewer.

The ACA-mandated expansion of the definition of small employer, which was met with protests from small businesses across the U.S., threatened to significantly increase the cost of coverage for employers with 51 to 100 employees; these employers would have been required to join the small group market for the first time. According to the American Academy of Actuaries, this change would have potentially affected 150,000 companies and more than 3 million workers nationwide. The PACE Act, however, now provides each state with the choice of whether to expand the definition of small employer or leave it as it currently stands.

Many states are expected to retain the 50 employee limit definition for 2016. The District of Columbia and several states, however, are expected to make a change, including the state of California, which in 2012 enacted A.B. 1083—legislation to expand the definition—while also adopting the ACA’s full-time and full-time equivalent method for counting employees toward the small employer threshold. As a result, the California small group market expansion will take full effect as expected on Jan. 1, 2016—unless state legislators act to repeal the decision before the end of the year.

The Great Migration: Areas of Impact in California

Based on third quarter 2014 California labor market employment data, roughly 14 percent of all California jobs—held by 2.3 million employees—and roughly 2.4 percent of all California businesses—33,000 employers—will be affected by the change. The definition of a small group employer in California has historically been one with 50 or fewer eligible employees for group health insurance purposes. However, unless an employer has a grandfathered large group plan, employers with 51-100 full time equivalent employees who renew or purchase coverage in 2016 will be required to follow all small group regulations.

In California, small group premiums will be based on the experience of the entire risk pool of all fully insured, nongrandfathered groups covered by the insurer in the state, and premiums cannot fluctuate based on an individual group’s claims experience.

For large groups, insurance providers commonly use health status or claims experience, industry risk factors, employer size, participation and contribution levels, age/gender factors, and composite ratings to determine premiums. But with the mandatory migration, those falling under the new small group definition will no longer be allowed those variations. For example:

The gender factor will no longer be permitted, as biases traditionally rate females healthier than males. According to research from Harvard Medical School, American men are more burdened by illness during life, fall ill at a younger age and have more chronic illnesses than women.

Age rating will be limited, with a 2016 ratio maximum of 3 to 1. As an example, the rate for a 63-year-old cannot be more than three times the rate for a 26-year-old. Current age factor variations often reflect up to a 5-to-1 ratio or higher.

Geographic regions within the state that are currently prescribed may be changed significantly. Changes are also possible with premiums for tobacco use, which may be increased up to but not exceed 50 percent.

Family size, too, will be a determining factor in adjusting premiums under the 2016 provisions. Up to three children under 21 years of age may be charged a premium within a family, but any additional children can receive coverage at no additional charge.

Changing Benefit and Cost-Sharing Requirements

When the ACA small group definition becomes effective in the state of California in 2016, employers with 51-100 employees will, for the first time, fall under the same requirements that currently apply to employers with 1-50 employees. This will present significant changes that include compulsory coverage for essential health benefits—10 categories of wellness and preventive health services that provide, for example, dental and pediatric benefits that are not necessarily included in large group plans.

In addition, these plans must satisfy a metallic benefit level of coverage. These metallic tiers—Bronze, Silver, Gold and Platinum—are intended to help consumers compare plans and reflect the actuarial value of the plans’ cost-sharing features, or the portion of covered benefits paid for by the plan, on average.

Additional benefit and cost-sharing requirements could increase the breadth and scope of coverage, potentially reducing plan flexibility yet increasing premiums. These changes may provide the impetus for employers with 51-100 employees to self-insure as a way to avoid these requirements, potentially adding to growing numbers of lower-cost groups choosing to assume the financial risk of providing health care benefits to their employees.

This is typically done by earmarking money from corporate and employee contributions and setting it aside in a special fund that is used to pay claims as they are incurred rather than paying fixed premiums to an insurance provider. If this kind of chain reaction were to occur, premium averages could likely increase not only among the fully insured employers with 51-100 employees but also for employers with 1-50 employees, as these groups will be combined for the purpose of premium rating.

A Sliver of Light

Though the state of California has been offered an olive branch by the government in its bipartisan change to the Affordable Care Act (ACA)—which it could extend to those businesses bracing for these new changes—that sliver of light is anticipated to fade into disappointment as Jan. 1, 2016, approaches. With all signs indicating that the state will not change its current position, employers with 51 to 100 employees will likely be required to join the small group market for the first time, with significant impacts expected, including higher premiums for employee coverage.

As the ACA continues to unfold and make adjustments, it’s a good time for the newcomers into this higher premium category to examine their employee benefits options and prepare for the unpredictable years ahead.

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