Repeal of Small Group Market Expansion Signed into Law

Amendment to the Affordable Care Act has big implications for employers with 51-100 workers

By Stephen Miller, CEBS Oct 8, 2015
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On Oct. 7, 2015, President Barack Obama signed into law The Protecting Affordable Coverage for Employees (PACE) Act, a measure to rescind the Affordable Care Act’s (ACA’s) expanded definition of a small employer subject to the rules of the small group insured market in all 50 states. The bipartisan bill had been passed by the Senate on Oct. 1 and by the House of Representatives on Sept. 28.

The Society for Human Resource Management (SHRM) was part of a coalition of employers and business groups that supported passage of the PACE Act.

Background

The ACA, as enacted in 2010, held that effective Jan. 1, 2016, the definition of a small group employer would increase nationally and would henceforth apply to organziations with one to 100 employees. As a result, midsize fully insured empoyers would only have been able to purchase small group plans (unless they were renewing plans that had grandfathered status).

“Under current law in most states, employers with one to 50 employees are considered small employers while employers with 51 to 100 employees are considered large employers,” Chatrane Birbal, senior advisor, government relations at SHRM, told SHRM Online. “The PACE Act leaves the one to 50 definition in place, although states have the option of expanding the definition of small employer to cover employers with up to 100 employees,” if state insurance authorities believe that market conditions in their state necessitate the change and state legislatures pass such measures.

Advocates of expanding the small group market under the ACA argued the move would make insurance more affordable for the smallest employers by expanding the risk pool to include midsized companies, and that it would help stabilize the ACA’s Small Business Health Options Program (SHOP) marketplace by bringing in more participants.

But employers and business groups responded that leaving the size of the small group market up to individual states would protect the ability of employers to select from a broader array of coverage options and mitigate against dramatic premium increases they feared would occur, especially for midsize employers, with the expansion.

Small Group vs. Large Group Markets

“This change is important. Small employers are treated very differently under the ACA than large employers for purposes of insurance regulation,” explained Timothy Jost, a professor at the Washington and Lee University School of Law in Lexington, Va. For example, small group market plans must:

  • Cover 10 essential health benefits.
  • Fit into the actuarial value levels (platinum, gold, silver and bronze) defined by the ACA.
  • Participate in the risk adjustment program and be part of a single risk pool for setting premiums.
  • Only consider age, geographic location, family composition and tobacco use in setting rates.

Large group plans are not bound by any of these requirements.

“Most states have long defined a small group as consisting of 50 or fewer employees, which is how the term was defined by the Health Insurance Portability and Accountability Act,” Jost said. “Many insurers write only in the large group market, therefore changing the definition of small group would likely result in many groups seeing their coverage cancelled.”

The definition change also would have left “midsize employers subject both to the employer mandate (which does not apply to employers with fewer than 50 employees) and the small group insurance requirements (which do not apply to employers with over 100 employees),” Jost pointed out. And, unlike midsize employers, organizations with fewer than 25 full-time equivalent employees may be able to take advantage of the ACA’s Small Business Health Care Tax Credit for group coverage purchased through the SHOP marketplace.

The Congressional Budget Office estimated that the PACE Act will reduce the deficit by $400 million over 10 years because it will lower premiums in the midsize employer market, thus increasing taxable income of employees. “It is thus one of the few potential amendments to the ACA that does not increase the deficit and require a ‘pay-for’ provision,” Jost noted.

Coalition Urged Enactment

The 50-100 Coalition in favor of the current definition of the small group market, which SHRM supported, urged the president to sign the PACE bill. “This important legislation will allow states to keep the current definition of a small group market as 50 and fewer employees, which will avoid dramatic premium increases and allow midsize employers to keep their current health coverage,” said a statement from the coalition, which noted premiums would otherwise have been likely to go up for midsized employers since health insurance carriers underwrite small group and large group employer plans differently.

That view was supported by the American Academy of Actuaries, which predicted that increasing the size of small groups would have meant midsize employers would “face additional benefit and cost-sharing requirements, which could reduce benefit flexibility and increase premiums.” It also raised the concern that midsize employers with mostly health workforces might self-insure, leaving primarily unhealthy groups in the small group market, raising costs for small employers.

Changing the definition of small group would have eliminated many of the plan choices currently available to midsize employers and made coverage “less affordable and more administratively complex,” said Janet Trautwein, CEO of the National Association of Health Underwriters, in a statement.

Transition Relief Was Set to Expire

In March of 2014, the administration issued guidance allowing state regulators to permit employers in the 51 to 100 market to renew existing large group coverage for policy years beginning on or before Oct. 1, 2016, said Jost. “Most states followed suit. But midsize employers who did not have coverage as of Jan. 1, 2016 and who purchased it thereafter—as they would have to do to avoid the employer mandate tax if one of their employees received marketplace coverage—would have to purchase coverage in the small group market.”

Enacting the PACE Act has effectively made the transition policy permanent and extended its protection to midsize employers purchasing coverage in the future.

The Commonwealth Fund provides a chart showing, as of June 2015, that most states applied the transitional policy to allow plans offered to midsize employers (groups of 51 to 100) to stay in the large group market, while some states prohibited use of the transitional policy for midsize employers.

“U.S-issued expatriate plans were already exempt from the ACA’s small group definition change. Plans of any group that employs more than 50 global lives will continue to be considered large group plans,” an alert from Cigna noted.

Post-Enactment Steps

“There will be some tangles to work out [after] the PACE Act becomes law,” Jost pointed out. “A number of states have adopted the federal requirement into their own law and may make the transition as a matter of state law, as the PACE Act allows them to do.”

Also, “Insurers have presumably filed their 2016 rates assuming the current requirement would go into effect and likely cannot refile in most states this late in the year,” he added. “But midsize groups will presumably be able to find coverage in the large group market and the disruption in most states will probably be less than if the current law stayed in effect without the PACE Act amendment.”

However, “Several states, including Colorado, Connecticut, Washington, Oregon, Virginia, Vermont, Maryland, Nevada and the District of Columbia, had passed laws redefining ‘small group’ beginning in 2016 according to the original ACA threshold of 100 employees, to be consistent with the ACA,” Employee Benefit News reported. “Although the PACE Act’s enactment now maintains the level at 50, those states will need to pass new laws to bring their threshold for the small-group definition back down to 50.”

In New York, which also adopted the 1-100 employee small group definition, “many groups in the 51-100 category have, or will, early renew on December 1 to lock in more favorable pricing,” noted Craig Hasday, president of Frenkel Benefits. “So the real impact on small group pricing (estimated at 2-3 percent) won’t be felt until 2017,” by which time Hasday was hopeful New York and other states that expanded their small group market will “adopt the 50 and fewer standard that is now, and will be, the prevalent structure in most states. It only makes sense since 50 lives dovetails with the employer mandate threshold.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related Resource:

FAQs on the Impact of PACE Act on State Small Group Expansion, Centers for Medicare & Medicaid Services, October 2015

Related News Articles/Posts:

A Small 'PACE' in the Right Direction, Benefits Bryan Cave, October 2015

Some Small Employers Remain in Limbo on Small Group Definition, Employee Benefits News, October 2015

Is ObamaCare Debate Starting to Thaw, The Hill, October 2015

Small Group Definition Will Not Change Nationally in 2016 - States Have Flexibility, Cigna, October 2015

Related SHRM Articles:

Small Group Market Expansion: If California Forges Ahead, SHRM Online Benefits, November 2015

SHRM Opposes Expansion of Small Group Market under ACA, SHRM Online Benefits, June 2015

HHS Gives States Flexibility to Set Essential Health BenefitsSHRM Online Benefits, December 2011

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