There’s an insurance market reform in the Affordable Care Act that has received relatively little attention over the past few years. But its impact – including potential premium increases for mid-size employers – will be felt soon, so policymakers and health stakeholders are starting to take notice. The provision defines the small employer market to include employer groups of 2-100 employees. This is a significant change because historically, most states have defined their small group markets to constitute groups of 2-50 employees. Recognizing the market disruption it could cause, the drafters of the ACA allowed states to delay implementing this new definition until 2016. However, there’s a rising call to delay this provision for another 1 to 2 years, or to repeal it entirely.

While we’re in the cold dark days of winter, plan year 2016 may seem far away. But that’s not the case for insurance companies and state regulators. Plans and rates for 2016 need to be filed for review relatively soon (May 15 for federally facilitated marketplaces). Under the law, insurers will need to combine the small and mid-size risk pools in their rate setting and extend the ACA’s rating and benefit standards to larger employers.

Why Change the Definition of the Small Group Market to 100 employees?

My informal research (a few calls and emails to former congressional staff and stakeholders) into the origins of this ACA provision have failed to uncover a member of Congress or interest group willing to claim it. It may have been part of a well-intentioned effort to extend the ACA’s small group market protections – particularly the ban on gender and health status rating and the requirement to cover a minimum package of essential health benefits (EHB) – to larger employers. Because health status, age and gender are allowable rating factors in the large group market, it is likely that employers with older, predominantly female, or sicker workforces pay higher premiums than their peers with predominantly young, healthy and male workers.

Similarly, without a requirement to cover EHBs, some plans may not cover the full set of 10 benefit categories listed in the ACA. However, while there is no national standard for reporting the scope of benefits in group health plans, a 2011 scan by the U.S. Department of Health and Human Services (HHS) of the benefits offered in large group, small group, and public sector employee health plans found that, in general, there were no major differences in the benefits covered. Instead, differences between markets were largely related to the cost-sharing charged for services.

What are the Risks of Changing the Small Group Definition?

The primary risk associated with changing the definition of the small group market to 100 employees is that premium rates for many mid-sized employers will rise, perhaps significantly. A letter submitted last week to HHS by the U.S. Chamber of Commerce cites an Oliver Wyman study projecting that two-thirds of groups with 51-99 employees will face an average premium increase of 18 percent.

Faced with such increases, mid-sized employers have three main options.

• Maintain their plan. Employers that decide to maintain their plan are likely to shift any increased costs onto their workers, accelerating a trend that already exists in this market.
• Self-fund their plan. Employers with relatively young and healthy workers will have a greater incentive to self-fund their plan, which exempts them from most of the ACA’s market rules and could, at least initially, stave off cost increases. However, if these employers self-fund in significant numbers, it would mean an older, sicker risk pool remaining in the regulated small group market, which would ultimately lead to even greater premium increases in future years.
• Drop their plan. While most employers currently offering coverage in this market are likely to continue to feel it is important to maintain coverage in order to recruit and retain a high-quality workforce, some employers may no longer find it affordable to offer coverage. While employers in the mid-size market will be subject to the ACA’s employer mandate (companies with more than 50 employees are not exempt from the mandate, as small businesses are), some may decide that paying the penalty is a better deal than paying for employees’ premiums, particularly when employees can purchase an individual plan (potentially with subsidies) through the marketplaces.

Whether or not the Oliver Wyman projections hit the mark, policymakers should re-consider changing the definition of the small group market, or at least provide for a transition period. We need better data on the market the ACA provision aims to reform. In particular, we need to better understand the extent to which mid-sized employers are affected by gender, age, experience and other premium rating factors. We should also try to learn how many workers in these plans face gaps in benefits that could be addressed by the EHB standard. Most importantly, we should try to get a better grasp on the likely impact of such a definition change, including the effect on premiums, employer offers of coverage, and incentives to self-fund.