By Sabrina Corlette, Jack Hoadley, Dania Palanker and Kevin Lucia

The Affordable Care Act (ACA) ushered in dramatic changes for small employers and the health insurers that cover their employees. But the impact of the ACA’s reforms has been lessened by the availability of non-ACA compliant plans and other benefit arrangements.

In a new report for the Urban Institute and Robert Wood Johnson Foundation’s project to monitor and track health reform in the states, Georgetown University researchers assess small-group market trends through a review of premium and coverage rates and structured interviews with insurer, broker and small business stakeholders across six states: Arkansas, Minnesota, Montana, New Mexico, Pennsylvania, and Vermont.

The authors find trends in the market since enactment of the Affordable Care Act (ACA) that have long-term implications for the future sustainability of this market, including increased segmentation leading to higher premiums and fewer choices for employers with less-healthy workers. While each state is unique, the trends uncovered in these six states could be indicative of trends nationwide.

Key findings include:

• Premium trends and offer rates. The small-group market in our study states experienced low or moderate rate increases between 2016 and 2017, generally consistent with medical trend. All study states experienced some decline in the number of small employers offering group health plans, but less than most stakeholders had expected. 

• Shifts to and from the individual market. Many small businesses, particularly those with fewer than 10 employees, dropped their group policies and shifted employees to the individual market in 2014. However, stakeholders reported that many of those employers are migrating back to the small-group market because of rising premiums, narrow provider networks, and less generous coverage in the individual market, as well as uncertainty over the future of the ACA. 

• Expanded coverage choices for small businesses. The ACA created an environment that expanded coverage options for many small employers, particularly those with young and healthy workers. Many small employers have remained in transitional “grandmothered” plans that are not ACA-compliant in states that continue to allow them. But enrollment is beginning to decline as sicker groups shift to the ACA-compliant market. Enrollment has steadily declined or disappeared completely in “grandfathered” plans, plans that predated the ACA and do not have to comply with many of the law’s reforms. 

• “Level funded” products marketed to healthier groups. Insurers have ramped up the marketing of level-funded products that combine self-funding, a stop-loss policy, and administrative services. These products are targeted to small employers that have relatively young and healthy workers. They are less expensive for these groups than ACA-compliant plans. But stakeholders note that as these plans gain traction, they will segment the market between high- and low-risk groups.

• Additional purchasing arrangements for healthy small groups. Other group purchasing arrangements have evolved to appeal to small employers with healthy employees, such as self-funded MEWAs and group captives.

• Health Reimbursement Arrangements (HRAs). Brokers and small business representatives reported that HRAs could be an attractive coverage option for many small employers to help employees buy individual health insurance, but they have yet to gain much of a foothold in the market.

While the ACA improved premium rates and coverage for some small businesses, employer groups with young and healthy employees faced premium hikes. Insurers and brokers have been quick to respond to these employer groups, and state and federal policies have permitted a greater set of coverage options than originally envisioned by the ACA.

These new options can deliver lower premiums to groups with healthy workers, but pose a risk to the small-group market as a whole. When markets are divided between healthy and less-healthy groups, premiums will rise for those less-healthy groups and fewer insurers will offer them coverage.

The authors recommend that state and federal policymakers collect and monitor data on changing coverage choices in this market and their impact on premium trends, so that they can respond with policies that support all small businesses. You can download the full report here.