The number of small businesses offering health insurance coverage has been steadily declining over the last decade and more, but there has been speculation that the Affordable Care Act (ACA) could potentially accelerate that decline. Because hard numbers to confirm or disprove this are scarce, Georgetown researchers, in partnership with the Urban Institute and with funding from the Robert Wood Johnson Foundation decided to reach out to key stakeholders – insurance companies, brokers, and state insurance regulators – and ask them what they are observing on the ground. We spoke to these stakeholders in 5 states, Arkansas, Montana, New Mexico, Pennsylvania and Vermont, where early data suggest that enrollment in the small group market is declining at a faster pace than the national average.

What we found was a market in flux. While the ACA has provided more consumer protections to small businesses and their employees, it has also created new uncertainties and changed incentives for how small group health plans are designed and offered. Our new report shares the following key findings:

• Some state departments of insurance are not closely monitoring enrollment and other trends in the small group market. In spite of the value that data can bring to informing policy decisions about small business health insurance, some state regulators do not appear to be collecting or analyzing data related to the small group market. In addition, because states have no authority to regulate health plans that are self-funded, their picture of the self-funded small group market is nonexistent.
• SHOP marketplaces continue to have minimal enrollment. Small employers show little interest in the SHOPs, and few have enrolled. There was broad consensus among stakeholders that the SHOP adds little value to the coverage already available to small businesses. Employee choice, originally touted as a major attraction of the SHOP, was criticized for being too complex and administratively burdensome.
• A significant portion of the small group market remains in non–ACA compliant plans. Though it varies among states and insurers, many small businesses have remained either on “grandfathered” plans (plans that were in existence before the ACA was enacted in 2010), or “grandmothered” plans (plans they were in in 2013; these plans can be renewed until October 1, 2016). These plans do not have to comply with the full range of ACA standards for the small group market.
• Some small employers are sending employees to the individual marketplaces, but fewer than expected. Some small employers, particularly very small groups (i.e., less than 10 employees) and those with employees who qualify for federal subsidies, have new incentives to drop their group plan and encourage employees to enroll in individual market place coverage. While this has proved an attractive option for some, most stakeholders are not seeing dramatic shifts in this direction, at least not yet.
• Stakeholders observe a shift away from association health plans, while other coverage options, such as self-funding and group purchasing arrangements, may be gaining a foothold. The ACA requires small group coverage to meet new standards, including prohibitions against health status and gender rating and requirements to cover an essential health benefits package. These new rules could cause premiums to rise for groups of healthy, young and male employees, even while they benefit groups with older, sicker, or predominantly female workers. As a result, some young, healthy groups could have incentives to seek alternative coverage arrangements that are exempt from the ACA’s market rules in order to find a more affordable option.
• The year 2017 will be critical for the future of the small group market. Many small employers will be required to transition off their non-ACA compliant plans in 2017. That same year, unless repealed by Congress, in many states employer groups 51-100 will be required to shift to small-group market coverage. These required transitions could encourage more groups with young, healthy employees, who could face premium hikes, to consider alternative coverage options, such as self-funding or the individual marketplaces.

In the wake of the ACA, many small employers have held onto the status quo by staying on non-ACA compliant plans. In so doing, a number of the intended reforms under the law, including the SHOPs, have not been fully realized.

For policymakers concerned about maintaining a robust and stable small-group market, however, there may be trouble on the horizon. As more employers are required to shift off transitional policies, or as mid-sized employers are required to join the small group market, many healthy groups will have greater incentives to leave the fully insured market. If many do so, this could result in adverse selection and increased premiums for those remaining in the small group market. Thus, policymakers need to closely monitor changes in this market and seek out policy solutions that avoid the further separation of health care risks.