President Obama signed legislation last Wednesday that makes a significant change in the health law’s small business rules, following a rare bipartisan effort to amend the Affordable Care Act.
The revision updates the definition of what constitutes a small employer so that companies with 51 to 100 workers won’t become subject to the small group insurance reform provisions next year. Instead, the law allows those companies to continue as large group plans, unless states step in to define them differently.
Lawmakers from both parties argued that classifying these companies as small businesses would increase their health insurance premiums significantly because they would have to comply with requirements to offer a comprehensive package of benefits, among other things. Such a change could lead to the surprising effect of leaving workers with plans that offer less protection than they currently have.
The health law amendment doesn’t affect the employer requirement to offer insurance to workers. Starting next year, these midsized employers will have to offer health insurance or face penalties, just like other large group plans, while smaller companies are exempt from that requirement.
Instead, the law signed last week concerns coverage and cost requirements for plans offered by small businesses.
Coverage in the small group health insurance market has historically tended to be skimpier and pricier than coverage in large group plans. The health law established new rules for employers with 50 or fewer workers who offer insurance that took effect in 2014: It required all plans to cover 10 essential health benefits and established standardized cost-sharing limits and maximum annual spending caps.
In addition, instead of taking workers’ health status into account when setting premiums, under the health law insurers can now base premiums in the individual and small group markets on only four things: where people live, family size, tobacco use and age.
Large group plans don’t generally have to comply with these new rules.
Starting next year, those rules for small group plans would have applied to companies with 51 to 100 workers, too. With the passage of the new law, they won’t.
Because of the requirement to offer coverage, the larger small companies —especially ones with healthy workers — may have had a strong incentive to sidestep small group coverage and rating rules by paying their workers’ claims directly rather than buying insurance for that purpose. The rules don’t apply to companies that self fund.
But self-funding can be a chancy proposition for smaller companies, who become financially responsible for their workers’ medical claims.
“It’s risky for the firm and for the people who are covered by that firm,” says Linda Blumberg, a senior fellow at the Urban Institute’s Health Policy Center. Blumberg says that even though small firms often buy reinsurance policies to cover claims over a certain dollar threshold, some reinsurance policies are only lightly regulated and may not offer as much financial protection as small companies think they have.
Now that they won’t have an incentive to avoid small group coverage and rating requirements, fewer companies with 51 to 100 employees may opt to self-fund.
“If you’re a healthy group and you can buy a fully insured product and you don’t have to come into compliance with small group reforms, it’s going to make self-funding less attractive,” says Kevin Lucia, a senior research fellow at Georgetown University’s Center on Health Insurance Reforms.