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States May Shape ACA Definition Of 'Small Employer'
Law360, New York (October 26, 2015, 12:16 PM ET) -On Oct. 8, 2015, President Obama signed into law the Protecting Affordable
Coverage for Employees Act of 2015, or the PACE Act. While the PACE Act
makes relatively minor amendments to Section 1304(b) of the Affordable
Care Act, and Section 2791(e) of the Public Health Service Act, the ultimate
effects of the PACE Act will assuredly prove significant for employers of fewer
than 100 persons, their employees and the small group market.
Each section of federal law amended by the PACE Act specifically defines
what constitutes “large” and “small” employers for the purpose of
determining how employers provide health coverage for their employees and
what type(s) they can provide. The distinction between “large” and “small”
employers in the context of group health coverage has long been significant
Michael J. Morris
under many states’ insurance laws, as even before the 2010 passage of the
ACA, many states imposed specific requirements on small group coverage
and implemented significant restrictions on health plan’s underwriting of small employer groups. In New
Jersey, for example, the state’s Small Employer Health Benefits Program, implemented in 1994, requires
health plans offering coverage in the small group market to offer standardized benefit plans, and
significantly limits the factors plans can use to set rates (including pre-existing health conditions of
covered employees). New Jersey law also required health plans offering small employer health coverage
to maintain a minimum medical loss ratio (MLR) long before the ACA.
Prior to passage of the ACA, most states’ insurance laws defined a “small” group employer as a firm of
two to 50 people. As an integral part of health care reform under the ACA, Congress expanded the
definition of a “small employer” to include firms of between two and 100 covered persons. The ACA in
turn imposes on the small group market, on a nationwide basis, restrictions on underwriting, MLR
requirements and risk-sharing mechanisms which are in many ways fundamentally similar to those
measures implemented by individual states in the years prior to passage of the ACA.
Because state insurance laws and regulations have typically defined “small” employer groups as those
with only two to 50 covered persons, and the ACA would preempt many states’ small employer group
health coverage laws, the ACA, as originally adopted in 2010, allowed states a transitional period until
Jan. 1, 2016, to continue to define “small” groups as those up to 50 covered persons. Under the ACA,
and prior to passage of the PACE Act, by Jan. 1, 2016, those plans sold or renewed for employers with
51-100 covered persons would have been necessarily moved into the small group market. The transition
away from the traditional (i.e., “large”) group health market, which was set to occur during the fall 2015
open enrollment period, would have required midsized employers (those of 51-100 persons), regardless
of their state(s) of residence, to purchase coverage compliant with the ACA’s small employer mandates
— something many midsized employer were loathe to do.
The transition for midsized employer groups into the small employer market would likely be disruptive
and costly, as small group plans must purchase coverage based upon the ACA’s actuarial value levels,
known as the “metallic” designations (i.e., bronze, silver, gold and platinum). Small employer plans must
offer “Essential Health Benefits” and are limited in what underwriting criteria may be used to price
coverage. For example, health plans offering small employer group coverage are prohibited from
considering group members’ health status and historical group claims experience in pricing their
coverage. Health plans also may not consider such common and basic underwriting factors such as age,
gender, industry and group size. These requirements generally have made small employer coverage
purchased either through the Small Business Health Options Program (SHOP) or the private market
more expensive on a per-covered person basis than large employer coverage.
Earlier this year, as more attention focused on the transition in the federal statutory definition of
“small” and “large” employer groups, concerns surfaced regarding the potential that newly “small”
employers would face significantly higher premiums for health coverage. According to a widely
cited Blue Cross Blue Shield Foundation report, on average, affected midsized employers were expected
to see an 18 percent increase in premiums, assuming such employers continued to provide similar
coverage to covered persons. Thus, the transition became a political issue.
The U.S. Department of Health and Human Services addressed the issue through published guidance
stating the agency would not enforce the ACA’s small employer group coverage requirements for groups
of 51-100 covered persons if the employer’s health plan was renewed on or before Oct. 16, 2016 —
essentially delaying the effective date of the regulation until Oct. 16, 2017. This stopgap measure,
however, proved inadequate to assuage growing concerns among employers and health plans that the
expansion of the more tightly regulated small group employer market would be detrimental for all
involved.
The PACE Act, which was introduced in Congress in late March 2015 as H.R. 1624, was drafted to provide
a more definite solution by “tweaking” the ACA in order to allow states the option of whether or not to
expand the definition of a “small” employer group for coverage purposes. The underlying premise of the
PACE Act is that each state may address the expansion issue as it sees fit depending on the needs and
demands of its particular market. The PACE Act received broad-based political support from several
bipartisan coalitions and state insurance commissioners, including the president of the National
Association of Insurance Commissioners, Montana Commissioner of Securities and Insurance Monica J.
Lindeen. In September, the PACE Act passed both the House of Representatives and Senate by simple
voice votes, and was sent to the president for signature within a week.
The PACE Act essentially excises the transitional expansion of the definition of “small employer” from
the ACA. Thus, the definition of a “small” employer group effective as of 2010 (i.e., between two to 50
covered persons) will remain in effect permanently. The PACE Act also contains new statutory language
which allows states an option to expand the small employer market within their jurisdiction to include
all employer groups between two and 100 covered persons.
It remains to be seen whether any state exercises this option and elects to retain the ACA’s original
expansion of the “small employer” definition. Prior to passage of the PACE Act, the majority of states
(including New Jersey) had exercised their discretion to delay the expansion of the definition of “small
employer” through 2016, although a minority (including New York, see N.Y. INS. LAW 3231(a)(1) and
N.Y. INS. LAW 4317(a)(1)) had given effect to the expansion. As HHS had already announced that it
would not enforce the ACA-mandated small employer group expansion that was effectively repealed by
the PACE Act, and with small employer group plan enrollment beginning imminently, few if any states
are expected to newly expand their small employer markets for the coming plan year. By way of
example, the Pennsylvania Department of Insurance, lead by a Democratic political appointee, has
announced that it will not expand its small group employer definition.
Most midsized employers have been especially receptive to the relief afforded by the PACE Act,
particularly given that implementation of the ACA’s provisions requiring such employers to offer
employees health coverage in the 2016 plan year has not been delayed. Under Section 4980H of the
Internal Revenue Code, “applicable large employers,” defined as employers of 50 or more full-time
equivalents, will be subject to “employer shared responsibility” provisions in 2016. In other words,
midsized employers, regardless of whether they are considered “large” or “small” employer groups for
determining in which market they procure coverage, are required to provide health benefits to full-time
employees in 2016 or face significant tax penalties. Under the PACE Act, midsized employers will not be
required to make this purchase in the expensive small employer group coverage under threat of tax
penalty.
While the immediate benefits of the PACE Act to midsized employers are readily apparent, the downside
costs have yet to be determined. Although coverage in the small employer market, especially coverage
purchased through SHOP, has become quite costly in recent years, the anticipated influx of 51-100
person employer groups ultimately could have reduced the cost of coverage by expanding the size of
the small employer group risk pool. Though there was little actuarial consensus on what would have
happened to traditional small groups’ (two to 50 covered persons) premiums had the small group
market expansion proceeded, following passage of the PACE Act there are no longer any significant
changes to the small group market on the immediate horizon which may improve the overall state of
the market.
As the market for small group coverage under the ACA continues to mature, states will now need to
decide whether to expand the size of the small group market by increasing the number and size of
employers included, or alternatively, to limit the scope of the ACA’s small employer mandates by
keeping in place the current definition. Those decisions will have the potential to further significantly
impact employers’ health care costs depending on their size and state of residence.
—By Michael J. Morris, Bressler Amery & Ross PC
Michael Morris is an associate in Bressler Amery & Ross' Florham Park, New Jersey, and New York offices.
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