What if Small Businesses Evade ACA Regs?

There's been some hand-wringing lately about the potential impact small employers could have on the health insurance market if they are able to skirt regulations under the federal Patient Protection and Affordable Care Act.

The concern is that cost sharing, which is among the central tenets of healthcare reform, could be undermined if small employers with relatively healthy workers and dependents are able to stay out of the Small Business Health Options Program (SHOP) or health insurance exchanges.

If that were to happen, then firms with sicker employees would find themselves stuck with ever increasing premiums because there wouldn't be enough healthy workers in the mix to balance the risk.


Weighing the Options
That's a very real worry for the folks at the National Federation of Independent Businesses, explains Kevin Kuhlman, manager of legislative affairs for NFIB. "We're going to see businesses sitting down with their accountants and looking at their options to see what works for them." In Kuhlman's view there are still so many unknowns in the ACA, including essential benefits, that small businesses are likely to try and stay away from it.

The ACA allows small employers to avoid participating in healthcare reform by self insuring or by maintaining their grandfathered health insurance plans—the ones that were in place before March 23, 2010. But in both cases the ACA sets the bar pretty high.

The grandfathered health plans still have to meet some basic standards such as no coverage exclusions for children and no lifetime limits on coverage benefits. But they are free from other requirements, including those that mandate coverage of certain prevention services with no cost sharing.

Grandfathered health plans may make routine changes.  For example, adding new benefits is OK, but cutting benefits or increasing out-of-pocket spending would dismantle the special status and invoke ACA regulations.

Self Insurance
To self insure, a small firm must be willing to bear the risk of its employees' health. This is common among big firms with hundreds of employees paying premiums and sharing risk. Small employers who test the self insurance market are usually happy to be back in the fully insured fold.

A recent RAND Corporation analysis that appears in the February issue of Health Affairs supports the idea that neither self-insuring nor grandfathered health plans would have a major impact on the future cost of health insurance because relatively few businesses are likely to take advantage of either option.

At least that's the case if the current rules remain intact. Keeping the rules as they are written, especially the limitations on maintaining grandfathered plans, is key to keeping premiums affordable in small business insurance exchanges explains Christine Eibner, the study's lead author and a senior economist at RAND, a nonprofit research organization.

Using a microsimulation model, Eibner and her team looked at how grandfathering and self-insurance options could impact coverage and premium costs for policies sold through insurance exchanges set up for small employers.

If the rules for grandfathered plans were relaxed, then premiums offered to small employers through health insurance exchanges could be as much as 50% higher, according to the study. Eibner says she's not aware of any effort to make changes in those provisions.

Financial Risk
She says most small employers will choose not to self-insure because of the financial risk of unknown employee medical expenses. Although the analysis demonstrates that the self-insure option would reduce enrollment in the small business insurance exchanges changes, it won't have a substantial impact on exchange premiums.

But Kuhlman counters that small businesses are often unable to predict many of the costs associated with the ACA. He says that stop-loss insurance and reinsurance can be priced into the future and that predictability may sway more small businesses to opt out of the ACA regulations.

And he points to an ACA tax provision on health insurers that kicks in in 2014 and is projected to raise $1 billion that year as another incentive for small businesses to turn to self insurance. "That cost will be passed on to fully insured small businesses in the form of higher premiums."

Eibner notes that under the status quo very few small businesses with fewer than 100 employees self-insure even though that option would allow them to avoid state rating regulations and state coverage mandates.

Some policy wonks argue that increased interest among small business could result in cost adjustments in stop-loss market that would make self insurance more affordable and attractive to small business. Eibner has looked into that scenario and says a high proportion of small businesses would be required to exercise that option to adversely affect premiums in health insurance exchanges. "We don't see that happening."