Next year, the Affordable Care Act (ACA) will be changing its definition of small group employer. Currently, an employer with 1-50 employees is considered a small group. As of January 1, 2016, the small group employer definition will be changed to 1-100 employees.
The same calculation that is used for determining Employer Mandate provisions will be used to assess employer size. This means that both full-time employees and full-time equivalents must be included in the calculation. You can calculate a full-time equivalent by adding up the hours of all employees who work less than 30 hours per week and divide by 30 (if calculating per week) or 120 (if calculating per month). Any employer who has 100 employees or less (including full-time employees and full-time equivalents) will be considered a small group.
The ACA has instated a special transitional rule for those employers with 51-100 employees who will be redefined as small employers as of January 1, 2016. These employers can choose to delay the impact of this change by renewing their current large group policy on or before October 1, 2016. Each employer who will be redefined needs to weigh their options carefully, whether they choose to renew early or make the change January 1st. This change, depending on your workforce’s health risk, age, claims history and industry, may make this transition either more or less costly for you.
What will change?
Groups sized 51-100 will be faced with significant new rating restrictions. As a large employer, factors such as industry, location and claims history were taken into account when determining rates. Now as a new small employer, rates can only be based on family size, geographic location, tobacco use (for certain states) and age.
- Family size rules will state that up to three children (under age 21) within a family can be charged a premium. Any additional children will receive coverage at no additional charge.
- Geographic locations are prescribed and can vary significantly from the regions that current insurance carriers are using.
- Tobacco use premiums may be increased by up to 50%.
- Adult age rating factors will change from a 5 to 1 ratio (or higher) to a 3 to 1 ratio. This means that coverage for a 65 year old can’t cost more than three times the rate for a person who is age 21.
In addition, these groups will need to comply with the essential health benefits (EHB) requirement. Essential health benefits are a comprehensive package of items and services including maternity and newborn care, mental health and substance use services, preventative/wellness services, etc. EHBs also include pediatric dental and vision care – benefits that typically aren’t included in a large group health plan.
Possible Outcomes
These new rules can have either a positive or negative impact on 2016 renewal rates depending upon the elimination or limitation of these rating factors for those groups sized 51-100. Some groups may find that the benefit and cost-sharing requirements and premium-rating limitations may increase their premiums and reduce their plan design flexibility. In order to avoid these requirements, more groups may look into becoming self-insured. This may be a good option for those groups with a healthier and younger population.
Although self-insuring has been more prevalent among larger groups, smaller groups are finding it to be a more viable and less risky option due to lower stop-loss insurance attachment points and being protected by guaranteed issue coverage. There is a risk of adverse selection if more lower cost groups choose to self-insure while higher cost groups (sized 51-100) still elect fully insured coverage. The small group plans would experience increased premiums.
For more information on self-funding or small group ACA changes, please contact your local National Insurance Services (NIS) representative.