PACE Act Modifies the Rules for Small to Mid-Sized Health Plan Sponsors

On October 7, President Obama signed into law the Protecting Affordable Coverage for Employees (PACE) Act, a measure that maintains the current definition of small group health plans for rating and underwriting purposes, thereby modifying a provision of the Affordable Care Act (ACA) due to go into effect in 2016 that was expected to lead to health insurance premium increases for many plan sponsors with between 51 and 100 employees. Although narrow in scope, the PACE Act joins a growing list of legislative changes to the ACA that have been approved by Congress and the President.

The legislation amends a provision in the ACA that would have expanded the definition of “small group” from an employer with 1-50 full-time equivalent employees (FTEs) to an employer with 1-100 FTEs, effective for plan years beginning in 2016. Under the PACE Act, a small employer will continue to be defined as having between one and 50 employees, although states will have the option of expanding the definition to include employers with up to 100 employees if they believe the conditions in their state necessitate the change.

Currently and in previous years, employers with 51-100 FTEs were classified as large for the purposes of buying health insurance. The change in status was intended to stabilize the ACA’s Small Business Health Options Program (SHOP) marketplace by bringing in more participants, and thereby expanding the risk pool and reducing premiums for very small groups. The drafters of the ACA had also hoped that expanding the definition of small to cover groups as large as 100 would extend the small group protections of the ACA to a larger population. But this reclassification was protested by the U.S. Chamber of Commerce and other small business associations, who expressed concerns that the premiums of many of these businesses would rise, and that some employers would have to switch insurers to comply with the new regulations, or would face more limited coverage options.

Whether an employer plan is classified as a small group or a large group plan is important because certain ACA insurance market regulations that apply to small groups do not apply to insurance offered in the large group market. For example, unlike large groups, small group health insurance plans are required to provide 10 “essential health benefits,” including pediatric and mental care; and can only offer plans that meet the ACA’s minimum actuarial value levels, which measure the percentage of expected health care costs a specific health plan will cover for a standard population. Small groups also have to comply with modified community rating restrictions that allow insurance premium rates for policies issued to these groups to vary based only on age, geographic area, tobacco use, and family composition; and not on the health history or gender of the group’s members.

The rules for large groups are much more flexible. For example, premiums for large groups may be based on a wide range of underwriting factors, including the group’s claims history, gender composition, and industry sector. Moreover, large group plans can provide any actuarial value as long as they meet the 60% minimum value requirement.

Generally, a shift from large group to small group status may be expected to raise premiums for healthier groups, and to lower them for groups made up of participants who are less healthy. If purchasing group health insurance policies becomes too expensive, employers with healthier workers may decide to self-insure, and to purchase stop-loss insurance to cover unexpected catastrophic claims. Moreover, if a significant number of healthy groups exit the small group market, rates could rise for the employers left in the marketplace.

Opponents of the expansion pointed out that a definition change would have left employers with 51-100 FTEs in an unfair situation, as they would have been subject both to the employer mandate, which does not apply to employers with fewer than 50 employees; and the small group insurance requirements, which do not apply to employers with more than 100 employees.

Business groups that opposed the reclassification also cited an estimate from the actuarial consulting firm Oliver Wyman that premiums could have increased by around 18% for a majority of employers with 51-100 FTEs if the small group definition changed. They further noted that the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) have estimated that the PACE Act will result in a net reduction in premiums for health insurance purchased by some firms with between 51 and 100 employees, which will increase their taxable income, resulting in up to $400 million in additional revenues to the federal government over 10 years.

However, because the PACE Act allows states to expand the small employer definition, the full impact of the legislation on premiums in the small group health insurance market remains unclear. Individual states now face the decision of whether to expand the size of the small group market to include employers with 51-100 FTEs, or to limit the scope of the small employer mandates in the ACA by retaining the current definition.