ACA & The New Normal

ACA & The Expanding Definition of Small-Group

What happens if California forges ahead?

by Bryan Bate

Mr. Bate, vice president of Burnham Benefits Insurance Services, Inc., has 17 years of experience in the employee benefits industry. With multiple individual and leadership sales and account management awards, Bryan is responsible for new business development, enhancing existing client relationships, and fostering marketplace relationships. Working strategically and collaboratively with clients, Bryan helps organizations navigate the employee benefits market—from negotiations and financial modeling to wellness strategies and communication—enabling them to achieve both their short- and long-term objectives.

On October 7, 2015 President Obama quietly signed into law a bipartisan change to the Affordable Care Act (ACA) that will allow states the discretion to define a “small group” employer.

With overwhelming approval in both GOP-led chambers, the new law, Protecting Affordable Coverage for Employees (PACE) Act, repeals the existing provision in the Affordable Care Act and the Public Health Service Act that would as of January 1, 2015 change the definition of a “small employer” from one that has 50 employees or fewer, to one with 100 employees or fewer.

The ACA mandated expansion of the definition of small employer, which was met with protests from small businesses across the USA, threatened among other things to significantly increase the cost of coverage for employers with 51 to 100 employees who would be joining the small group market for the first time. According to the American Academy of Actuaries, this change would potentially affect 150,000 companies and more than 3 million workers nationwide. The PACE Act, however, now provides each state with the choice whether to expand the definition or leave it as it stands.

Many states are expected to retain the “50 employee limit” definition for 2016. The District of Columbia and several states, however, are expected to move forward, including the state of California, which in 2012 enacted A.B. 1083 legislation to expand the definition while also adopting ACA’s full-time and full-time equivalent method for counting employees towards the small employer threshold. As a result, the California small group market expansion will take full effect as expected on January 1, 2016—unless state legislators act to repeal the decision before the end of the year.

The Great Migration: Areas of impact in the State of California

Based on Q3 2014 California labor market employment data, roughly 14 percent of all California employment—2.3 million employees—fall in the 51-100 segment, while roughly 2.4 percent of all California businesses—33,000 employers—fall into the 51-100 market. A California small group employer has historically been defined as 50 or fewer eligible employees for group health insurance purposes. Unless an employer has a grandfathered large group plan, employers with 51-100 full time equivalent employees who renew or purchase coverage in 2016 will be required to follow all small group regulations. In California, small group premiums will be based on the experience of the entire risk pool of all fully insured non-grandfathered groups covered by the insurer in the state, and premiums cannot fluctuate based on an individual group’s claims experience.

For large groups, insurance providers commonly use health status or claims experience, industry risk factors, employer size, participation and contribution levels, age/gender factors and composite ratings to determine premiums. But with the mandatory migration, those falling under the new small group definition will no longer be allowed those variations. For example, the gender factor will no longer be permitted and age rating will be limited, with a 2016 ratio maximum of 3 to 1. In other words, the rate for a 63-year-old cannot be more than three times the rate for a 26-year-old.

Current age factor variations often reflect up to a 5-to-1 ratio or higher. Geographic regions within the state that are currently prescribed may also be changed significantly, as well as premiums for tobacco use, which may be increased up to but not exceeding 50 percent. Family size, too, will be a determining factor in adjusting premiums under the 2016 provisions. Up to three children under 21 years of age may be charged a premium within a family, but any additional children can receive coverage at no additional charge.

Changing Benefit and Cost-sharing Requirements

Current age factor variations often reflect up to a 5-to-1 ratio or higher. Geographic regions within the state that are currently prescribed may also be changed significantly, as well as premiums for tobacco use, which may be increased up to but not exceeding 50 percent

When the ACA small group definition becomes effective in the state of California in 2016, groups sized 51-100 will for the first time fall under the same requirements that currently apply to groups sized 1-50. This presents significant changes that include compulsory coverage for essential health benefits (EHB)—ten categories of wellness and preventive health services that provide, for example, dental and pediatric benefits that are not necessarily included in large group plans. In addition, these plans must satisfy a metallic benefit level of coverage. These metallic tiers—Bronze, Silver, Gold and Platinum—are intended to help consumers compare plans and reflect the actuarial value of the plans’ cost-sharing features, or the portion of covered benefits paid for by the plan, on average.

Additional benefit and cost-sharing requirements could increase the breadth and scope of coverage, potentially reducing plan flexibility yet increasing premiums. These changes may provide the impetus for the 51-100 groups to self-insure as a way to avoid these requirements, potentially adding to growing numbers of lower-cost groups choosing to assume the financial risk for providing health care benefits to its employees. This is typically done by earmarking money from corporate and employee contributions and setting it aside in a special fund that is used to pay claims as they are incurred rather than paying fixed premiums to an insurance provider. If this kind of chain reaction were to occur, premium averages could likely increase not only among the fully insured 51-100 groups but also for 1-50 groups, as these groups will be combined for the purpose of premium rating.

A Sliver of Light

Though the state of California has been offered the olive branch—which it could extend to those businesses bracing for these new changes—that sliver of light shining through is highly anticipated to fade into disappointment as January 1, 2016 approaches. Regardless, there is no question that health coverage offered by employers with 51-100 employees will be significantly impacted by the new definition of the small group market. As the ACA continues to unfold and adjust, it’s a good time for the newcomers into this higher premium category to examine their employee benefits options and prepare for the unpredictable years ahead.



ABOUT BURNHAM BENEFITS INSURANCE SERVICES: Burnham Benefits Insurance Services, Inc. is a privately held, full-service employee benefits consulting and brokerage firm headquartered in Irvine, Calif. The firm is among the largest in the state to specialize solely in strategic employee benefits consulting and brokerage services. With a comprehensive offering of client-first health and wellness programs, Burnham effectively manages more than $1.5 billion in premiums for more than 400 clients.
The firm maintains a more than 97 percent client retention rate and has averaged 25 percent growth annually over the past 10 years. Because Burnham Benefits does not have outside shareholders, it can easily adapt and create customized solutions that fit clients’ best interests — investing in cutting-edge technology and the tools and resources needed to provide the specialized level of service that today’s rapidly challenging climate demands. Its team of more than 80 highly skilled industry professionals includes in-house underwriters, compliance officers, healthcare reform consultants, communications specialists and wellness experts.
Through a strategic partnership with Burnham Gibson Financial Group, Burnham also provides retirement planning and wealth management services. Burnham Benefits’ footprint currently spans offices in Orange County, San Francisco Bay Area, Los Angeles, San Luis Obispo, Santa Barbara, Sacramento and San Diego, Calif., as well as a satellite office in the Washington D.C. metro area. Burnham Benefits holds national recognition as Business Insurance’s #1 Best Places to Work in Insurance 2013 and 2014 and has been ranked a Best Place to Work by the Orange County Business Journal for five years running. For more information, visit