Change to small employer definition hurting some businesses

By Dan Goldberg
10/11/16 05:28 AM EDT

Larry Lee is executive director at the New York Asian Women’s Center, a Manhattan-based nonprofit that helps women overcome domestic violence. In 2015, it cost $508,748 to provide health insurance to his employees.

In 2016, however, his health insurance cost jumped nearly 24 percent to $629,763, an unaffordable surge for a nonprofit where revenue exceeded expenses by less than $100,000 in 2013 and 2014, the most recent years for which IRS filings are available.

The reason for the price increase is that Lee’s nonprofit went from purchasing large group insurance to purchasing small group insurance. His business didn’t change; the law did.

The Affordable Care Act is most often thought of as a vehicle to help individuals purchase health insurance with federal subsidies. One of the lesser discussed provisions was how it redefined what it meant to be a small employer.

Beginning in 2016, the law expanded the definition of a small business to those with up to 100 employees. The old definition had limited small businesses to those with fewer than 51 employees. The idea behind the change was that if more small businesses were eligible for small group coverage the small group market would be more stable.

The problem for companies that have between 51 and 100 employees – and there are 676,000 New Yorkers who work in these sized firms – is that the rules for pricing the small group market are different than the large group market, which is why some companies such as Lee’s are experiencing large increases.

Large group plans have experience rating, which means the cost of health insurance is based on the group’s demographics, claims history and likelihood of future medical needs. Younger workforces are typically charged less than older ones, and men are often less expensive than women.

Small group plans in New York State have what is known as community rating, which means the cost is based on the health and demographic profile of the region, not the individual members. That means companies with a younger, healthier workforce can’t get a break for being young and healthy.

Instead, they end up paying more because they are in a pool that is based on the average age of a geographic region.

“We’re asking the young to subsidize the old,” said Keith Zuckerman, president of Professional Group Plans, a Hauppauge-based company that specializes in employee benefits.

Congress and the Obama administration, realizing the problem, passed the PACE Act in 2015, which allowed states to revert to the old definition of a small business. Forty-six states took the Obama administration up on the offer. Colorado, Vermont, California and New York did not.

Lee has 78 employees, about three-quarters of whom opt to take health insurance through the company. His workforce is made up of mostly younger women. When moved into a community-rated pool, his costs went up because his employees are effectively subsidizing older employees.

The change in definition also means that some businesses – those with older employees – benefited from the transition, Zuckerman said, but they are the minority. That’s because the risk pools aren’t equal. Small group pools tend to require higher rates because of the pure community rating.

“Generally large group market rates are more competitive,” he said.

Employees with fewer than 50 employees also tend to be less healthy, according to research from the United Hospital Fund, though the degree to which this is true is hard to know. The UHF study estimated that if the morbidity rate in the 2-50 group were 10 percent higher than the 51-100 group, premiums for businesses placed into this pool would increase an average of 7 percent.

That report, which came out in March, 2015, predicted that the new definition of small employer would be a positive change for the small group market in the long term because it would create a larger small group market more capable of spreading risks. “But the change would involve some collateral damage for low-risk employers in the 51–100 employee segment, who would effectively subsidize the premiums of smaller businesses,” the report said.

That prediction appears prescient.

Lee, needing to save money, offered his employees a choice. They could keep their current plan and pay a higher share of the cost, or they could switch to a more narrow network, a cheaper plan, essentially, and pay the same. About half chose the more narrow network.

Reluctantly, Lee said he is now considering a Professional Employer Organization, or PEO. The benefit is his company would again be in an experience-rated pool and his health insurance costs would almost certainly come down. The downside is he wouldn’t be able to choose the insurer and would still have to pay a management fee. The loss of autonomy, however, may be a price worth paying.

PEO’s have also been accused of turning away companies that have older, sicker employees, or cherry-picking the healthiest customers. That means the small group pool becomes even more expensive because it is comprised of employees who can’t find benefits elsewhere.

Gov. Andrew Cuomo inserted language in his 2013 executive budget that would have made eliminated the ability for PEOs to offer insurance this way but it was not adopted in the final budget.

Earlier this year, Sen. James Seward, chair of the insurance committee, introduced a bill that would have reverted the small-group definition back to fewer than 50 employees.

“This bill would obviate the foregoing problems and market disruptions,” its sponsors wrote.

The bill passed the Republican-controlled Senate with unanimous support but never made it out of the Democrat-led Assembly insurance committee.

Seward, a Republican from Oneonta, said he plans to re-assess the marketplace in January when the new legislative session begins, and try to determine whether the change has been as hurtful to small businesses as he suspected.

“This will be one of our priorities in 2017,” Seward said. “I have every intention of making another run at this. “The way i look at it is if going back to [the old definition] is good enough for the authors of Obamacare and the President, it is certainly good enough for me … I don’t quite understand the reluctance to go back.”