A Small PACE in the Right Direction

On October 8, 2015, President Obama signed the Protecting Affordable Coverage for Employees Act (“PACE”). As originally enacted, the Affordable Care Act (“ACA”) included a provision which, beginning in 2016, would have expanded the universe of employers considered “small employers” to include those employers with 51 to 100 employees. PACE eliminates this provision and instead leaves each state with the option of defining a small employer as an employer with up to 100 employees. As a result, the existing ACA definition of “small employer”, which currently includes only groups with 50 or fewer employees, will remain in effect after 2015, except in those states that choose to expand the definition.

Staying in the large group market is significant for employers with 51-100 employees because several ACA requirements apply in the small group market that do not apply in the large group market. These small group requirements would have increased premiums and caused administrative issues for most employers with 51-100 employees. The three most significant differences between small group insured plans and large group insured plans are as follows:

1. Small group insured plans must cover ten essential health benefits (e.g., pediatric dental care, mental health and substance use disorder services, behavioral health treatment).
2. A small group insured plan must meet specified actuarial values, while a large group insured plan can provide any actuarial value as long as the plan meets the 60% minimum value requirement.
3. As more fully described below, small group insured plans are subject to ACA’s national community rating rules.

Community Rating Laws. If left to their own devices, insurance companies would charge premiums based on the risks they are insuring. In the health insurance arena, for example, insurance companies would normally rate employers purchasing group health insurance coverage based on such factors as the age and health status of plan participants. The community rating laws are designed to level the premium costs for group health insurance among small employers such that small groups with healthy members will pay higher premiums than would otherwise be the case if the insurance companies were allowed to fully rate based on risk, while small groups with less healthy employees will pay correspondingly lower premiums. In other words, the community rating laws are designed to compel healthy groups to subsidize the insurance costs of unhealthy groups.

The various state departments of insurance impose widely different restrictions on insurance carriers’ ability to rate group health insurance coverage provided to small groups. New York, for example, imposes the most severe rating restrictions, while Virginia and Hawaii impose no rating restrictions at all, with the other 47 states falling somewhere in between.

Prior to 2014, there were no federal rating restrictions with respect to health insurance. This changed as a result of the enactment of ACA, which imposed national community rating restrictions on small groups of 50 or fewer effective January 1, 2014 (and, absent the enactment of PACE, would have imposed national community rating restrictions on groups of 100 or fewer effective January 1, 2016). The ACA community rating restrictions overlay rather than preempt the state law restrictions. In other words, insurance carriers are required to comply with state law community rating requirements to the extent more restrictive than the federal requirements.

Implications of PACE. The biggest winners are fully-insured healthy groups in the 51-100 category in states that choose to stick with the 50-employee definition, which likely would have seen significant health insurance premium increases effective in 2016 absent the passage of PACE.

Some states will need to consider whether to adjust their definitions of small employer for community rating purposes in light of PACE. Specifically, in anticipation of the ACA provision which would have expanded the small group definition to groups of 100 employees or fewer effective January 1, 2016, several states, including California, Colorado, Maryland, New York, Virginia and Vermont, had previously changed their definition of “small group” to encompass groups of 100 or fewer commencing January 1, 2016 to mirror what they thought would be the federal small group definition. Maryland reacted quickly to the President’s signing of PACE, issuing a bulletin on October 8 indicating that the definition of “small employer” for purposes of the Maryland community rating laws would remain at 50 employees in 2016 in light of the change in the federal law. It remains to be seen what other states will do in light of the passage of PACE.