November 2016 The Small Employer Market during Year One of the Affordable Care Act

Issue Brief www.norc.org info@norc.org November 2016 The Small Employer Market during Year One of the Affordable Care Act Jon Gabel, Heidi Whitmore, Jennifer Satorius, and Matthew Green, ABSTRACT Some analysts predicted that, the first operational year of the Affordable Care Act (ACA), would be a year of major disruptions in the small group market. Based on a survey of 800 randomly selected small employers, this issue brief examines the state of the small employer market during its first year. One major change was the November 14, 2013 provisional fix that further segmented the market into ACA compliant, grandfathered and grandmothered plans. Nearly one-third of enrollment in the small group market was in grandmothered plans, another third in grandfathered plans and another third in ACA compliant plans. There was no increase in premiums from 2013-. The percentage of firms offering coverage was statistically unchanged. Fewer small firms reported it was difficult finding affordable and needed coverage. SHOP enrollment was low and small firms knowledge of SHOPs and ACA market reforms was very limited. In contrast to the individual health insurance market, the most remarkable development in the ACA s first year of operation was the absence of dramatic change. THE SMALL EMPLOYER MARKET DURING YEAR ONE OF THE AFFORDABLE CARE ACT With an 86 percent approval rating, the American public holds small businesses in higher esteem than virtually any American institution. i In the political arena there is similar deference for small businesses built around the commonly asserted belief that "Small businesses are the driving force of the economy and create 70 percent of the jobs in America." ii In fact, since 1977 net job growth among large firms has outpaced that of small firms. iii One conventional wisdom consistent with statistics about small businesses is that the health insurance market does not work as well for small employers as large ones. Historically, small firms, defined as firms with 50 or fewer workers, have been subject to medical underwriting, higher administrative expenses on the part of insurers and brokers, fewer choices of health plans and higher premiums for similar coverage. iv Having fewer employees over which to spread administrative expenses, insurers faced greater risk providing coverage for small firms. Most states have set different regulations for the small group as opposed to large group market. Firms with 3-49 workers constituted 93 percent of firms in America and employed about one of every four workers in 2015. However, only 17 percent of employees who obtain coverage from their employer work for a small firm. v The Affordable Care Act (ACA) aimed to remedy shortcomings of the small employer market through a number of reforms. These included: An end to medical underwriting including the use of preexisting conditions An end to rescissions where the insurer terminates highcost firms A requirement that 85 percent of the premium dollar is spent on medical expenses or quality improvement. Review of proposed health plan premium increases greater than 10 percent. Establishment of Small Business Health Options Marketplaces (SHOPs) that are exchanges for employers with 50 or fewer workers Increased transparency with all small employer plans having a designated metal level, such as Silver or Gold, and ACA compliant plans having detailed information on benefits and premiums available through the SHOP exchanges. NORC 2016 Research Brief Page 1

The authors of the ACA saw SHOPs as a major building block in providing small employers more employee choice of plans at lower premiums. SHOPs are electronic marketplaces where small businesses can find information about each qualified health plan sold on the exchange. Information includes benefits, premiums, and actuarial value and sign their company up for the plan of their choice. SHOPs conduct administrative functions such as claims adjudication and responding to questions from consumers. Employers make a fixed contribution for each employee consistent with the cost of the tier that the employer selects. In the first year of the ACA, the Administration dedicated most of its resources to the individual exchanges rather than making the SHOPs functional. Most states had neither electronic marketplaces nor employee choice of different plans for SHOP in. By 2017 nearly all states will have electronic Marketplaces and allow employees a choice of different plans. To further reduce the cost of coverage, the ACA offered tax credits to firms with 25 or fewer employees whose average income was $50,000 or less, and where the employer paid for at least 50 percent of the cost of premiums. This credit was available only to firms buying coverage on the SHOP. The credit is temporary, lasting two years for an individual firm. It is also non-refundable so the employer only receives the credit after the calendar year if the firm is profitable. The tax credit may constitute as much as 50 percent of the employer s contribution for premiums. Small group market reform had a rocky start. In the fall of 2013 a political uproar over cancelled plans not compliant with ACA requirements led to an unanticipated fragmentation of the small group market. On November 14, 2013 the Obama Administration implemented a provisional policy permitting states to allow non-compliant small group and individual market plans sold between the passage of the ACA in March 2010 and October 1, 2013. vi These noncompliant plans were termed grandmothered plans. Grandmothered plans are distinguished from grandfathered plans in that grandfathered plans were plans in effect when the ACA was passed, and were essentially frozen to retain their grandfathered status. Thus, in year one of ACA market rules, the small employer market consisted of ACA compliant plans, grandmothered plans and grandfathered plans. the ACA brought in its first year of operation. We also present findings on the cost of coverage, knowledge of ACA reforms and tax credit, and use of brokers. Readers should be aware that some aspects of the small employer market may have changed since ; however, grandmothered plans are still allowed in most states and grandfathered plans continue to hold a substantial share of the small employer market. FINDINGS Canceled, ACA Compliant, Grandmothered and Grandfathered Plans In 2013 brokers and insurers became aware that in calendar year only ACA-compliant plans and grandfathered plans would be permissible in the small group and individual markets. Brokers and insurers notified small firms that if they were to renew their coverage early before the ACA rules went into effect, they could keep their old plans for another year. In the autumn of 2013 insurers sent cancellation notices to small firms with non-compliant plans that had not renewed early. Some small firms and individuals faced major increases in premiums for their new ACA plans over the previous plans. Facing an uproar, the Obama Administration on November 14 allowed a reprieve. States had the discretion to allow employers currently holding non-compliant ACA plans to continue buying such plans until 2017. Ten states, all with state-based Marketplaces, did not permit continued coverage of noncompliant grandmothered plans. We asked small firms if they had received a cancellation notice for any of their health plans, and fourteen percent indicated that they had received such a notice (Exhibit 1). Small firms in the Northeast were most likely to receive a cancellation notice (24 percent), and firms in the South (6 percent) were the least likely. Based on our series of questions, we estimated that 35 percent of small firms offer an ACA compliant plan, 30 percent offer a grandmothered plan, and 35 percent offer a grandfathered plan. Based on a survey of 800 randomly selected small employers, this issue brief examines the state of the small employer market during the first operational year of the ACA. Our focus is on small employers purchasing behavior and experiences, and determining the amount of change NORC 2016 Research Brief Page 2

Exhibit 1: Percentage of Small Firms Offering Coverage Who Received at Least One Cancellation Notice for a Plan, by Size and Region, Northeast Midwest South West All Small Firms 6% 13% 14% * No statistically significant difference from all other firms not in category at p<0.05 9% 13% 12% 16% Coverage, Premiums and Plan Provisions Forty-eight percent of firms with 3-50 employees offered health insurance coverage in (Exhibit 2). This is statistically unchanged from the 2013 Kaiser Family Foundation annual survey figure of 55 percent. vii Only 42 percent of firms with 3 to 9 workers offered coverage in, significantly less than other firms. Coverage is more widely offered in the Northeast (67 percent) than in other regions. Virtually all firms offering coverage offer dependent coverage (not shown). Eight percent of small firms providing health benefits added dependent coverage for, and two percent dropped dependent coverage (not shown). Exhibit 2: Percentage of Small Firms Offering Coverage, by Firm Size and Region, 25% 0% 5% 10% 15% 20% 25% 30% The average monthly premium for single coverage remained statistically unchanged from 2013 to, at $502 versus $490 (Exhibit 3). About 76 percent of small firms offered one plan, and this represented no significant change from 2013 (Exhibit 4). Exhibit 3: Health Plan Premiums for Single Coverage by Firm Size, 2013 and $600 $500 $400 $300 $200 $100 $0 $502 $490 * No statistically significant change from 2013 to at p<0.05 2013 and Exhibit 4: Percentage of Small Firms That Offer One Plan, 2013 and All Small Firms $448 $452 $561 $486 All small firms 2013 56% 58% $498 $553 77% 76% 74% 68% 83% 84% All small firms 48% 2013 42% 55% 2013 and Northeast Midwest South West 42% 50% 69% 67% Seventy-four percent of employees in small firms faced a general annual deductible in, and these deductibles averaged $1990 (not shown.) Moreover, 55 percent of these employees had deductibles of $2,000 or more (Exhibit 5). 0% 20% 60% 80% * Statistically significant from all other firms not in category at p<0.05 NORC 2016 Research Brief Page 3

Exhibit 5: Distribution of General Annual Deductibles, by Firm Size, All small firms 5% 15% 2% 15% 6% 21% 25% 9% 7% 17% 24% 28% 55% 58% 67% 45% 120% Lt $500 $500-$999 $1000-1999 $2,000+ * No statistically significant difference from all other firms not in category at p<0.05 Important Factors in Offering and Selecting Coverage For those firms not offering coverage, we asked how important various factors would be for their firm to consider offering coverage in both years of the survey (Exhibit 6). There was a significant drop in the percentage of firms that cited if insurance cost less than it does today (82 percent in 2013 versus 66 percent in ) as very important. The percentage of firms identifying if costs would rise more slowly than in the past as very important fell from 75 percent in 2013 to 49 percent in. The percentage of firms citing if more health plan choices were available and if a monthly check were the only responsibility also declined substantially. Exhibit 6: How Important Various Factors Would Be for Non-Offering Small Firms to Consider Offering Health Insurance, 2013 and : Percent Responding Very Important Costs less than today Costs will rise more slowly More health plan choices Ability to compare features on line Third party administration Monthly check is only administrative responsibility 21% 17% 61% 45% 41% 49% 58% 66% * Statistically significant change from 2013 to at p<0.05 73% 82% 2013 2013 and For firms offering coverage or that shopped for coverage in, we asked about the difficulty of different aspects of choosing a plan and compared responses to 2013. One area showed significant improvement (Exhibit 7). The percentage of firms identifying as very or somewhat difficult finding affordable coverage declined from 82 percent compared to 71 percent. Exhibit 7: For Small Firms Offering Coverage or that Shopped for Coverage, Difficulty of Choosing a Plan, 2013 and : Percentage Responding Very Difficult or Somewhat Difficult Comparing Quality Among Plans Comparing Premiums among Plans Comparing Benefits among Plans Finding Affordable Coverage Finding Needed coverage 39% 51% 53% 42% 66% 62% * Statistically significant change from 2013 to at p<0.05 82% 71% 2013 Data represent share of firms stating each item was very or somewhat difficult. 2013 and Small employers were asked what characteristics were important in selecting their current plan. Large majorities found all attributes very or somewhat important (Exhibit 8). Three characteristics were most commonly identified as very important benefits in the plan, premium amounts and employee cost sharing. Employers scored specific hospitals available in network and network size as less important than benefits, premiums and cost-sharing. Exhibit 8: Among Firms Offering Coverage, Importance of Various Factors in Decision to Offer Current Health Plan, Employee Cost-Sharing Benefits Covered Specific Hospitals Available in Network Network Size Premium Amount Somewhat Important 21% 31% 26% 37% 65% 69% 77% Very Important NORC 2016 Research Brief Page 4

Use of Brokers Brokers perform services that human resource departments carry out for larger firms, such as choosing a plan, providing customer service, and acting as a conduit with insurers that few small employers can provide. The percentage of firms using brokers or agents was 80 percent in (Exhibit 9). Firms with were less likely to use a broker than other firms (74 percent). Moreover, firms with a larger share of higher income workers were more likely to use a broker or agent than firms with fewer higher income workers. For example, 86 percent of firms where 35 percent or more of workers earn $56,000 or more per year used a broker, whereas 74 percent of firms where less than 35 percent of workers earn $56,000 or more did so. Exhibit 9: Percentage of Small Firms Using a Broker or Agent, All small firms Less than 35% of workers earn $56,000 or more 35% or more of workers earn $56,000 or more 80% 74% 74% 86% * Statistically significant from all other firms not in category at p<0.05 89% 88% Between 2013 and there were few changes in the percentage of brokers providing human resources type services (not shown). Among small firms using brokers in, 84 percent used them to select health plans, 79 percent enrolled employees, 59 percent provided customer service such as claims adjudication, 57 percent administered COBRA, and 31 percent determined the employee contribution. Small Firm s Knowledge of SHOPs and Tax Credits Earlier we noted that the Obama Administration did not invest substantial resources to publicize SHOPs in and that enrollment was largely by paper. Small employers knowledge of SHOPs and ACA small business market reforms was unsurprisingly low. When asked how familiar are you with SHOP marketplaces, only three percent of small firms indicated they were very familiar and 19 percent were somewhat familiar, while 61 percent responded that they were not at all familiar (Exhibit 10). Exhibit 10: Small Employer Familiarity with SHOP Marketplaces, Offering and Non-Offering Firms, 61% Similarly, when asked how familiar the firm was with ACA reforms in the small group market, 11 percent of respondents said they were very familiar, 23 percent somewhat familiar, 21 percent not too familiar, and 44 percent were not at all familiar (not shown). Awareness of the small business tax credit is more extensive, but changed little from 2013 to (not shown), with 51 percent aware of the tax credit in 2013 and 54 percent aware in. Firms where 35 percent or more of workers are full-time employees indicated greater awareness in than firms where fewer than 35 percent of workers were full-time (58 percent vs. 39 percent) (Exhibit 11). Exhibit 11: Among Firms Aware of Tax Credit for Small Businesses, Percentage of Small Firms Aware of or Taking the Following Actions, Category Aware that small business tax credit is higher in than 2013 Aware that the small business tax credit is available only for plans purchased on SHOP Marketplace For non-offering firms, considered offering coverage due to tax credit Determined if eligible for tax credit 35% or more of Workers Are 25 or Younger Less than 35 Percent of Workers are 25 or Younger All Small Firms 33%* 11% 13% 25% 15% 16% 18% 17% 17% 34% 46% 45% *Statistically significant from firms where less than 35% of workers are 25 or younger at p<0.05 4% Not at All Familiar Very Familiar 19% Somewhat Familiar 16% Somewhat Unfamiliar NORC 2016 Research Brief Page 5

We asked those firms aware of the tax credit a series of questions about the tax credit. Only 13 percent of such firms were aware that the tax credit was higher in (not shown). (In 2013 the maximum tax credit was 35 percent.) Forty-five percent of aware firms had determined if their firm was eligible for credits. Only 16 percent of small firms were aware the credit was available only through the SHOP exchange. About one of every six non-offering firms had considered offering coverage due the tax credit. Self-Insurance and Brokers Self-insurance offers an opportunity to circumvent state regulation of health insurance such as consumer protections, reserve requirements, mandated benefits, and premium taxes. It also allows firms to bypass most ACA requirements such as community rating by age, free preventive benefits and mandated essential benefits. Selfinsurance is particularly attractive to firms with many young and healthy employees whose expected medical expenses are relatively low. We asked firms using brokers if the firm had discussed self-insuring in the next few years with their broker. Among firms with, the percentage of firms that had such a discussion increased from 34 to 48 percent from 2013 to. Less than one percent of firms not using brokers were considering self-insuring (not shown.) DISCUSSION The first year of the full implementation of the ACA was remarkable, not for dramatic changes in the performance of the small group market, but the absence of dramatic change. The major development was the November 14, 2013 provisional fix that further segmented the market into ACA compliant, grandfathered and grandmothered plans. The newly created grandmothered plans, plans that were in force in October 2013 but did not exist in March 2010, constituted about 30 percent of the small group market. Contrary to the torrent of ACA critics asserting that the legislation was leading to hyperinflation in the cost of health insurance, there was no change in the cost of coverage among small firms from 2013-. viii The percentage of small employers offering coverage was and continues to be statistically unchanged. Three-fourths of all small employers continue to offer just one plan. Fears that SHOPs would greatly diminish the role of brokers proved unwarranted; 80 percent of small firms continue to use brokers and brokers still perform functions that a human resource department does in a large firm. One factor impeding change in the small group market was the very low enrollment in SHOPs (78,000 in ). ix A number of factors explain low enrollment. In addition to the limited resources that the Obama Administration invested in SHOPS illustrated by paper enrollment in most states, the administrative burden for a broker to enroll employees was far greater than buying a traditional off-the SHOP plan. With the advent of private exchanges, the major valuepropositions of SHOP were two-fold wider employee choice and tax credits. But employee choice was not available in most states in. Tax credits were and are widely viewed as inadequate. Credits are non-refundable and received after the calendar is over and the firm has filed its income tax for the preceding year. The administrative burden for brokers and employers is taxing and includes listing wages for each worker. Hence, there can be little surprise that brokers found SHOPs unattractive, and consequently, small employers knowledge of SHOPs and ACA market reforms was very limited. Only three percent of small employers were very familiar with SHOP and 19 percent were somewhat familiar, and this absence of familiarity undoubtedly restricted SHOP enrollment. Small firms were more familiar with tax credits for small businesses (11 percent very familiar and 44 percent somewhat familiar ), but only 16 percent of small employers familiar with tax credits recognized that these credits were only available on the SHOP. There were some positive developments in perhaps attributable to the information available through the SHOP Marketplaces. Fewer small firms reported it was difficult in finding affordable and needed coverage. Non-offering firms were less demanding in what would need to occur for them to consider offering health insurance in than in 2013 on such items as insurance would need to cost less than today, or costs would need to rise more slowly or would need more health plan choice. Three trends may substantially shape coverage in the small group marketplace. First, what will be the timeline for terminating grandmothered plans and thereby increasing the number of firms offering ACA-compliant plans? December 2017 is the last month that states can allow grandmothered plans but states have the authority to prohibit these plans at an earlier date. Eleven states in 2015 did not permit grandmothered plans. As more states prohibit transitional plans and fewer small firms continue their grandfathered plans, the pool of ACA compliant plans will become larger, which should provide for a more stable risk pool. Second, will more small employers become familiar with and adopt SHOPs and private exchanges, thereby increasing employee choice and reducing employers financial risk by using a defined contribution model? For SHOPs to flourish will require major advances in the state NORC 2016 Research Brief Page 6

of knowledge of small employers about SHOPs and tax credits. It will also require buy-in by brokers to the concept of SHOPs. Third, when grandmothered plans are fully phased out, will more small employers, particularly with 25-50 employees, consider self-insuring to circumvent ACA requirements? If brokers recommend self-insurance and small employers follow their advice, the net effect may be to nullify gains in pool size and stability associated with the decline of transitional plans. REFERENCES i H. Fingerhut, Millennials views of news media, religious organizations grow more negative, Pew Charitable Trusts, Dec 31,, http://www.pewresearch.org/fact-tank/2016/01/04/millennials-views-of-news-media-religious-organizations-grow-morenegative/ ii S. Gorman, Cantor Says Small Businesses Create 70 percent of U.S. Jobs, PolitiFac, thttp://www.politifact.com/virginia/statements/2011/dec/30/eric-cantor/cantor-says-small-businesses-create-70-percent-us-/ iii J. D. Harrison, Who Actually Creates Jobs: Start-ups, Small Businesses or Big Corporations? The Washington Post, https://www.washingtonpost.com/business/on-small-business/who-actually-creates-jobs-start-ups-small-businesses-or-bigcorporations/2013/04/24/d373ef08-ac2b-11e2-a8b9-2a63d75b5459_story.html iv T. Jost, Employers and the Exchanges under the Small Business Health Options Program: Examining the Potential and the Pitfalls, Health Affairs February 2012 vol. 31 no. 2 267-274. doi: 10.1377/hlthaff.2011.1011 v Kaiser Family Foundation, Employer Health Benefits, 2015, September 22, 2015, http://kff.org/report-section/ehbs-2015- methodology/ vi Lucia, K., Corlette, S., and Williams, A. The Extended Fix for Canceled State Insurance Policies: Latest State Action. November 21,, The Commonwealth Fund, http://www.commonwealthfund.org/publications/blog//jun/adoption-of-thepresidents-extended-fix vii Kaiser Family Foundation, Employer Health Benefits, 2015, September 22, 2015, http://kff.org/report-section/ehbs-2015- Summary of Findings/ viii D. Herrick, The Effects of the Affordable Care Act on Small Business, National Center for Policy Analysis, No. 356. June 12, http://www.ncpa.org/pub/st356#sthash.ntxpkpum.dpuf; H. Magister, 5.6M Small Businesses Blindsided By Obamacare, Forbes, April 20,, http://www.forbes.com/sites/hollymagister//04/30/5-6m-small-businesses-blindsided-byobamacare/#7d3ddd9845ff ix D. Mangan, Obamacare's VERY Small Business Exchange Enrollment, November 13,, http://www.cnbc.com//11/13/obamacares-very-small-business-exchange-enrollment.html NORC 2016 Research Brief Page 7