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Although the political controversy surrounding the Affordable Care Act has focused primarily on its extension of coverage through the individual market and Medicaid expansions, Congress also intended the ACA to reform extensively reform the small-group market. In the decade preceding the ACA, small-group health insurance premiums had more than doubled while the percentage of small firms offering coverage dropped from 66 to 59 percent. Administrative costs and employee cost sharing charges were high and benefits offered by some employers were skimpy. 

The ACA’s small-group market reforms closely resembled its individual market reforms. Insurers offering coverage in the small-group market (defined as groups with 1 to 50 employees) could only consider age, tobacco use, geography, and family composition in setting rates. The ACA required all of an insurer’s small-group enrollees to be rated in a single statewide risk pool and established a risk adjustment program to encourage insurers to cover sicker enrollees. Small-group plans had to cover a comprehensive menu of essential health benefits. A special SHOP exchange was created to permit employee choice and encourage competition in the small-group market while a small employer tax credit was offered to defray health insurance costs for very small employers. 

Perhaps the biggest change the ACA made for very small groups went largely unnoted. By expanding Medicaid and making individual coverage available on a guaranteed issue, community rated basis, the ACA relieved very small businesses and sole proprietors from having to purchase or offer coverage to their employees. The ACA’s employer mandate did not extend to small employers, but many employees of small employers were able to access affordable health coverage in the individual market or Medicaid. The percentage of small business employees who were uninsured dropped dramatically. With ensured access to health insurance, individuals with preexisting conditions who were previously locked in dead-end jobs with large employers were able to launch their own small businesses. 

But almost from the beginning things did not go as some had hoped. The small employer tax credit proved too limited and narrowly focused. Small-group plans grandfathered under the original ACA and “grandmothered” under the 2014 transitional plan guidance continued to offer health status underwritten and often skimpy coverage; in many markets the majority of small businesses remained on these pre-ACA plans. Additionally, the Obama administration focused its efforts in 2014 on launching the individual exchanges and delayed the launch of the federal SHOP enrollment website. As a result, SHOP enrollment was never high and the Trump administration effectively terminated the SHOP exchange as an online enrollment platform in 2018. 

Moreover, insurers and small employers quickly figured out how to evade the small-group reforms. The ACA did not subject “self-insured” employer coverage to many of the reforms, and insurers began to offer health status underwritten “level premium” plans to small groups, through which the insurer offered stop-loss coverage (limiting the financial exposure of plans) and administrative services to a nominally “self-insured” small-group for a fixed premium. This coverage is now offered to groups as small as five to ten, for which true self-insured coverage is obviously inappropriate. 

Association health plans (AHPs), which have long offered coverage to small groups, continued to offer that coverage after the ACA. Under a 2011 CMS guidance, AHPs, including multiple employer welfare associations (MEWAs), are supposed to cover small groups under the ACA’s small-group reform rules. But so-called “plan MEWAs,” where the MEWA meets “commonality of interest” requirements under Department of Labor guidance, continued to rate small groups in some states based on their claims experience, a key marker for health status.  

The recently finalized Department of Labor AHP rule will further undermine the small-group reforms of the ACA. AHPs that cover either a single trade, business, or profession, or a single state or metropolitan area can offer coverage free from the ACA’s essential health benefits, single risk pool, and risk adjustment requirements. Under the new rules, AHPs are not supposed to discriminate based on health status, but can set premiums based on gender, occupation, age (without limit), group size, or other employee characteristics, and offer skimpy benefits, leaving AHPs room to make coverage unattractive to high-cost small groups and more attractive to healthier groups or individuals. And, if the new rules prove too confining, AHPs can still claim to be “plan MEWAs” under the prior guidance and underwrite based on health status. 

The ACA’s small-group reforms remain in place and small employers with older or sicker employees can still get coverage under them. Small employers with high cost employees can also drop coverage, leaving their employees to the individual market and Medicaid. Under recent legislation, small employers can even offer their employees health reimbursement accounts (HRAs) to help cover premium costs in the individual market.  

But the ACA’s vision of a reformed small-group market, in which employers could be assured of affordable coverage regardless of the age or health status of their work force seems to be under serious threat. A combination implementation problems and delays and aggressive efforts by insurers and associations to exploit loopholes in the statute undermined the vision. Finally, Trump administration initiatives, effectively ending the SHOP exchanges and creating new opportunities for segmenting the market, may leave an ever-shrinking and costlier small-group insurance market in many states.  

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