The Next Shoe to Drop: Small Group Health Insurance Cancellations

Obamacare is impacting the small group insurance market in many of the same ways as the individual health insurance market. While employers with less than 50 workers don’t have to provide coverage, if they do they are required to comply with the same essential benefit mandates, age rating changes, and pre-existing condition reforms the individual market faces.

That means essentially all small group policies cannot continue as they are––they have to be discontinued.

What makes things a bit easier, if not any less expensive, is that small employers typically have health insurance brokers to run interference for them and help them through this change where individual consumers often get that dreaded cancellation letter telling them they will not have health insurance after a certain date if they do not act quickly in what is a confusing marketplace in the best of times.

The first small group renewals are now occurring––the January 1 renewals that typically have to be delivered during the month of November under state law.

Many employers are facing significant changes in order to comply with Obamacare and therefore price increases. One Maryland broker I spoke to this week has 90 small group accounts and he reports his smallest increase was 15%, his largest was 69%, and most are in the 30% – 40% range.

(By comparison, Mercer just announced the average large employer health care cost increase for 2014 will be 5.2%, meaning small groups could have reasonably expected an increase under 10% without Obamacare.) The biggest rate increases are generally going to those employers with the youngest groups the most impacted by the new “age compression” rules.

Does this mean these small employers’ coverage has been outright cancelled and they will now send their workers to the exchanges, as I have heard some commentators argue?

No, at least not anytime soon.

But that does not mean that lots of these small employers aren’t angry and confused.

What are these small employers doing?

Some small groups, but only a very few, benefit from the grandfather rules if their plan was in place in March 2010 and they haven’t made any but the slightest changes. Like the individual market that comes under the same grandfather rules, the Obama administration made those regulations so stringent almost no one is grandfathered.

Perhaps the most common means by which small groups are avoiding the big increases, at least for the first year, is through the early renewal strategy. Most states and health plans have allowed employers to change their renewal date to late in 2013 thereby allowing them to keep the old health plans for about another year. But this is a stay of execution, not a solution. Their old plans are toast when they next renew.

However, many brokers and small employers are hoping that this one-year delay will give the Congress some time to fix this. That said I don’t see any real hope of Obamacare fixes until after the November election, if then. Republicans have no interest in saving any Democrats––and therefore small groups––from Obamacare before the first Tuesday in November.

If the small employer doesn’t have access to the early renewal strategy, then they must face higher premium costs immediately. To offset these higher costs, at least in part, small employers are doing what they have always done––increasing deductibles and co-pays to try to keep the premiums close to what they were. This is also what the employers who used the early renewal strategy will have to consider come the end of 2014.

Will the small employer, faced with these increases, abandon their health plans and send their workers to the exchanges?

First, since so many have gotten that early renewal one-year stay of execution, we really won’t know that for a while.

Second, the number of small employers offering health benefits was already on a years long steady and this certainly can’t help.

But with all of that said, the simplistic, “Small employers are better off dropping coverage and sending them to the exchange,” is just too simplistic.

It’s a lot more complicated than that.

Let’s say an employer pays $7,000 a year toward the average worker’s health insurance benefit––typical in the small market. Let’s further say the employer could just give the worker that money in a pay raise and send them to the exchange.

First, the employer can’t just give them a payroll raise of $7,000. Increasing their wages has payroll tax and benefit cost implications––Social Security and Medicare taxes, workers compensation premiums, fringe benefit costs tied to payroll, vacation pay, and so on. That $7,000 would need to be reduced to about $6,000 to offset the employers payroll costs before it could go to the worker (and an employer with more than 50 workers would also be subject to the $2,000 fine for not providing health benefits and the “raise” would have to be further reduced).

Now the worker has $6,000 to take to the exchange. But wait, health insurance bought by an individual is not income tax preferenced––the worker has to pay state, federal, and payroll taxes of their own on this “raise.” Even if the worker is only in a 20% marginal bracket, this means the $6,000 just melted to about $5,000.

So the worker ends up with $5,000 to take to the exchange––about $400 a month. A higher income worker in a higher tax bracket might end up with only $4,000 net of taxes with which to buy insurance.

How does the worker fare with $5,000 to spend in the exchange? Remember the lower your income the higher the subsidies. If the worker has a very low income, they do very well––maybe even make a lot of money. If they are lower middle-income, they do OK. If they are middle to upper income they lose.

Who wins under this scheme? The lowest paid and least skilled workers. Who loses? The highest paid and most skilled, and presumably sought after workers. This strategy suddenly doesn’t look so smart if competing for skilled workers is what worries the employer.

It gets more problematic. The health insurance exchange subsidies are tied to family income, not what an employer pays their workers. An employee making $50,000 with a family could win under this scheme by being eligible for lots of subsidy. But if another $50,000 worker has a spouse also working and the household income is now $80,000 or $90,000 a year they would be disqualified for all or most of the federal health insurance subsidies.

So, this $50,000 worker does OK and that one has to pay most if not the full cost of health insurance out of their pocket.

It gets even more complicated. Employers often contribute more for family coverage and give single workers less because their coverage costs less. So, how do they pass out the raise when and if health benefits are terminated? Does a single worker get paid less for doing the same job going forward?

Just ditching the employer’s health insurance plan can be more attractive to businesses that are filled with low-income and unskilled workers. But any business that relies on even a few skilled and key employees will likely find this simplistic, The, “Just dump the insurance, give them a raise, and send them to the exchange,” idea has more holes than Swiss cheese.

What will employers do?

They will use the early renewal strategy when they can to buy themselves a year. Then they will likely increase employee premiums and deductibles to keep the wolf from the door for maybe another year. But Obamacare caps out-of-pocket costs and employers will quickly bump up against that in a year or two.

What will employers and their brokers do? They will tap dance as long as they can and hope for a rescue party.

Robert Laszewski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.

24 replies »

  1. Greetings! Quick question that’s entirely off topic. Do you know how to make your site mobile friendly? My site looks weird when viewing from my iphone4. I’m trying to find a theme or plugin that might be able to resolve this issue. If you have any recommendations, please share. Many thanks!
    red epi louis vuitton shoulder bag http://www.tempiocavalleriaitaliana.it/public/file/louis-vuitton-outlet-10/u@1red-epi-louis-vuitton-shoulder-bag09og.asp

  2. Actually the HHS regulations require cancellation for non-grandfathered plans. The insurance industry pointed this out in comments on the proposed regs back in 2010 and were ignored.

    The wave of small business cancellations is already starting. My sister and her husband have been notified that their small business plan cannot be renewed because of the ACA when it expires next spring. This is a plan covering pre-existing conditions with no lifetime spending caps and with which my relatives were very pleased.

    Getting rid of existing plans (both group and individual) as quickly as possible was described by the US Department of Justice as a “compelling” state interest in the brief it filed recently in the Priests for Life case. It is part of the core design of the ACA.

  3. According to a Milliman actuary, in some cases insurers were ordered by state insurance departments to cancel non-compliant policies.

    (yet another area where state discretion seems deeply stupid to me)

    In other cases, an insurer who modified a policy to make it compliant would of course include a rate increases.
    Under the ACA, rate increases over 10% can be subject to federal review.

    So canceling plans was simpler and faster than modifying them.

    You can see why the Medicare-for-all folks are appalled by this train-wreck rollout.

  4. “Is the ACA legislation so blind and rigid that it would force a plan to be cancelled when it was 85% compliant?”

    Yes! If employer changes PCP copay from $20 to $30, it becomes a predatory, cheap, no-good , exploitive plan that needs to be exterminated to protect the unwitting masses from the evil insurance carriers and employers. Thank you Obama for protecting me from a $30 copay.

    Obama idiom…If 85 to 99% like it, it’s bad, and must be destroyed:

    1) Marriage…done
    2) Private Health Insurance…almost there.

    Changes Causing Loss of Grandfather Status

    Grandfather status and the loss of grandfather status are determined on a per benefit option basis for a plan. For example, a PPO option offered under a plan may lose grandfather status, but a high deductible option offered under the same plan may not. The interim final regulations specify that the following actions will result in loss of grandfather status:
    Changing Insurance Carriers or Entering into New Contracts – changing the insurer of fully-insured coverage will trigger the loss of grandfather status even without changes in plan design. In addition, entering into a new contract (even with the same insurer) instead of merely renewing a contract will cause the loss of grandfather status. For example, if a plan adds a high deductible option as part of a contract renewal, the new high deductible option will not be grandfathered, but the existing options under the plan will. A plan may also lose grandfather status if it changes from being self-funded to fully-insured, or vice versa.
    Eliminating Coverage of a Benefit – the elimination of substantially all benefits of the coverage that was in place on March 23, 2010, for a condition or substantial elimination of any element necessary to treat a condition. For example, eliminating coverage of counseling for mental illness treatment or any coverage related to a particular condition, such as AIDS.
    Increase in Co-Insurance – any increase in the coinsurance percentage in effect on March 23, 2010.
    Increasing Fixed Cost-Sharing Amounts – an increase in a fixed cost-sharing amount that exceeds the amount in effect on March 23, 2010, by medical inflation plus 15% (or the greater of $5 or 15% for a copay).
    Decreasing the Rate of Employer Contributions – a decrease in the rate of employer contributions of more than 5%. If employer contributions are based on a formula, grandfather status is lost if employer contributions for any tier of coverage decrease by more than 5% for similarly situated individuals. If the plan is self-insured, the employer’s contributions are equal to total plan costs minus employee contributions.
    New Maximum Limits on Benefits – imposing a new annual or lifetime maximum on an option after March 23, 2010. ACA prohibits annual or lifetime maximums on essential benefits for plan years beginning on and after September 23, 2010 (January 1, 2011, for calendar year plans). In addition, a plan that imposed a lifetime limit on March 23, 2010, but not an annual limit, will lose grandfather status if it later adopts an annual limit that is less than the lifetime limit that was in place on March 23, 2010. Finally, a plan will lose grandfather status if it decreases an annual limit that was in place on March 23, 2010.

  5. So the author thinks that the size of your employer should determine the provisions of your health care benefits?

    Think harder please.

  6. Bob Herz

    Obama is definitely too trusting – He has made this mistake repeatedly

  7. Jeff- Thanks-

    I was in a Fortune 500 during the birth of the concept of “presenteism” and corporate wellness programs . Yes – differential benefits packages were/are used to compete for some highly skilled workers. But the majority of American workers have sufferred horribly since RR was elected in 1980 with job loss, threat/fear of job loss, benfits erosion/elimination including pension erosions/eliminations, union busting, minimal to no pay raises, etc.

    I am STILL waiting for the vacuous cliche that “employees are our most important asset” to become manifest. Generally, with very few exceptions, employees remain on the cost side of the leger and are viewed as disposable.

    What workworld are you referring to?

  8. Insurance companies have made money for years by canceling plans and forcing the insureds into new risk pools.

    As Bobby suggests, the ACA gave them an excuse to do this on a massive scale.

    Obama was stupid to trust them.

  9. What, seek help refuting your lame and empty retorts?

    This from a guy who defends Nancy Pelosi did NOT say “pass PPACA and we’ll read it later?!

    Boy, your agenda speaks volumes!

  10. Point #1 — the premium increases right now in small group plans is due to various rules of the ACA — the 3:1 age ratio, gender equality, no rate up for occupation, no wellness discounts.

    Therefore any small group which is mostly male, young, and doing white collar work is getting a big increase. Other groups are seeing some premium relief.

    Point #2 – I am puzzled as to why group plans must be cancelled vs just amended. In my experience, most group plans have long had maternity benefits, drug benefits, and guaranteed issue within the firm.

    Is the ACA legislation so blind and rigid that it would force a plan to be cancelled when it was 85% compliant? and when the remaining mandates are probably very cheap things like pediatric dental?

    Obama is really being hurt by the understandable melodrama around the word ‘cancellation.’ Even in the current fuster-cluck of the individual market, most insureds are in fact being offered a new policy to replace the old one.
    Not too many insurers are totally leaving the market. The new policy is always more expensive, so people are going to be mad no matter what. But if the ACA had a smidgeon of a brain for public relations, they would have asked insurers to use a term like ‘amendment’ , to forestall panic.

  11. Ah, the unintended consequences just keep rolling along.

    So because of the ACA, small businesses will be economically incentivized to drop their insurance plans.

    Well as long as they don’t offer the spectrum of benefits that all the self interested associations lobbied for I guess they deserve it.

  12. Actually, they do.

    Because sick people don’t show up for work and aren’t as productive when they do (there’s something called “presentee-ism”).

    PLUS, they are competing in many cases for skilled workers with firms that also offer them coverage, and many tried to compete by offering the least costly, hassle free insurance they could.

  13. One issue regarding employer provided health insurance that doesn’t get much press or discussion is the fact that to the employee, the policies are community rated with no age bands while to the employer, the aggregate cost is experience rated. This is the case whether the employer has a risk based plan (fully insured) or fee based plan (self-insured). So, when considering whether or not to drop the insurance, there is an issue of how to distribute the aggregate cost in the form of raises to individual employees who will enter an insurance market with up to a 3 to 1 age rating band.

    When the workforce is mostly lower paid, those employees will be better off in the subsidized exchanges as Bob noted so dropping employer coverage and paying the penalty could make economic sense. In theory, the relatively small number of skilled employees that the employer most wants to keep could be given a raise of more than the prior cost of health insurance and enough to buy a decent policy even after payroll and possibly income taxes. An alternative approach could be to give health insurance coverage purchased by individuals without subsidies a non-refundable tax credit equal to 25% of the premium for a Silver level plan.

  14. Hey- Any American dumb enough to trust their employer with something as necessary and personal as health care deserves to reap the rewards and punishments of our US employer based health insurance system

    Consider for a moment what especially big business has done to average workers since RR was elected in 1980 and perpetuated by every president since RR including Bill Clinton.

    And you think they give a damn about your health?

  15. “I think Obama has antisocial traits”

    That’s just STUPID.

    Harry Reid, who I KNOW is an overt antisocial person”


    Seek help.

  16. By the way, after I left here following that last comment, go to read that Harry Reid, who I KNOW is an overt antisocial person, has unilaterally changed the rules of the Senate to allow just plain majority number vote for Senate actions. How antisocial is that, to take it upon yourself to change the Constitutional arrangements of a branch of government??

    In other countries, people here would be quick to label such actions as tyranny or dictator rule, but here, politics as usual.

    Seems incongruent at least, profoundly hypocritical at most.

    This law’s content as now being released, as your buddy Nancy did in fact infer at the very least, I feel she said it per NOT reading it first before passing it, shows incredibly poor judgment and insight on the Democrats’ part.

    People who cannot admit they were wrong and are causing complications for others are not healthy and responsible people.

    But, I await the usual people to jump in with the dysfunctional defenses of denial, projection, minimization, and deflection to make sure insignificant matters like truth, responsible representation, and concern for public welfare are buried and ignored!

    As has been the case for the past 13 years at least!

  17. Not true, sir. It looks at variances of the spectrum of various personality disorders and I will copy a paragraph from the Wikipedia source to state it with more accuracy for other reader:

    “The first major revision of the MMPI was the MMPI-2, which was standardized on a new national sample of adults in the United States and released in 1989.[1] The new standardization was based on 2,600 individuals from a more representative background than the MMPI.[12] It is appropriate for use with adults 18 and over. Subsequent revisions of certain test elements have been published, and a wide variety of subscales were introduced over many years to help clinicians interpret the results of the original clinical scales. The current MMPI-2 has 567 items, and usually takes between one and two hours to complete depending on reading level. It is designed to require a sixth-grade reading level.[12] There is an infrequently used abbreviated form of the test that consists of the MMPI-2’s first 370 items.[13] The shorter version has been mainly used in circumstances that have not allowed the full version to be completed (e.g., illness or time pressure), but the scores available on the shorter version are not as extensive as those available in the 567-item version. The original form of the MMPI-2 is the third most frequently utilized test in the field of psychology, behind the most used IQ and achievement tests.”

    But, to answer your question about the stability of our political candidates, not just the Presidential ones, Yes, I think there is an inherent characterological struggle in more than not. Whether it be Narcissism, Antisocial, Histrionic, Dependent, and even a bit of Paranoid type features, what does it take these past 15 or so years for NEW candidates to decide to run for office, for what the entrenched incumbents bear to greet the newcomers?

    I think Obama has antisocial traits, and note the difference between a defined Disorder versus just Traits is different. I have never met the man nor know of any defined treatment history, so will not comment on outright psychiatric impairment, but, I think his deeds, which include his words these past 5 YEARS allow me even a peripheral view of who and how he carries himself.

    I never worship or give complete trust in politicians, irregardless of party or agenda. As I sincerely do not see any focus on responsible nor inherently appropriate principles by either Repugnocants nor Democraps.

    Bush et al gave us a terrible enduring war and chipped away at our freedoms, and now Obama et al are stealing the citizens’ monies and even more freedoms still left after Bush et al left.

    I will repeat this until I am appropriately proven wrong, or die: 40% of the registered voters believe in torture without accountability, or taxation without restraint, both antisocial agendas. These are the calling cards of Republicans and Democrats respectively.

    So, if you have a core constituency that is inherently based on antisocial agendas, who are they going to turn to as representatives?

    I am not expecting an unbiased nor objective opinion from you per your writings, but, maybe other readers will pause and reflect?

  18. “Wouldn’t it be nice if all Presidential candidates had to at least take the Minnesota Multiphasic Personality Inventory”

    So, you’re saying that all presidential candidates are mentally ill? The MMPI is normed on and only appropriate for psychiatric dx’s.

    That’s really your implication, right?

  19. Seems like taxation without restraint to me. Hmm, if this same behavior happened out on the street, the person taking the money would possibly be charged with robbery.

    Yet, when the government does it, we call it “the cost of living”.

    Pity too many in this culture find creative and yet pathologically defensive ways of validating theft and loss of freedoms. Hence how tyranny sometimes is so insidious.

    A tip to anyone who even remotely might agree with my perspective on the role of antisocial elements in our political system: the antisocial at the end of the day has only the strongest alliance with him/herself, the sense of cooperation or concern for the needs and welfare of others, even if these others are fellow antisocials and mirror the agenda of the prime antisocial running the show, that sense of cooperation or concern is only for show.

    So, the President has either already or trying to throw who/whom under his wheels of the bus? The American people have enough tread marks on their faces to obscure any facial recognition, his posse in the House are close to the tread, the Senate is getting shoved onto the road, Sebelius is too busy staring at screens to notice Barry positioning himself behind her and putting his arms out, doctors as a group have been already left behind at the last mile marker, and now the insurance industry is getting nervous as they watch Obama standing next to Sebelius.

    Oh, and just for all you Clinton fans, wait ’til the Benghazi hearings of real substance finally get completed by the end of Winter 2014. If I were Hillary, I would NOT stand near her former boss. Because frankly, I think Barry will be standing next to Bill, who is already scheming his substitute companion.

    Wouldn’t it be nice if all Presidential candidates had to at least take the Minnesota Multiphasic Personality Inventory, which I think does a fair job at defining antisocial traits, oh, and has a lie scale in there too. Some could game the test, but, some wouldn’t.

    But, that is asking the public to be attentive and aware. For them to understand more than just the letter “D” or “R” after candidates names, well, I know, I ask too much.

  20. While the increases don’t sound as bad as forecasted, realize that this is on top of the huge increases some businesses saw for premiums in 2013. I don’t know if this was by design, but look at pricing over a 5 year period, rather than just for 2014 and you’ll see that insurers were pre-pricing cost increases anticipated under ACA.

  21. What about the small business exchanges that are part of the ACA? Won’t they allow small employers to band together to essentially create larger groups that can have sustainable plan terms?