Insurance Coverage in the Small Employer Market: Implications of the Affordable Care Act

June 3, 2013

Newspaper headlines about small employers’ fears of the Affordable Care Act (ACA) make it seem like there will be a major cataclysm in the small employer health insurance market come January 1, 2014. What most of these stories miss, however, is that a cataclysm has already occurred in employment-based coverage and the likely impacts of the ACA on the small employer market will be mixed at worst: beneficial for some and challenging for others. Overall, the ACA’s impact on the small employer market is likely to be smaller than most people think—at least in the early years of its implementation.

The cataclysm that has already occurred is the fact that employers have been dropping coverage for the past decade and relatively few truly small employers offer coverage today. In 2001, 60 percent of Michigan’s small firms offered health insurance coverage. By 2011, that percentage had dropped to less than 40 percent—a greater than 20 percentage point decline over those 10 years.

Employers have been dropping health coverage principally because of the cost of health care—a trend worsened by the recession. And, as large firms have reduced their work force, more individuals have obtained employment in smaller firms, which are least likely to offer health insurance and most likely to drop coverage when faced with financial pressures.

A major question is whether the ACA will improve or further worsen this trend. In order to look at this question, it is important to consider several facts. First, a key piece of legislation concerning employers is what is called the “Play or Pay” rule. Under this rule, employers must offer health coverage or pay a penalty for employees who obtain their coverage with a subsidy through the individual market on the health insurance exchange. The reality is, however, that when it comes to the small employer market, very few small employers will be subject to this penalty. The penalty only applies to employers with 50 or more employees. For example, our center just published a report showing there are 154,488 employers in Michigan with fewer than 100 employees, of which 96 percent have fewer than 50 employees and will not be subject to the penalty.

For employers with 50 to 99 employees, about 90 percent already offer health insurance coverage. And, while there will be new requirements for these employers that go into effect on January 1, 2014, many changes have already been implemented without significantly disrupting this market (such as full coverage of preventive benefits, required coverage of dependents to age 26, elimination of lifetime benefit limits and the like).

Second, it is important to recognize that the ACA has new employer benefits as well as new requirements. The Small Business Health Options Program (SHOP) health insurance exchange is designed to pool small employers together so that they can find more affordable health insurance coverage. And, there are new requirements in this market place for community rating and insurance rating oversight that could help some employers, especially those with an older work force. And, finally, there are new grants for wellness programs and some tax credits for very small employers. So, some could obtain new funding from the ACA to offer coverage.

Our best crystal ball on the impact of the ACA is what has already happened in Massachusetts. Employer-offered health insurance actually grew after the implementation of health reform in that state. And, the market there has continued to be quite vibrant.

The bottom line is that today’s headlines are not likely to be representative of what will really happen with the implementation of the ACA. Or, as some might say, it is time to “cool our jets” and wait to see what happens.