For small employers in California, the Affordable Care Act is fairly simple. There is no mandate; there is a new purchasing pool, there are new opportunities for coverage of spouses, children, laid off workers, new hires. There are small business tax credits and some improvements in the rules governing underwriting.
The California legislature had already enacted many of the ACA’s reforms for small employers in 1992, and many have stood the test of time. The most interesting point in the ACA for small employers is the interface with Covered California/the Exchange/the Marketplace with coverage offered through employees.
The Affordable Care Act created a purchasing pool, the Small Business Heath Options Program (SHOP), for small employers who wish to use it to offer coverage for their employees. The concept is to give small employers the same broader choices of plans, benefits and provider networks as larger employers.
Under California’s implementation of the SHOP, small business can choose the level of coverage (bronze, silver, gold or platinum) for their employees and the amount of premium (from 60% to 100% of the premium) the employer wishes to contribute. Employers choose a reference plan and price (e.g. gold coverage for the Kaiser plan).
The employees can choose among several different offerings from Kaiser, Health Net and Blue Shield. Employees would pay 100% of the extra cost of choosing the more expensive plans than the employer selected reference plan and would get 100% of the savings from choosing the less expensive plans. The prices, coverage and provider networks of Covered California plans can be reviewed on the web site www.coveredca.com.
Anthem Blue Cross is not participating in the SHOP, but instead is participating in an alternative private, purchasing pool, founded by agents and brokers, known as California Choice.
Small Business Tax Credits
The ACA created small business tax credits to help small, low wage employers purchase coverage for their employees. These credits reimburse up to 50% of what the business contributes towards health plan premiums. The credits are at their maximum for employers of 10 employees or less and average earnings of $25,000 or less then phase down and out as the employer size reaches 25 and the average wages reach $50,000. The credits have been in existence since the ACA was passed in 2010, but at lower levels.
There are two mandates in the ACA: an individual mandate and a large employer mandate; there is no small employer mandate. The individual mandate, which takes effect in 2014, requires all citizens and legal permanent residents to enroll in coverage with exceptions for financial hardship and religious beliefs and those exempt from filing federal taxes. The individual mandate requires coverage for at least the lowest cost bronze plan (pays 60% of expected medical costs). Or an individual can have grandfathered coverage that could cover even less.
The large employer mandate takes effect in 2015. It requires employers of 50 or more full time equivalent employees to “pay” or “play”. Play means offering to pay at least 60% of the cost of the lowest cost bronze plan (covers 60% of expected medical costs). Pay means paying $2000 per full time employee (minus the first 30 employees) if one employee uses premium assistance in Covered California. Full time employee means 30 hours a week or more and 90 days on the job. For most large employers there is little change as 94% offer coverage and 98% of eligible employees are covered.
Ten Essential Health Benefits
The ACA requires individuals to have coverage for ten essential health benefits. These include familiar services such as doctors, hospitals, prescription drugs, lab, prevention, maternity, well child and behavioral health. Most and more are already included in standard employer plan.
California’s minimum requirements for health plans already require most of these services. Maternity benefits for example were required under California law for employer plans, but not until relatively recently for individual insurance coverage. Some services on the list may be unfamiliar, such as “Habilitative and Rehabilitative” services. This includes wheelchairs for persons injured in a terrible accident or with birth trauma and rehab services needed to regain functioning after a stroke. Prescription drugs were not a required benefit under California law; however virtually all employer plans cover them and they are required under the ACA.
States were given 10 choices as to how to define their minimum essential benefits. California chose the most popular small business plan, the Kaiser Small Group 30 plan.
A typical employer plan has an actuarial value of 80%; this means it will pay about 80% of a group’s expected medical costs; Medicare has a similar value. The ACA requires an individual to maintain coverage of at least the lowest priced bronze plan, i.e. a plan that will cover 60% of their expected medical costs.
Young adults under the age of 30 can meet the individual mandate with catastrophic coverage (about 50% of expected medical costs). Individuals with financial hardship (the premiums of the lowest cost bronze plan exceeds 8% of the household income) can also purchase catastrophic coverage. Catastrophic coverage is only available in the plans offered by Covered California.
Coverage for Spouses and Children of Small Business Employees
For those small businesses who offer employee only coverage, the ACA offers coverage for their uninsured spouses and children. Uninsured spouses are eligible for premium assistance through Covered California if the family income is between 138% and 400% of FPL. Children are eligible for Medi-Cal up to 250% of FPL and for Covered California above that. Family members with household income over 400% can purchase coverage through Covered California, but without premium assistance. The ACA’s offer of adult children up to age 26 continues to apply.
These rules apply to all plans sold to small employers. There are some modest improvements for California small businesses as compared to existing California law.
The rules are quite similar for individuals. There are very large improvements for individuals, including California’s self-employed, as compared to existing California law.
Guaranteed Issue: The ACA requires all health plans selling coverage in the small employer market to sell to all comers; in other words plans must sell your business coverage regardless of the health status of your employees. California has required a similar policy for small employer plans since 1992.
Guaranteed Renewal: The ACA requires all health plans selling coverage in the small employer market to renew coverage to all participants, regardless of their health status or claims experience. California has required a similar policy for small employer plans since 1992.
Pre-Existing Condition Exclusions: The ACA requires all health plans selling coverage in the small employer market to eliminate their pre-existing condition exclusions for all participants. Since 1992 California has restricted small employer plans to a one time only, six-month exclusion if a new employee had not maintained continuity of coverage.
Rating based on health status or claims experience: The ACA requires all health plans selling coverage in the small employer market to eliminate their rating based on an employee’s health status or claims experience. In 1992, California restricted health status or claims rating to +/- 10% for small employer plans.
Age rating: The ACA permits age rating within a 3/1 rate band (i.e. premiums for a 64 year old can be three times as much as a 21 year old). Premiums increase with age on an employee’s birth date. In the 1992 reforms, California permitted age rating; premiums increase at 5 and 10 year intervals, depending on an employee’s age – e.g. 20, 30, 40, 50, 55, 60 and 65.
Geographic rating: The ACA permits states to decide the number of geographic regions, subject to federal approval; California chose 19 regions, and the federal government approved this configuration. In the 1992 reforms, California permitted geographic rating with plans using only 9 regions.
Family size: The ACA permits increases in premiums based on the number of members of the employee’s family. In the 1992 reforms, California permitted family size rating based on 4 family variations – e.g. single, couple, with one child and with children.
Gender rating: The ACA bars rating based on an employee’s gender. California adopted the same policy in 1992.
A Note of Caution About Dropping Employment Based Coverage
Some employees may wish to use Covered California for their own coverage or their children’s coverage because they cannot afford their premium contributions for their employment-sponsored coverage. This is only rarely a good idea as they would be ineligible for premium assistance in Covered California unless their share of “employee only” coverage exceeds 9.5% of their household’s income. As a general rule, employees should stick with their employer’s coverage and have a very clear understanding of the consequences of dropping coverage for themselves or their children in order to enroll in Covered California.
Self-employed individuals are often covered through a spouse or parent, through private individual insurance or are uninsured. The uninsured have new options under the ACA and should look at their coverage options in the individual market inside and outside Covered California. The ACA’s underwriting reforms will give them the same protections inside and outside Covered California; however premium assistance is only available inside Covered California.
Based on survey data, nearly 45% of those with private individual coverage might be eligible for some premium assistance under the ACA. Self employed private individually insured individuals with incomes up to 400% should review their existing coverage and their Covered California offerings with their brokers to determine which best meets their financial and medical needs.
A self-employed spouse or adult child may in some circumstance have a choice between employment-based coverage through their spouse or parent and the new ACA coverage options. This will require a careful analysis and cautious review of the plans, provider networks and financial assistance available in each option.
Start-Up Small Businesses
Start-up businesses often begin with low pay, few employees and no benefits. The ACA offers two important new choices. The individuals can apply for Covered California and receive the premium assistance for which they qualify. The small employer can apply to and use the Covered California SHOP and receive premium assistance for the employer share of the premium for up to two years. The added advantage of purchasing as a business is that the employer share of premium is a pre-tax benefit. The choice is clearly a business decision based on the company’s cash flow and financial stability, the start-up’s assessment of its expected growth in revenues, salaries and the need to retain valued employees.
Employees stay on jobs because they or their family members cannot get health benefits due to pre-existing conditions. The ACA’s underwriting reforms for the small employers and individual markets and the premium assistance available through Covered California remove this job lock barrier to employee mobility and improved economic performance.
New Hires, Terminations, and Layoffs
Provisional and temporary employees may not qualify for health benefits until the end of a 90 day probationary period. Terminated employees have access to COBRA, but frequently lack the means to pay the premiums (the employer’s average premium plus three percent). The ACA’s underwriting reforms and the premium assistance through Covered California provide a new option of affordable and accessible coverage during probationary periods and job transitions.