The most challenging group health market in the country is navigated by employers with 51 to 125 or so full-time employees. These employers must steer carefully through most of the respective challenges of the small- and large-group markets while forfeiting many of the respective advantages. They are caught in the middle from a regulatory, vendor and contractual perspective.
What are the specific challenges and opportunities facing midsize employers?
First, most of these firms have more than 49 full-time employee and full-time equivalents and are subject to Affordable Care Act employer-shared responsibility and reporting, while smaller companies are not. Also, most of these firms sponsoring fully-insured plans have experience-based premiums, while smaller companies do not.
Next, vendor consolidation has left many markets with only a handful of fully insured vendor options. This lack of competition allows past disqualifying business practices (the lack of providing meaningful claims experience, for example) to now become an acceptable practice.
Also, so-called level-funding products are increasingly available in this market and can create a stepping stone to traditional self-funding, the contractual terms of level-funding contracts can cause an evaluating CFO and HR Director to chuckle in disbelief. While these products can be useful in eliminating the 4% or so ACA premium tax (aka health insurer fee), this fee is a moving target, given its enactment for 2014-2016, welcomed suspension for 2017, and scheduled return for 2018. In an effort to dissuade midsize employers from moving to self-funded contracts, several of the states passed laws to create or raise individual and aggregate stop-loss level floors.
Finally, from a federal regulatory standpoint, the demarcation line between large and small employer varies by topic and tends to shift with little notice, making it difficult for midsize employers to develop long-term strategies. For example, because Congress mandated via the ACA that the small group fully insured market expand in 2016 to all groups with less than 101 full-time employee + equivalents, many midsize employers made proactive changes ahead of this deadline. When Congress canceled this expansion at the eleventh hour, it was welcome news for midsize employers but perhaps bittersweet for those that had made proactive changes.
Time for a plan
How can midsize employers successfully navigate through these shifting headwinds? Perhaps the key is developing a strategic plan and being willing to toss it overboard once the winds shift.
Let’s consider the recent group health plan odyssey of a midsize employer client of mine. Their plan year is July 1. Historically, they sponsored a fully insured plan and received annual claims experience reporting from their carrier. To ease ACA employer shared responsibility compliance, they use the “easy button” federal poverty line affordability safe harbor and outsource Form 1095-C/1094-C preparation to their payroll vendor.
Under the ACA-mandated 2016 small-group expansion, this employer was slated to fall from large group to small group effective July 1, 2016. Among the unappetizing impacts of this change was the shift from four-tier rates to ACA age-banded rates and the loss of plan design flexibility. As this group, my team and I reviewed their options in early 2015, we considered moving to a self-funded contract as an escape hatch from both the 2016 small-group expansion and the roughly 4% ACA premium tax on fully insured plans. Based upon their size, we narrowed our focus to level-funded contracts.
At that time, only one mainline vendor offered a level-funded product to midsize employers in their geographic area, and we reasoned that this vendor would be overwhelmed with new business once the 2016 small group expansion begun and thousands of employers sought refuge from the age-banded rate storm. Thus, upon realizing that July 1, 2015 rates could be negotiated with this level-funded vendor at levels (including the reserve) less than their incumbent vendor’s renewal rates, this employer decided to proactively make this vendor and funding change, one year early.
Congress then repealed the small-group expansion right before the deadline via the October 2015 PACE Act. Thus, the entire reason this employer changed vendors, disrupted provider networks and moved to level funding went away.
Meanwhile, the first year’s claims experience under this contract did not run well, ending in a contractual deficit. Fortunately, my team and I were able to negotiate an increase to rates (including the reserve) of only 6%. However, during the second policy year, claims continued to run at a deficit, prompting a proposed renewal increase for July 1, 2017, of 24%.
Given that the small-group expansion threat had ended and that the ACA premium tax was suspended for at least the balance of 2017, we sought fully insured proposals from the incumbent and viable competitors. After negotiation was complete, the incumbent offered fully insured pricing just 7% above current rates and maintained the proposed 24% increase if the group stayed with level funding. While this fully insured offer didn’t make actuarial sense, we chalked it up as a gift. Thus, this employer returned to a fully insured contract.
Of course, more challenges for this midsize employer likely await, given the return of the ACA premium tax for calendar year 2018, the lack of claims experience that will be issued with the group’s 2018 renewal, and the approaching Cadillac tax thunderstorm.
Who knows, maybe we’ll go back to level funding next year.
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