ACA Reform and its Impact on Individuals and Employers – The Unintended Consequences

The Affordable Care Act (ACA) was passed with the intent of making health insurance affordable and easily attainable for anyone, whether as an individual or for an employer providing group benefits.

To make insurance more attainable, the law forced insurance companies to accept all individuals and all small employers (less than 50 employees) without allowing for medical underwriting.

In the individual market, this “guaranteed issue” of coverage means all individuals of the same age and gender are charged the same premium regardless of any underlying health conditions they might have. Plus, everyone would have immediate coverage for any pre-existing conditions they might have, even if they have never had health coverage before. While the goal of getting people access to health care is laudable, this insurance mandate had a very predictable outcome – it caused an explosion in the cost of individual health insurance.

To counter the high costs of individual insurance, a premium subsidy is provided by the government for anyone whose income doesn’t exceed 400% of the Federal Poverty Level. This makes the coverage affordable for those who can qualify. However, rapidly increasing premiums (and decreasing number of health plans available in each market) have effectively made insurance coverage unaffordable for individuals in the “middle” – those unable to qualify for a subsidy.

In the small group market, similar “guaranteed issue” rules for small employers also have driven costs higher. Not just because the insurers are absorbing more risk, but because they are charging a “community” rate that doesn’t allow rate differences between employers of similar demographics.

Previous laws allowed rates to be stratified by + or – 25% in most states to allow for a difference in the relative health of a group. Now there are no “minus 25%” groups – these relatively healthier groups are now paying higher premiums.

So, what has happened in the marketplace as a response to these ever increasing and ever more unaffordable premiums?
For individuals, there has been a surge in the sales of “non-ACA” qualified plans. Fixed indemnity plans and short-term duration plans have both become popular lower cost alternatives to the high prices and mandated benefits of ACA plans. Short-term medical plans can be less than half the cost of ACA plans and still provide quality health coverage. Many states even allow these plans to be renewed for durations of a year, or even three years.  These plans don’t cover pre-existing conditions, however the coverage to an otherwise healthy individual is affordable and the only other alternative is no coverage at all.

In the group market, a new type of group self-funding program called “level funding” has emerged. Level-funded plans use self-funding exceptions in ACA regulations that avoid guaranteed issue and community rating regulations and provide small employers with a viable and affordable alternative to fully insured ACA plans. These plans provide all the same benefits as an ACA plan, yet have the added benefit of providing employers money back (their own claim fund money) when their group has a healthy plan year.

For the smallest of groups, previous trends in insurance coverage and affordability encouraged many of these employers (and maybe this is your experience) to not provide group health benefits. Business owners would seek out their own individual insurance and not provide for their employees. But the ACA cost explosion in individual coverage has actually encouraged many small employers (two to five employees) to “regroup” and seek group health coverage for their business for the first time. These employers are taking advantage of lower groups rates, particularly in the level-funded market to find affordable coverage.

As is often the case when major government regulatory shifts occur, the marketplace adapts and tries to find a way to meet the demand created by new market inefficiencies. Unintended consequences always occur.

If you’re wondering if level funding could be the right fit for your small business, leave us a comment and we’ll be happy to send you more information or a free quote.  

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Allied National

Founded in 1970, Allied is one of the nation's oldest and most experienced third-party administrators. Allied National is a 90 Degree Benefits Company, a subsidiary of Blue Cross Blue Shield Alabama. As the small group benefit experts, Allied works with small business employers to provide unique and affordable group health benefits.