Storm Clouds With Sun Shining

An article written last week by Robert Weisman for the Boston Globe – Mass. businesses don’t like insurance decision – highlighted the concerns of health care affordability that continue to grow in the small business community.  Confusion reigns as well.  But as it is with storm clouds, there is always the silver lining.

Small Business Definition

In light of the concerns for the small business community, the first question a business owner might ask is “what is a small business and do I qualify?”  The answer is one an attorney might give – “it depends”.  When health care reform was initiated in Massachusetts in 2006, a business with ten employees would be considered small – or at least small enough to be exempt from much of the then newly formed law.  For rating purposes, Massachusetts health insurance providers consider businesses with fewer than 50 employees to be small.  With the implementation of the Patient Protection and Affordable Care Act (PPACA), 50 may not be small enough.  In Massachusetts, it is becoming increasingly clear that 100 will be the benchmark – perhaps not now, but soon.

The Impact for Small Businesses as PPACA Regulations are Enforced

Large employers are rated based on the experience of the group and many factors that define risk exposures.  For the insurer, this methodology gives an added degree of confidence.  More measuring tools combined with the mathematical “law of big numbers” create a more exacting formula that creates confidence for the insurer and a greater sense of rate stability for the employer.  In Massachusetts, small businesses follow a different set of rules for rating purposes, the basics of which are highlighted as follows:

  • Business rating factors currently include as many as ten underwriting factors.
  • With PPACA implementation, small businesses in Massachusetts will eventually only be able to consider four:
    • Employee Age
    • Number of Family Members
    • Geographic Area
    • Tobacco Use
    • The recent federal ruling will require a phase-in of the new underwriting guidelines.
    • Unless the federal regulators have a change of heart, full implementation will be in force by 2016.
Why Rating Factors Are Important

To properly assess risk, underwriters consider as many risk factors as possible.  While all are important, the impact of some are much more profound than others.  The most important variable eliminated is the consideration a business’s SIC or NAICS code.  As Jim Edholm, president of Business Benefits Insurance (BBI) stated in his company’s recent press release,  the impact on many industries, especially small white collar businesses will be profound.  “Removing five of those factors will result in severe disruptions to white-collar firms in particular,” Edholm said. “Once industry rating factors are removed, the ditch-digging firm gets the same underwriting calculation that the software consultant does. It’s ludicrous.”

The urgings expressed in the March 25, 2013 BBI press release did not achieve the desired results.  While insurers sought a waiver, what they got was a temporary reprieve.  Federal regulators have ruled that 2/3 of the additional rating factors can be used in 2014, 1/3 in 2015 and none in 2016.  Furthermore, regulators and attorneys we have spoken with believe that the 100 employee benchmark for small business measurements will be reached by 2016, if not sooner.  Unless things change, the impact could be extreme for small business owners in Massachusetts.

Other Concerns

Unlike other states, Massachusetts merges individual and group rates which can provide yet another adverse impact.  Given that the penalty for eligible individuals who fail to comply with the state health care requirement is considered minimal by most standards, the impact on loss ratios can be significant when individuals sign up for health care, treat a current condition, and then drop coverage.  This experience is merged with small groups for rating purposes.  When coupled with the inability to use more discerning rating factors, the result will assuredly result in increased premiums for the small business community that will outpace those who are part of a large group.

The Silver Lining

Uncertainty breeds concern.  While PPACA legislation exists, much regulation needs to be written.  So what does that mean for small businesses?  Little is known, but this much can be assumed and hoped for:  the regulators might change their minds and consider the plight of stand-alone small businesses.  No guarantees, of course.  It might well be that the Commonwealth, while leading the charge to meaningful healthcare reform, has inadvertently put its small business community at risk.  The rest of that story is yet to be told.  Still, for small businesses who partner with a few select members of the Professional Employer Organization (PEO) industry, other options exist.  Full service Human Resource partnership is the primary function for regional PEOs.  For small business owners who look for a full service Human Resource solution, including a comprehensive employee benefit strategy, partnering with a local accredited PEO could indeed be the silver lining in a cloud of regulatory uncertainty.