Eric Foster, CEBS
2017 has been a year of significant disruption in the insurance markets. It can be daunting to try to predict what awaits health insurance markets serving small businesses. Just weeks before the beginning of the open enrollment period for the Affordable Care Act (ACA) healthcare exchanges President Trump signed Executive Order (EO) 13813, the Executive Order Promoting Healthcare Choice and Competition. In doing so, he dropped another pebble in the insurance pond and sent ripples to all shores. However, if we isolate some of the variables that impact what products are available to PEOs and their clients, we can sort through some of the confusion.
The Individual Market
November 1, 2017 brought with it the start of the fifth open enrollment period for the individual exchanges. Insurers uncertain about the anti-selection that will come from public confusion over the termination of cost-sharing reductions (which reduced out-of-pocket costs within the plans for certain subsidy-eligible individuals) have acted defensively in setting their rates.
The unsubsidized premium for the lowest-cost bronze plan in individual exchanges is going up an average of 17 percent nationally for 2018, 35 percent for the lowest-cost silver plan, and 19 percent for the lowest-cost gold plan. Silver plans received the brunt of the premium loads for the termination in cost-sharing payments.
Notwithstanding the increase in premiums, individuals who remain eligible to receive premium tax credits may still see the net cost of purchasing insurance decrease for 2018 once the tax credits are taken into account. That’s a less-advertised boon for individuals. Nevertheless, many anticipate that the reduced open enrollment period for individual exchanges, the reduction in advertising budget, and the well-publicized elimination of cost-sharing payments will result in a reduction in enrollment in individual marketplaces despite the potentially lower costs available to those qualifying for the federal premium tax credits. The data suggest that employees who are ineligible for the 2018 tax credits may be better served looking for coverage outside of the exchanges. Alternatively, such individuals might instead seek employment with an employer that sponsors group coverage for its employees.
Meanwhile, small group health (Small Business Health Options Program (SHOP)) exchanges have almost no takers, according to the Centers for Medicare and Medicaid Services (CMS). Per CMS statements in May 2017, “Out of the 30 million small businesses in the country, less than 8,000, just 0.1 percent of small businesses, currently participate in the [federally facilitated] SHOPs in 33 states.1” That amounts to fewer than 40,000 workers covered through SHOP exchanges accessible through HealthCare.gov. Another approximately 20,000 small businesses access coverage through state-run marketplaces covering just under 200,000 people. Combined, all small group exchanges nationally cover fewer than 30,000 of the nation’s 30 million small businesses. HealthCare.gov has announced that it will no longer support new small business enrollment in 2018, and as a result, small businesses looking for new coverage may choose to use traditional brokers, associations, or PEOs for new coverage beginning in 2018.
PEO Master Policies
Other than the issues discussed above, in the near future PEOs that sponsor master policy health benefits should still provide a cost-effective and comprehensive coverage solution for their client employers and worksite employees.
President Trump’s EO 13813 seeks to unwind the impact of the ACA in significant ways: it would permit the purchase of health insurance across state lines and allow employers in certain instances to band together in associations to purchase health benefits on a pooled basis. The president has asked the secretary of labor to expand the “commonality of interest” requirements under past Department of Labor (DOL) advisory opinions about the definition of “employer” under the Employee Retirement Income Security Act (ERISA) in order to permit more associations to form. A Notice of Proposed Rulemaking was released in early January 2018, the effects of which will be closely watched in the coming months.
The risk dynamics of association health plans can be similar to those of PEO plans, but employers may not have as much “skin in the game” in terms of administrative services and fees (like with a PEO). As such, there may be a greater potential for an ebb and flow of association members who choose to participate in an aggregated large-group association health plan. Such an ebb and flow would generally result in more anti-selection for associations and could mean a well-managed PEO master health plan could keep costs lower for a typical employer, relative to the association health plan. However, the additional service fees required for core PEO services would be a competitive disadvantage if an employer were primarily looking for access to employee benefits only. We will need to continue to monitor developments to assess how association health plans will be offered and rated.
Insurers remain bullish on PEO potential to be a profitable alternative to traditional distribution channels, and several insurers that have not traditionally played in the PEO space are looking for opportunities to learn more. That includes new Anthem and Health Care Service Corporation (HCSC) plans, as well as independent Blues plans. Each has a unique preference for holding risk or sharing risk as well as including brokers and general agents in complement to internal sales or in place of internal sales. The expansion of interest among Blues plans will most likely be the largest development in the insurer marketplace for PEOs operating master policies. Many of those entities, though, do not have deep experience in how to establish the PEO plan portfolio and rating scheme. In the end, it is in the best interest of both the PEO and insurer to establish processes and reports that facilitate profitable, sustainable growth.
Another key development involves PEOs that seek to self-fund in states that have traditionally limited self-funded PEO sponsored plans. Many states today continue to restrict the ability of PEOs to offer self-funded plans to client employers within their states. In addition, PEOs could run the risk of jeopardizing licensure if they offer self-funded plans to clients within a non-permissive state and simply establish the plan situs outside of the state or cover individuals living and residing in a state that does not permit the offering of self-funded PEO-sponsored plans within its boundaries. To improve that situation, there are creative alternatives being pursued that are similar to self-insurance, but provide elements of insurance that not only protect against volatility, but also against insufficient funds and insolvency. An example of that is being referred to as “hybrid minimum premium.” Administrative costs are lower than full insurance and traditional minimum premium, and the structure of the underlying plan reduces taxes and provides more flexibility in customizing features like pharmacy coverage. If state regulators can become comfortable that insurance protections are in place to protect the plan beneficiaries, PEOs can develop plan offerings with much more customization than they have today and roll it out in different states.
In summary, recent political developments likely will continue to make exchange plans less attractive while enhancing the ability of small businesses to purchase plans with the benefits of aggregated buying. That is a mixed blessing. New insurers are entering the market with several new Blues options becoming available, which increases PEO options and creates more cost competitiveness. PEOs could approach the association health plan challenges by offering a customized package of services to associations that could include access to a master policy health plan, thereby turning a potential competitor into a new revenue stream. New developments in risk-sharing for PEOs will likely lower costs further and provide them the ability to have true national consistency in health offerings. There are still many reasons to be encouraged by PEOs and their ability to offer unique, competitive health plans.
Eric Foster, CEBS is Chief Consulting Officer, Executive VP, and Managing Principal at Jacksonville, Florida-based Compass Consulting Group.