How New “Community Ratings” Are Affecting Rates

Changes to the way in which small-group rates are calculated have small employers weighing their options.

A new “community rating” system, which takes effect January 1, is having a major impact on small group rates, and therefore on small business’ decision-making.

Employers with fewer than 50 full-time workers can buy small-group plans through MNsure, the state’s new health insurance exchange—but their employees may also be eligible to obtain tax credits when buying individual plans through MNsure.

In other words, they’re weighing whether it makes the most sense to offer insurance (and if so, where to procure it) or whether employees are better off buying their own plans.

Historically, a carrier’s underwriter has used “group ratings” to determine the relative risk of a group, and that risk was based largely on the health of a group’s members. They tended to give groups a rating of between .75 and 1.25—which results in a 67 percent difference in premiums paid between the healthiest and least healthy groups, says Greg Thurston, director of benefits at Minneapolis-based Doherty Employer Services.

GregThurston.jpgGreg Thurston of Doherty Employer Services

The new “community rating” system effectively squeezes all groups into the 1.0 rating. The idea is to level the premium playing field, regardless of a person's health condition, with the only differentiators being age, location, and tobacco usage. In other words, an employer with predominantly young, healthy workers could see a big jump in costs. And those in areas like Rochester could expect to pay more than those in the Twin Cities. (For a full description of community ratings from Bloomington-based HealthPartners, click here.)

Age was previously a factor in small-group rating, too—and like before, plans under the community rating can charge more for older people. But the calculation has changed: Where they used to be rated in five-year increments (meaning a 30- and 34-year-old were charged the same), carriers may now step up costs for each year.

So, while it may seem that those with a young, healthy work force, and those operating in an area with higher rates like Rochester, may be most likely to drop coverage and send workers to the exchange, that's not necessarily the case, because the “community rating” also applies to the individual market.

“The small group in Rochester might be paying a lot for their premiums, but if they drop their health plan and tell people to go to the individual market, the individual premiums in Rochester are a lot too,” explains Thurston. “If the employee is not eligible for a government subsidy, and an employer drops health coverage, employees recognize that that was a portion of their compensation that they’ve lost.”

Another problem is that employers don’t know exactly how many of their workers would be eligible for subsidies. “You might think you know, but because you don’t know things like how much their spouse is earning, you really don’t have a way of being positive that they’re eligible for a subsidy,” he says.

Some healthy groups are seeing “substantial increases” in premiums as a result, while new taxes and other new costs have more or less offset gains that those least healthy groups may have seen due to the shift to community ratings, says Thurston.

Some small employers have been looking into renewing their plans early in order to lock in more favorable rates, but that window has likely passed as the new year is just around the corner. Others may have already discontinued offering insurance.

Thurston says he’s heard from “a number of small groups that have indicated that they may be dropping coverage,” but he suspects that faction represents less than 5 percent of businesses he’s spoken to.

Groups most apt to drop coverage are small employers with low-paid employees, as their workers are most likely to be eligible for subsidies on the exchange. But Thurston warns that some stats are misleading. For example, some news sources have suggested that people who earn as much as 400 percent of the poverty level can receive government assistance. “But the reality is, that $93,000 family of four would only get a very small subsidy—it wouldn’t be, say 80 percent of the premium.” So if a company has that type of employee and drops coverage, the worker “may get a few bucks subsidized, but they’ll have a lot of out-of-pocket costs for the premium.” Plus, that worker will have to pay for it with after-tax dollars.

K.M. Davis, founder of Minneapolis-based Davis Law Office, LLC, hired her first full-time employee (besides herself) this year. She says she plans to begin subsidizing her employees’ individual plans beginning in the second quarter of this year, but says she’s “definitely not going the group route, as we've heard from more than one insurance professional that it doesn't really make sense if you have fewer than 50 employees for 2014.”

KMDavis_160.jpgK.M. Davis

However, all small businesses should explore all of their options. Many of Davis Law Office’s clients are small businesses, and the firm advises those that offer group coverage to contact an independent broker “to see if there is a less expensive option for them under the [Affordable Care Act],” Davis says.

Meanwhile, Davis recently bought an individual plan from outside the exchange for herself. She said that, while she may have qualified for a subsidy on MNsure, it’s difficult to know as a small business owner, because she’s unsure how much money she’ll earn next year, and that’s what the subsidy is based on. “That part seems particularly ridiculous to me,” she says.

Other small businesses are finding new resources for helping their workers obtain insurance. Zach Supalla, founder and CEO of Spark, a Twin Cities startup that connects household devices like light bulbs to Wi-Fi networks, has tapped the resources of another local startup, called Gravie, which facilitates the process of employees buying insurance through the individual market.

“We’ve found that the prices are much lower so we can offer better health care that way,” he says. “We’re a young startup, so we weren’t in a position to offer health insurance until very recently, and the new individual market seems like a no-brainer.”

What about large employers? Ratings for businesses with more than 50 employees are based on the claims of that specific employer group, and that formula is more or less unchanged by the ACA, says Julie Bunde, director of product management and product and market solutions at HealthPartners. The main factors affecting large group plans, some of which have already taken effect, are new taxes and assessments from the ACA, the addition of dependents through age 26, and a need to offer coverage within 90 days of hiring an employee, per the play or pay rule.

What is paramount right now for employers is communication with employees, says Thurston. “Premiums are going to go up, and they ought to confirm what their networks are,” because some plans may be renewed with different networks than people previously had, he says.