The Affordable Care Act Rate Reforms and what can small employers do about it


One purpose of enacting the Affordable Care Act (ACA) was to increase access to health insurance.  It does so by guaranteeing every U.S. citizen the ability to purchase the health plan of their choosing with no pre-existing conditions provisions.  Although this provision enjoyed broad support, it comes at a high cost and it was never clear to most people who would pay for it and how.  The following paragraphs describe who pays and how.

In a normal population approximately 50% of health claims are incurred by just 5% of the insured population.  Also, approximately 50% of the insured population in any given year normally has almost no claims.  This is a normal distribution of health costs and it is what makes insurance work.  High claims are spread across a large population so that insured members can pay an affordable premium to provide protection against the risk of potential high health care expenses.  This was how insurance worked before the ACA and the catch was that in most cases you needed to secure insurance before you knew that you would have high claims,

The ACA changed this.  The ACA allowed everyone to access insurance and helped many people who through circumstance beyond their control were barred access to insurance.  It also guaranteed access to individuals with high known claims regardless of circumstance.  The ACA even guarantees access to insurance if you choose to wait until after you know you have high claims.

As expected, the number of insured people has increased, but unfortunately, only by approximately 5%.  It is logical to assume based upon the distribution of claims in a normal population that the 5% enrollment growth included the sickest 5% and few others.  Although the idea that fines would encourage enough healthy uninsured to enroll to make this work, this has not happened.  The end result was enormous increases in claims costs with little or no new premium revenue to cover them.

The designers of the ACA anticipated this problem.  To help pay for this higher average claims cost per person the ACA imposes a significant cost burden solely on small employers.  “Small Employers” are employers with between 2 and 50 eligible employees.  Specifically, the ACA requires that insurance carriers determine rates for small employers on the combined claims costs of 1) small groups (with typically lower claims) and 2) the individual market (with significantly higher claims for reasons explained above).  Small employers must now, in effect, subsidize the cost of individual policies.

The rating reforms applicable to small employers were deferred for several years by amending the ACA to allow certain employer plans (Grandmothered Plans) to delay the effective date of the rating reforms.  Now that Grandmothered plan rate reform deferrals have ended, the necessary increased premiums for small employers are showing up in this year’s renewals.

The enormous complexity of the ACA and lack of transparency has obscured until now just how much this cost shifting will cost small employers and their employees. Some rate increases are dramatic.

For example, December 2015 renewal increases at our agency for small employers losing Grandmothered status from one carrier, Health Net, ranged from a low of 22% to a high of 60%.

Another illustrative example of how small employers are burdened with the ACA’s rate reforms is an employer with just over 50 employees and not subject to the ACA rate reforms.  This employer received a competitive bid from Aetna which would have represented a 2.2% rate increase over prior year rates. However, if this employer had to purchase a plan from Aetna with similar benefits as a small employer, the rate increase would have been 54% instead of just 2.2%.

An unknown for California employers is whether or not the definition of a “Small Employer” will change on January 1, 2016 to include employers with between 2 and 99 employees.

Strategy – what to do:

Large employers now have a significant cost advantage over small employers.  Aside from the competitive advantage issue, many small employers will be hard pressed to maintain satisfactory benefits at all.  As these costs are passed along to employees, many employees may be priced out of coverage for themselves and/or their spouse and children.  This will lead to serious financial stress for employees and it probably will eventually affect their work.

Look at opportunities to access health insurance in the large employer markets.  Fortunately, if you qualify, small employers can avoid the extra ACA small employer rate reform costs by purchasing coverage as a large employer.

One opportunity for small manufacturers is to access health coverage through the Southern California Small Manufacturers Association (CSMA).  The CSMA combines the purchasing power of many small manufacturers to create a large group of more than 5,000 employees.  The result is that premiums are significantly lower in most cases than what is available in the ACA-burdened small group market.  In addition, employee out-of-pocket exposure is reduced in many cases by half, networks of medical providers are larger and administration is elegantly simple compared with the small group market.

The CSMA insurance plans are available via an elite list of highly qualified insurance brokers including California Corporate Benefits Insurance Services.

There are other solutions and strategies as well.  Contact us at:

Robert Recchia, CLU ChFC
President, California Corporate Benefits Insurance Services
(858) 753-4102
or email at

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