Part of the rationale behind the Affordable Care Act has been that the misfortunes of birth, or even most of the unhealthy habits acquired thereafter, should not greatly affect the terms on which individuals can acquire health insurance. Unfortunately, that egalitarian philosophy is not sustainable in a market in which the purchase of health insurance is voluntary and in which the insured can accurately foretell their likely expenses. An adverse-selection death spiral that shrinks or kills the market is the almost sure result. This tension between egalitarianism and freedom underlies the various compromises one sees in many ACA provisions that have gained prominence since passage of the Act in 2010: an “individual mandate” that isn’t particularly mandatory for the first two years or, apparently, mandatory at all for people victimized by President Obama’s broken promise that one could keep one’s health plan; diluted age rating; the opportunity to choose between levels of benefits; and the inability to enroll during most months of the year even if one’s health has seriously deteriorated through no fault of one’s own.
We could be about to see the same clumsy reconciliations of egalitarianism and freedom ensnare the nation’s 6 million or so small businesses, the 40 million–plus people they employ, and the millions more spouses and children who depend on those employees. If only because the number of people involved is so much larger, the consequences and the stresses created could be even more serious than those we have seen playing out over the past few months in the individual market. The major points of tension here are (1) the prohibitions in section 1201 of the ACA on experience rating and medical underwriting in policies sold to small employers; (2) the requirement, also in section 1201, that, if a small business purchases group health insurance from a state-regulated insurer, it must provide the same sort of generous protections (including “essential health benefits”) as do individual policies; and (3) the effective tax that section 1421 of the ACA (section 45R of the Internal Revenue Code) places on wage increases and hiring by some small businesses that choose to offer health insurance.
Section 1201 of the ACA extends its prohibition on medical underwriting to insurers selling policies to small employers (usually meaning ones with fewer than 101 employees). Just as in the individual market, premiums in the “small-group market” may now depend on nothing more than the metal tier of the policy (bronze to platinum), the geographic region in which the policy is sold, and a small subset of the characteristics of the persons protected by the plan — age and relation to the employee. The idea, of course, is that just because a particular employer has some sick employees or dependents, that should not affect its ability to provide health-insurance coverage for those individuals. The ACA does not mandate, however, that employers with fewer than 50 employees ever purchase such coverage. Moreover, President Obama has by administrative order purported to delay for one year a requirement that employers with more than 50 employees either purchase coverage for their employees or pay a substantial tax. There is no limited “open enrollment” period in the government-sponsored insurance marketplaces (SHOP exchanges) created by the act for small businesses; unlike the situation for individuals, a small employer can, without penalty, apply for coverage through a SHOP exchange at any time — as, for example, when it discovers that a dependent covered by its policy has been afflicted with some expensive-to-treat form of cancer.
This combination of provisions is a Petri dish for an adverse-selection death spiral in the small-group insurance market. The average medical expenses of employers’ work forces varies greatly, particularly among small employers, where the “law of large numbers” fails to provide statistical protection. Studies by the Kaiser Family Foundation indicate that, among the 5 million–plus employers with fewer than 20 employees and the 22 million or so employees working for them, the percentage of employers whose work forces have substantially higher-than-average medical expenses is greater than 22 percent. What that means is that there are an awful lot of employers who, if they want to provide health insurance to their employees and dependents, will now be able to purchase those policies at prices that do not take into account their abnormally high projected medical expenses.
A large number of these employers are likely to do so; even now 35 percent of employers with 50 or fewer employees provide some form of health insurance. Many small employers with lower-than-average projected health costs will strive to avoid being lumped in with their colleagues or competitors with higher costs. Instead, they will, if financially possible, “self-insure”: The section 1201 requirement of uniform premiums does not apply to arrangements whereby the employer (or union) itself nominally provides the medical benefits but throws off much of the financial risk onto reinsurers and many of the headaches of running a health plan onto “third-party administrators.” This option becomes even more attractive if employers can get away with the now-bandied-about “dumping strategy” of offering to pay their sickest employees enough so that they can purchase platinum health insurance in the individual exchanges and have money left over. Still other small employers may simply decide not to insure at all — reserving perhaps the delicious option of entering the exchange if some crucial employee or his dependents develop expensive medical conditions.
This self-segregation of small employers based on the projected health-care expenses of their employees will pressure small-group health insurers to raise prices. It would not be surprising to see prices jump by upwards of 25 percent after insurers endure one year of high claims, and to see further price hikes in the years to follow. Yes, this pressure will be relieved somewhat by various provisions in the ACA that have the federal government and other insurers subsidizing small-group insurers who lose money selling these non-underwritten policies, but it will exist nonetheless. As even some proponents of the ACA recognize, by letting a small business refuse to insure its employees at all and by providing a loophole that lets the ones with low projected medical expenses avoid the exchanges and self-insure instead, the system is in grave jeopardy of imploding even more swiftly and more decisively than the individual market. There is a serious risk that, even if the implementation problems that have thus far limited enrollment in the SHOP exchanges get worked out — and if you think the individual exchanges were dysfunctional, read up on the travails of the various SHOP exchanges — the promise of egalitarianism contained in the ACA will be mooted by the unraveling of the small-group market. Yes, employers will face prices that are wonderfully “equal,” but they will be so high that almost no one can afford them.