Opinion: We Must Rescue Health Insurance for Small Businesses and Their Workers

Highlighting inherent and growing challenges, as hotly debated legislation goes under the microscope in the Legislature Thursday
Joel C. Cantor and Margaret Koller

New Jersey has successfully “flattened the curve” in the growth of coronavirus cases, but the prospect of a second wave can’t be ignored, and cautious consumers may not return to dining out or shopping locally anytime soon.

Small employers are at the cross-currents of pandemic-driven forces. Many small businesses rely on face-to-face interactions, and few have deep pockets to weather shutdowns and stalled demand. The revenue freefall that businesses have experienced over the last five months makes sustaining payments for health insurance coverage challenging if not impossible. Yet, at a time when we are all vulnerable to a dangerous virus with no vaccine and limited treatment options, the idea of going without health coverage can be terrifying.

To address growing challenges in small group health insurance, the Rutgers Center for State Health Policy convened a virtual expert panel on July 16. Drawing on perspectives from the insurance industry, small business, and public affairs, the forum shed light on the causes of our troubled market and possible solutions. The discussion was informed by analysis and policy recommendations provided in the New Jersey Health Care Quality Institute’s recently released white paper on options for the small group market. You can view the entire forum here. What follows is our take on the upshot of this discussion.

The forces that keep premiums high

The small group health insurance market has inherent challenges. Coverage for small businesses has high administrative costs and the small group market is vulnerable to adverse risk selection. Groups with older and sicker workers have much greater demand for coverage than those with young and healthy workforces. These forces contribute to keeping small group premiums high. High premiums, in turn, encourage firms with lower-risk workers to drop out of the market, leading to an unvirtuous cycle of declining enrollment and rising premiums. Without policy measures to stabilize the market, it has a propensity toward “adverse selection death spirals,” insurance jargon that is self-explanatory.

To understand the current state of New Jersey small group health insurance, and to think about policies to rescue our market, we need to provide a bit of history. The chart below shows trends in the number of people covered in New Jersey’s individual (sometimes also called non-group) and small-group markets. The trends are clear. The two lines crossed in the first quarter of 2020, for the first time, with more people covered individually than in small groups. At its peak, in 2005, nearly 1 million people were covered by small group health insurance in the Garden State. Today enrollment is less than a third of that level.

In the period before 2014, New Jersey’s small group insurance market was declining by about 10,000 covered lives per quarter, largely because of fast-rising premiums compounded by lingering effects of the 2007-2009 Great Recession. There was an inflection point in 2014 when the Affordable Care Act created the subsidized individual market and expanded Medicaid eligibility, establishing more affordable options for some workers in small firms. The ACA also changed regulations to protect consumers and help ensure stable and affordable individual market coverage, but some of these regulations contributed to the decline in small group coverage.

The continuing downward trend in small group coverage cannot be explained by the ACA alone. A proliferation of alternatives to standard, state-regulated plans (shown in the chart) has emerged, causing a complex dynamic that may be undermining prices and enrollment in state-regulated small group plans. The alternative plans vary greatly in design and structure, and some have weaker consumer protections than our standard market. The Trump administration has promoted some alternatives, arguably to destabilize the ACA. While New Jersey regulators have curbed some of the most questionable types of plans, others continue to attract enrollment in our state.

A market ‘rife with complexity and opacity’

Alternative plan types available here are governed by different state and federal laws, regulated by different agencies, have different rules for what must be covered, are taxed differently, and have different reporting and disclosure requirements. The market for small business health coverage in New Jersey is rife with complexity and opacity. No market could function well under these conditions, even for employers who are committed to offering coverage.

Achieving stable and affordable small group coverage is a difficult challenge in need of greater attention. Risk pooling is key to affordability. Ensuring that insurance pools include a significant share of young and healthy members keeps premiums down. However, when the market is as fragmented as it is today in New Jersey, public policies to broaden risk pools can create losers (and political opposition) from employers who have benefited from defection to less regulated or less taxed plans.

Because some kinds of alternative plans are not required to publish enrollment or cost data, we do not have a good sense of how much these plans lead to market fragmentation, contribute to rising costs, or erode enrollment in standard plans. An essential first step to improve the market is to require that all entities authorized to sell coverage to small businesses, including the providers of alternative plans, report their enrollment, premiums, and other data to state health insurance regulators. After that, working toward leveling the playing field among options available to small businesses is essential.

Aside from leveling the playing field to ensure broad risk pools and fair competition among plans, another way to tackle affordability is to directly subsidize premiums for those with incomes too low to afford coverage. The ACA does this in the individual market for people without access to employer-paid coverage. Still, small businesses with mainly low-wage workers can face daunting affordability barriers. While the ACA had a narrowly fashioned tax credit for small groups, it was insufficient. At a time of ballooning federal budget deficits and starkly declining state revenues, thinking about a robust, long-term subsidy strategy for small business coverage will likely be off the table for the time being.

Under some circumstances, however, it may be possible to tap federally funded individual insurance subsidies for the benefit of low-wage employees of small businesses. New federal regulations permit Individual Coverage Health Reimbursement Arrangements (ICHRAs), allowing small employers to help pay individual coverage premiums for employees. ICHRA rules are complex and make it difficult for workers with employer contributions for coverage to access federal tax credits. However, if the goal is maximizing access to affordable coverage, through whatever mechanisms feasible, then breaking down the barrier between individual and small group coverage may be a worthy experiment.

No magic bullet

New Jersey lawmakers are looking to bolster subsidies for coverage, but these would be likely directed to people who buy their own plans, not through an employer. Currently, there is hotly debated legislation pending, that would impose a 2.75% premium tax on insurers, raising an estimated $300 million. If the bill passes, some of the resulting revenue would be used to draw down federal matching dollars to buy “reinsurance” which, in turn, will lower premiums in the individual coverage market. Some of the new revenue could also be used to expand direct subsidies for people buying their own coverage.

The state takeover of responsibility from the federal government for the ACA health insurance exchange may present other opportunities to leverage more affordable small group coverage. For one, federal law permits merging the individual and small group risk pools, tying small-group premiums to those for individual coverage. In an analysis we did in 2011, such a merger did not appear wise for New Jersey. But times have changed, and this option should be revisited.

One could be forgiven for thinking that the policy options for rescuing the small group health insurance market seem extraordinarily complex or would operate mainly at the margins. True enough. Private employer-sponsored health insurance has worked reasonably well in this country for larger employers with broad risk pools (although large-group coverage is proving difficult to sustain during the pandemic and many have argued that it has not done a good job of cost containment). But clearly, the private insurance model is much more difficult to sustain for small businesses.

The nation has debated broader, government-sponsored coverage, which would obviate the need to address the questions raised in this commentary. We may be approaching a turning point in the national dialogue on how to address coverage gaps. If so, the conversation must include ways to address the serious problems in the market for private coverage for workers of small firms.