Large Group vs. Small Group Health Insurance

Group health insurance comes in two sizes – large and small – and this difference is critical as premiums and benefits vary widely based on this categorization.

Comparison of Small and Large Health Plans

Small businesses pay substantially more than large businesses for the same health insurance coverage. Therefore, it is not surprising that the higher cost of health insurance is the No. 1 concern of small businesses and the top reason why small businesses often do not purchase coverage for their employees.

A primary reason for the higher cost of small group health insurance is that a small business can’t bargain with the insurance company. Small group premiums are set by the insurance company, and once set, premiums are non-negotiable and can’t be discounted. By contrast, premiums for large group health plans are negotiated between the employer, the employer’s broker or benefit consultant, and the insurance company.

Another driver of the higher cost of small group health insurance is benefit mandates. Small group health plans, in contrast to large group plans, must cover all of the Affordable Care Act’s 10 Essential Health Benefits (EHB), which are very specific and detailed categories of benefits. The inclusion of EHBs in a health plan is further conditioned by the “benchmark” plan for the state, which sets additional requirements within each EHB category. Large employers have greater flexibility in the selection and design of health plans for their employees. Most significantly, large employers often incorporate digital health programs such as wellness, telemedicine and wearable health technologies into their health plans, which have been proven to improve employee health outcomes and drive down employer and employee premiums substantially over time. The most innovative digital health programs and technologies are typically absent from the small group market.

A third major cost driver of small group health insurance is an insurance rule called the “medical loss ratio” (MLR). For fully-insured plans, the Affordable Care Act requires that at least 85% of all premium dollars collected by insurance companies for large employer plans be spent on health care services and health care quality improvements. If an insurance company does not meet this threshold because their administrative costs or profits are too high, they must issue rebates to their health plan participants. By contrast, only 80% of the premium collected for small business plans must be spent on heath care services and quality improvements. Notably, this 80% MLR in the small group market is the same MLR percentage that applies to the very fragmented, high-touch, and paper-based individual insurance market. The higher medical loss ratio of large group plans basically makes large group health plans more affordable than small group plans for the same benefits since a smaller portion of premiums can be spent on profit, marketing, and administrative costs.

How to Qualify for Large Group Coverage

Due to the lower cost of large group plans for the same coverage, most businesses (if given a choice) prefer large group plans over small group plans. However, not all businesses can qualify as a large group. For most states, a business can only buy a large group plan if it has 51 or more full-time equivalent employees. An employee who works an average of at least 30 hours a week is considered full-time. So if a business has at least 51 employees working more than 30 hours every week, that business can qualify for large group coverage. Qualification is more complicated if the business has part-time employees. Each part-time employee will need to be converted to a full-time equivalent using a formula based on the 30 hour threshold. Additionally, some states set an even higher threshold of 100 employees in order for a business to access the large group market.

Association Health Plans Will Soon Expand Large Group Coverage to More Businesses

Historically, businesses of less than 51 (or even 100) employees have been locked out from accessing the large group market. However, a recent federal regulatory change will make it easier for smaller companies and the self-employed to purchase association health insurance plans under the preferable large group insurance rules. Associations of smaller companies and the self-employed can gain large group health plan status because the association can aggregate employees across all association member businesses. Accessing large group coverage through their associations will allow small businesses to benefit from lower rates, leverage proven digital health programs, and take advantage of the 85% MLR requirement that benefits only large businesses today. In addition, fewer benefit mandates mean that the association has more flexibility to design a health plan that best meets the employee’s health needs and the budget constraints of the small employers seeking better coverage for their employees. While this benefit design flexibility may result in less expensive health coverage, association health plans are not free of benefit requirements. There are various rules concerning pre-existing condition coverage, maternity and newborn coverage, and other benefits. For a more comprehensive discussion, see “association health plan benefit requirements.”