2 Recent Trends in Small Group v. Large Group Health Insurance Markets

When talking health insurance plans for businesses, the size of the business matters a lot. Most states define small group as 2-50 employees, and anything above that is large group. Some other states (e.g. California, Colorado, New York, and Vermont) draw that line at 100 employees, and anything above is considered large. The difference between the two classifications is very important because premiums and plan design flexibility vary significantly based on this binary categorization of business’ size.

For small group insurance, federal and state regulations define all the factors that set insurance prices. In short, small group insurance rates can only be based on the location of the business, family size, the ages of enrollees, and in some cases, tobacco usage among enrollees. You can choose any broker or buy direct from the insurer because no matter who your broker is, you’re going to end up with the same prices for the same plans. In contrast, more factors are allowed to be considered in calculating large group insurance rates than small group rates. Most significant among these is the health history of the large group, which means that large employers have a strong financial interest in keeping their employees healthy. Also since prices aren’t fixed with large group coverage, your broker or third party administrator (TPA) can help negotiate premium prices down.

Another major difference between small and large group is health plan design flexibility. Small group plans are commodity products and generally lack flexibility to customize plans, bundle related products, or discount prices or deductibles. For example, small group health plans must cover all the Affordable Care Act’s (ACA) definition of Essential Health Benefits (EHB). EHBs cover ten categories of benefits and their inclusion within a health plan is further conditioned by the “benchmark” plan for the state. A benchmark plan determines the specific requirements within each Essential Health Benefits category for every Affordable Care Act health plan offered in the state. This can have implications for issues such as how many medications are covered in each therapeutic category within a drug formulary.

Large group plans have fewer benefit mandates and more flexibility in their plan design though, as employer-based coverage, benefit breadth is still essential for attracting and retaining talented workers. Fewer benefit mandates means that large employers can design a health plan around their employees participant needs and their budget constraints. Additionally, the financial interest of large employers in the good health of their employees as a driving factor that reduces premiums has resulted in the emergence and now widespread adoption of wellness programs and digital health innovations being bundled into large group health plans. This benefit design flexibility has resulted in better health outcomes and less expensive health coverage for large group plans compared to small group plans, where such digital health innovation has been absent.

Recent Trend No. 1: Small Group Prices Up, Enrollment Down & COVID-19 Expected to Drive Further Enrollment Decline

The higher cost of small group plans have had a significant impact on their enrollment. From 2015 to 2018, the small group market has seen an average premium price increase of over 6 percent a year, which is substantially higher than premium increases in the large group market over the same period. During this same period, the small group health insurance market has experienced an 8 percent decline in enrollment, despite a very strong economy for U.S. small businesses. Additionally, the coronavirus pandemic (COVID-19) is having a very hard economic impact on U.S. small business survival and is anticipated to drive a significant enrollment decline in the ACA small group market during 2020.

Recent Trend No. 2: New Association Health Plans (AHP) Can Bring Immediate Relief to Small Businesses

Historically, small businesses have been excluded from the lower costs of the large group health insurance market. However, a new federal regulation on association health plans, which are regulated by ERISA rather than the ACA, will make it simpler for smaller companies, as well as sole proprietors and freelancers, to band together and offer health plans operating under the preferable “large group” health plan rules. Associations of smaller companies and the self-employed can gain large group health plan status because the association can aggregate the employees across all association members. Association health plans are not free of benefit requirements. There are various rules and safeguards concerning the full coverage of pre-existing health conditions, maternity and newborn coverage, preventative coverage and other benefits. For a full discussion, see “Association Health Plan Benefit Requirements.” Most interesting to small businesses being hit right now by COVID-19 and worrying about next year’s premium increases, top industry sources such as Avalere, the Society of Actuaries, and the Congressional Budget Office (CBO) have projected that AHP premiums will be at least 20 percent lower than small group premiums by 2022.