March 9, 2011: Section 1304 of the federal Affordable Care Act (ACA) defines a “small employer” as an employer with anywhere from one to 100 employees (although states may cap the number of employees at 50 until 2016). The implication of this new definition is that businesses with one employee will be able to purchase health insurance coverage in the small-group market regardless of whether the state in which the business is located has opted to merge its individual and small-group markets. This shift could cause some concern among states that do not have experience with businesses of one purchasing in their small-group market and are uncertain about how the change will impact market dynamics.
In assessing the potential impact of the ACA’s small employer definition on the small-group market in a given state, there are several factors to consider:
- Under the ACA, both the small-group market and the individual market will be guaranteed issue, will have the same rules for premium variation, and will have limitations on company profits and overhead. These factors will limit the degree to which differences between the two markets could drive purchasing decisions by businesses of one.
- On the other hand, if historical price differences between the small-group market and individual market continue, businesses of one could have an incentive to shift to the small-group market.
- In addition, the availability and amount of subsidies will vary across the small-group and individual markets (and will depend on individual circumstances), and this variation could influence the decision by businesses of one about where to buy coverage.
Concern about potential adverse selection in the small-group market has been addressed to a certain extent by the Internal Revenue Service (IRS), which issued new guidelines in May 2010 to clarify employee counting procedures in determining eligibility for tax credits. These guidelines specify that sole proprietors do not count toward the total number of employees for the purpose of healthcare tax credits (IRS Notice 2010-44). Without these tax credits, sole proprietors are less likely to see an advantage in purchasing coverage on the small-group market rather than on the individual market.