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PACE Act Puts Small Group Market Expansion Decision in States’ Hands


Increase to Threshold for Micro Captives Under ConsiderationOver the last several months, concerns had been rising regarding a somewhat obscure provision of the Affordable Care Act (ACA): The ceiling for the “small group market” for health care benefits was scheduled to be raised from 50 employees to 100 employees for 2016. As members of this market, employers with 51 to 100 employees would face a host of coverage requirements not explicitly required of large employers — and possibly higher premiums.

But this has not come to pass. On October 7, President Obama signed into law a bipartisan change to Health Care Reform. The Protecting Affordable Coverage for Employees (PACE) Act puts the small group market expansion decision in states’ hands. The expectation is that states will choose not to raise the ceiling. Let’s take a closer look at the issues behind this legislation and what the PACE Act means going forward.

Small group market requirements

Had employers with 51 to 100 employees been forced to join the small group market, they, like other members of this market, would have been required to cover the 10 “essential health benefits” spelled out in the ACA. These are:

  1. Ambulatory patient services,
  2. Emergency services,
  3. Hospitalization,
  4. Maternity and newborn care,
  5. Mental health and substance use disorder services including behavioral health treatment,
  6. Prescription drugs,
  7. Rehabilitative and habilitative services and devices,
  8. Laboratory services,
  9. Preventive and wellness services and chronic disease management, and
  10. Pediatric services, including oral and vision care.

The specific services required under each of the 10 categories are set by reference to existing large health plans serving small employers in each state, as identified by the Centers for Medicare and Medicaid Services.

If mandated by the state, a plan may need to include additional benefits not on the list of 10. For example, Maryland requires basic infertility treatment. California requires coverage of organ transplants for HIV patients.

It’s important to note that these 10 essential health benefits noted above are not the same thing as the minimum essential coverage that is one of the requirements of applicable large employers (ALEs) for avoiding penalties under the ACA’s shared-responsibility (or “play or pay”) provision. A health plan doesn’t have to provide the 10 essential health benefits to qualify as minimum essential coverage.

Keep in mind that, because of transitional relief now in place, 2016 is the first year that all employers with 50 to 99 full-time employees or the equivalent will be considered ALEs for play-or-pay purposes. As ALEs, they’ll be obliged to offer minimum essential health care coverage that is affordable and provides at least minimum value to their full-time employees or potentially face penalties. This is not affected by the PACE Act.

Higher premiums for small group plans

Another potential negative consequence employers with 51 to 100 employees could have faced had they been forced to join the small group market is higher premiums. Federal regulations limit the criteria health insurance carriers can use to set premium rates, which is pushing up prices for many employers. Notably, since 2014 carriers have been able to factor in only family size, geography, tobacco use and age (with the maximum age-based spread a factor of three).

Previously, carriers could also use gender, industry, group size, health status and medical history as rating factors. This meant that employers with more healthy employees got a better deal than those with fewer. These restrictions have caused carriers to not offer small group plans in many markets, resulting in less competition for small employer business — and higher premiums.

States’ choice

Under the ACA, states were permitted a year ago to raise the ceiling on the small group market definition to 100 employees, but none has done so. Thus, if employers in the 51 to 100 bracket were forced into the small group market, carriers would face a spike in demand for two reasons:

  1. The implementation of play-or-pay for most of that size group, and
  2. The higher ceiling for the small group plan definition.

Thus, concerned observers urged the U.S. Department of Health and Human Services to postpone the change in the small group plan definition until 2018. But the PACE Act potentially offers more permanent relief.

Specifically, the act allows states to decide for themselves whether to raise the small market definition to the 100-employee ceiling. When already permitted to do so, however, no state chose to change the standard. Therefore, supporters of the legislation are confident this pattern will continue.

Specific impact

If your workforce comprises 51 to 100 employees, or may expand or contract into that range, consult your attorney and benefits advisor for more information. They can help you assess the PACE Act’s specific impact on your organization.

Present_RonDo you have questions about the PACE Act?

Contact Ron Present, Partner and Health Care Industry Group Leader, at 314.983.1358 or


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