Colorado small businesses likely to see premium spike

If you’re a small-business owner or you purchase insurance on the individual market, there’s a good chance you’ll see substantially higher premiums come October, when your provider releases 2014 annual renewal rates. That’s because under the Affordable Care Act (ACA), rating will be limited for small groups – those with fewer than 50 employees – and individuals as of next Jan. 1. Here’s what you need to know about rating under the new federal law.

Brian Berglund, a partner at Bryan Cave-HRO, a multinational law firm with more than 1,000 lawyers worldwide, has been analyzing nuanced employee-benefits issues such as rating laws for the past 32 years. “Not surprisingly,” says Berglund, “if there were no laws, an insurance company would charge premiums based on the risk they’re insuring.” A car insurance company, for example, charges a 16-year-old boy more than a middle-aged father of two and a DUI offender more than a non-offender. That’s rating.

Insurance companies consider certain individuals as “high risk,” including tobacco users, women of child-bearing age, the elderly, people living in high-cost urban environments and those with chronic illnesses. “If permitted, carriers would gather information on every employee at a business and charge employers for health insurance based on this information,” Berglund says. “Then, each year, carriers would look at an employer’s experience and raise or lower rates, which is called experience rating.”

Currently state law regulates rating. New York has the strictest rating laws, only allowing rating on geography. Virginia and Hawaii, by contrast, impose no restrictions. In between are a host of modified rating laws.

But the rules change on Jan. 1 when ACA’s rating limits for individuals and small businesses (those employing fewer than 50) go into effect. In 2016, a second phase of the provision will apply stricter ratings to small businesses with 50-100 employees. “These rating restrictions will not apply to larger employers,” Berglund says, citing the theory that risks within bigger groups are more likely spread out.

Under impending federal legislation, rating is allowed in only three circumstances: geography and, to an extent, tobacco use and age. “Under the new law, smokers can be charged 1.5 times the rate charged to non-smokers,” Berglund says. When it comes to age, the maximum differential between an older and younger person will be 3:1, which means a 64-year-old can be charged at most three times that of a 21-year-old. “As with tobacco use,” continues Berglund, “the difference in rates isn’t as great as would be appropriate given the disparity in the costs of covering the groups.”  

In Colorado, modified community rating has been the standard since 2009 when House Bill 07-1355 superseded then-current laws allowing unfettered rating. According to Laura Beckingham, customer service representative at Roper Insurance & Financial Services, brokers saw substantial rate increases – of more than 35 to 40 percent – when those state law changes went into effect. 

Our current law allows rating for geography, industry, age and tobacco use. Because Colorado doesn’t allow rating based on health status, gender or experience, the impact of the ACA’s market reforms will not be as great as will be the case in many other states. Still, federal law will impact local small businesses
and individuals.

“In Colorado, ACA’s primary impact will be to prohibit rating based on industry classification and to restrict the extent of rating based on age,” Berglund says. Restrictions on industry rating affect small-business owners operating in an industry that tends to draw healthy workers; these employers may see substantial premium increases in 2014. Employers with younger employees may also see premiums soar. 

It is estimated that, for some small business owners, the cost of health insurance will rise 50 percent or more in 2014 as a result of federal rating restrictions. One carrier has indicated two-thirds of Colorado small groups will receive an increase of at least 50 percent. Beckingham notes nonprofits and churches, in particular, will see at least a 25 percent increase when federal law eliminates industry rating. On the other hand, unhealthy groups and individuals may experience a decrease in premiums.

Federal laws concerning rating are value-dependent. “The reason for the law,” explains Berglund, “is that with a small group there’s a concern that one or two unhealthy employees could make insurance prohibitively expensive for the entire group.” Berglund goes on to discuss two truths: “A lot of people would agree sick people should be allowed to buy insurance that is affordable. But if you think people should have personal responsibility for their actions and this new law eliminates personal responsibility for unhealthy lifestyle choices, then you might oppose the law.”

Regardless of where you stand, one thing is certain: Some small businesses and individuals should prepare now for increased premiums in 2014. “Small-business owners will want to begin considering alternatives and strategies to help mitigate additional costs associated with ACA’s rating restrictions,” Berglund says. One strategy is to renew insurance coverage in December 2013 to delay the onset of higher premiums. Additionally, Berglund suggests contacting your health insurance broker to discuss 2014 health insurance renewal.