Small Business Health Insurance Exchanges: Low Initial Enrollment Likely due to Multiple, Evolving Factors
Published: 2014-11-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Patient Protection and Affordable Care Act required SHOPs—exchanges, or marketplaces, where small employers can shop for health coverage for their employees—to be established in all states. States may elect to establish and operate SHOPs themselves or allow CMS to do so within the state. Enrollment in SHOPs was to begin in October 2013, with coverage effective as early as January 2014. GAO was asked to examine the early implementation experiences of the SHOPs.
In this report GAO describes (1) SHOP functionality, enrollment, plan availability, and premiums and (2) stakeholders' views on key factors that have affected current SHOP enrollment or may affect future enrollment growth. GAO reviewed relevant information from CMS and states, including data on employer and employee enrollment, plan availability, and premiums generally through June 1, 2014. GAO also interviewed representatives of key stakeholders that operate SHOPs (CMS and states), offer coverage in SHOPs (health insurance issuers), obtain coverage through SHOPs (small employers), or assist in obtaining coverage through SHOPs (agents and brokers) on a national basis and, for certain stakeholders, in five states—California, Illinois, Kentucky, Rhode Island, and Texas. The five states were selected based on factors including varied issuer participation levels and SHOP functionality. The experiences of these stakeholders cannot be generalized to other states or stakeholders.
GAO incorporated HHS comments on a draft of this report as appropriate.
section_title: What GAO Found
paragraphs: Though all of the Small Business Health Options Programs (SHOPs) required by the Patient Protection and Affordable Care Act were operational, many features were not yet available and enrollment was low as of June 2014. According to the Centers for Medicare & Medicaid Services (CMS), the agency that oversees the SHOPs, all 33 of the SHOPs run by CMS (federally facilitated, or FF-SHOPs) and 14 of the 18 SHOPs run by states (state-based, or SB-SHOPs) were accepting enrollment applications as of the October 1, 2013, deadline. The remaining 4 SB-SHOPs became operational by the following May. Websites where employers could review plan information such as premiums and benefits were available on October 1, 2013, for all FF-SHOPs and most SB-SHOPs. Other key SHOP features—online enrollment and employee choice, the ability for employees to choose among multiple plans—were delayed for all FF-SHOPs, but available for most of the SB-SHOPs. CMS is currently preparing to implement online enrollment for all FF-SHOPs and employee choice for many of the FF-SHOPs for 2015. Based on official estimates and stakeholders' expectations, enrollment for the SB-SHOPs has been significantly lower than expected. The 18 SB-SHOPs had enrolled about 76,000 individuals—including employees, their spouses, and dependent children—in plans purchased through nearly 12,000 small employers, as of June 1, 2014, for most states. Enrollment data for the FF-SHOPs was not yet available, although CMS was in the process of collecting the data from issuers and expected to have complete data by early 2015. However, CMS officials said they do not expect major differences in enrollment trends for 2014 between SB-SHOPs and FF-SHOPs. Finally, most SHOPs had multiple plans available in each county, although a small number of states had counties with no plans available. Premiums for SHOP plans varied across states and were generally comparable to premiums for other small group plans offered within a state but outside of the SHOP.
Stakeholders identified several factors that may have led to current low SHOP enrollment and that may affect future enrollment growth. Many stakeholders reported that the primary incentive for employers to use the SHOPs has been the small business tax credit available to eligible employers who offer coverage through a SHOP, although some noted that the credit may be too small and administratively complex to motivate many employers to enroll. Other factors identified that may have hindered current enrollment include the ability of employers to renew plans that existed before the SHOPs—which, depending on state requirements, is permitted until October 1, 2016—and employer misconceptions about SHOP availability. Stakeholders also described factors that may help stimulate or detract from future SHOP enrollment growth. For example, the phase-out of existing pre-SHOP plans, the implementation of employee choice by an increasing number of SHOPs, improved coordination with agents and brokers, and increased marketing to small employers may help stimulate enrollment growth. Conversely, other factors, such as the 2-year limit on the availability of the small business tax credit and the likelihood, according to stakeholders, that SHOP premiums will not be lower than non-SHOP premiums, may hinder future enrollment growth. The evolving and localized nature of these factors suggests that that a determination of the SHOPs' long-term impact remains premature at this time.

section_title: Letter
paragraphs: The Patient Protection and Affordable Care Act (PPACA) required the  creation in all states of Small Business Health Options Programs  (SHOPs)—exchanges, or marketplaces, where small employers can  shop for and purchase health coverage for their employees. SHOPs  were required to begin accepting enrollment applications for 2014  coverage by October 1, 2013, with coverage starting as early as   January 1, 2014. A state may elect to establish and operate a SHOP  itself (through a state-based, or SB-SHOP) or allow the Department of  Health and Human Services’ (HHS) Centers for Medicare & Medicaid  Services (CMS) to establish and operate a federally facilitated SHOP   (FF-SHOP) within that state. In June 2013, we reported on the status of  federal and state efforts to establish the SHOPs. At that time, we found  that both CMS and states had made progress in establishing SHOPs,  although many activities remained to be completed and some were  behind schedule.
As the first year of SHOP operations nears its end, members of Congress  have raised questions about the challenges that SHOPs may face in  achieving long-term success. Such questions include whether SHOPs  have been able to provide online enrollment tools and other expected  functionalities, and in general whether SHOPs will offer sufficient value to  small employers to motivate them to enroll. You asked that we examine  the early implementation experiences of the SHOPs. In this report, we  describe  1.  SHOP functionality, enrollment, plan availability, and premiums; and  2.  stakeholders’ views on key factors that have affected current SHOP  enrollment or may affect future enrollment growth.
To describe early indicators of SHOP functionality, enrollment, plan  availability, and premiums, we requested information from CMS and  states and interviewed relevant officials. Specifically, to describe SHOP  functionality, including when SHOPs became operational, whether  SHOPs had a website that allowed employers to browse plan options and  enroll online, and whether SHOPs offered employers the ability to offer  their employees a choice among multiple plans, we requested information  from CMS and interviewed CMS officials. We analyzed CMS and SB- SHOP data on plan availability and premiums in 2014, and we analyzed  SB-SHOP data on employer and employee enrollment for timeframes  ending between May and September 2014, with most ending on June 1,  2014. To assess the reliability of the data we received from CMS and  states, we performed manual and electronic tests of the data to identify  any outliers or anomalies and followed up with officials as necessary and  incorporated the corrections we received. We determined that the data  were sufficiently reliable for the purposes of our analysis. We also  reviewed other information sources, including published literature and  state SHOP websites, and identified federal requirements related to the  SHOPs by interviewing CMS officials and reviewing relevant laws and  regulations.
To describe stakeholders’ views on key factors that have affected current  SHOP enrollment or may affect future enrollment growth, we interviewed  national-level representatives of key stakeholders that operate, offer  coverage in, obtain coverage through, or assist in obtaining coverage  through SHOPs. Specifically, we interviewed officials from CMS’s Center  for Consumer Information and Insurance Oversight (CCIIO) who oversee  the operation of SHOPs, as well as national organizations representing  issuers of health coverage, insurance commissioners, small employers,  and health insurance agents and brokers. In addition, we selected five  states in which to interview state-level representatives of the SHOPs,  small employers, and agents and brokers. To ensure that we captured a  range of SHOP-related experiences and perspectives, we selected states  that varied in terms of state population, geographic location, SHOP type  (FF-SHOP or SB-SHOP), SHOP website functionality, including the  availability of employee choice, and issuer participation in the SHOP. We  selected Kentucky, Rhode Island, California, Illinois, and Texas for our  study. For the SB-SHOP states—Kentucky, Rhode Island, and  California—we interviewed state exchange officials. For the FF-SHOP  states—Texas and Illinois—we interviewed CMS officials involved with  the establishment and operation of the FF-SHOPs. Our work was limited  to reviewing illustrative examples of stakeholders’ experiences with and  perspectives on the SHOPs. The findings from our interviews therefore  cannot be generalized to the perspectives and experiences of all issuers,  insurance commissioners, employers, agents and brokers, or state  exchange officials.
We conducted this performance audit from February 2014 to November  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: PPACA included a number of provisions that changed requirements for  small group health plans. For example, PPACA required that, beginning  January 1, 2014, plans offer a set of minimum essential health benefits.  PPACA also set standards for the percentage of total average costs that  plans must cover for such benefits. The average costs covered by each  plan are reflected in different plan levels, or tiers, and each tier is  designated as bronze, silver, gold, or platinum. In addition, beginning on  January 1, 2014, issuers are no longer able to consider the average  health status of a particular group when setting premium rates and can  only adjust premiums based on enrollment type (individual or family  enrollment), geographic area, age, and tobacco use. Plans meeting  these and other federal requirements, as well as other standards set by  states, may be certified to be offered in an exchange; these plans are  referred to as qualified health plans (QHPs).
PPACA required all small group health plans to comply with these  requirements as of January 1, 2014. However, in response to concerns regarding some issuers terminating plans that did not comply with PPACA  requirements, CMS announced in November 2013 that it would provide  transitional relief under which states could elect to permit issuers in their  states to offer renewals of their noncompliant plans for a plan year  beginning between January 1, 2014, and October 1, 2014, provided the  plans met certain conditions. In March 2014, CMS extended this  transitional policy through October 1, 2016, and noted that the agency  may grant an additional 1 year extension, if necessary.
PPACA also mandated the establishment of SHOPs in each state to allow  small employers to compare available health insurance options in their  states and facilitate the enrollment of their employees in coverage. Until  2016, states have the option to define small employers either as  employers with 100 or fewer employees or employers with 50 or fewer   To be eligible for SHOP coverage, a small employer must  employees. offer coverage to all full-time employees in a QHP through a SHOP. To  be eligible to enroll in a QHP through a SHOP, an individual must have  been offered health insurance coverage by a qualified employer through a  SHOP.
Under PPACA, beginning in 2016, small employers will be defined in all states as those  with 100 or fewer full-time equivalent employees. Beginning in 2017, states may allow  issuers of health insurance coverage in the large group market—issuers offering coverage  to groups of 101 or more full-time equivalent employees—to offer QHPs through the  SHOP and, in turn, will allow large employers to obtain coverage through the SHOP. in the state by the participating issuers of health coverage. In addition,  the benefits, cost-sharing features, and premiums of each QHP must be  presented in a manner that facilitates comparison shopping of plans by  small employers and their employees. Each SHOP must accept employer  and employee applications through the SHOP website and may also  accept applications over the phone, in person, or by mail. This application  should collect the information necessary to screen an employer’s  eligibility for SHOP participation and identify employees eligible to enroll  in a QHP. Employers and employees may receive assistance to compare  coverage options and complete applications through a qualified insurance  agent or broker.
In general, when offering coverage though a SHOP, employers select a plan, which  becomes the employer's reference plan. Employers also decide the percentage they will  contribute to the premiums for employees who select that plan, referred to as a defined  contribution. Employees who have been offered a choice of plans are typically able to use  the amount of the defined contribution for the reference plan when paying their premiums  for a different SHOP plan. broader employee choices among multiple plans across different tiers.  According to CMS, employee choice is intended to be a fundamental new  benefit of SHOPs, in that small employers would be able to offer multiple  plans from more than one issuer of health coverage, whereas traditionally  most small employers have offered only one or a few plans from a single  issuer. SHOPs were initially required to have the capacity to allow  employers to provide employee choice beginning in 2014. However,  under a final rule issued in June 2013, the requirement that SHOPs offer  employee choice was first postponed to 2015, although SB-SHOPs  retained the option of providing employee choice in 2014. The  requirement was further postponed under a May 2014 final rule to 2016 in  states that could demonstrate that postponing employee choice would be  in the best interest of small employers and their employees and  dependents, given the likelihood that implementing employee choice  could cause issuers to price their products and plans higher than they  would otherwise due to issuers’ beliefs about adverse selection.
To provide an incentive for small employers to provide health insurance,  and to make insurance more affordable, PPACA established a small  business tax credit for certain eligible small employers offering coverage  to their employees. The tax credit was available beginning in 2010, prior to the establishment of SHOPs. However, beginning in 2014, employers  must offer coverage to their employees through the SHOP to be eligible  for the credit. Beginning in 2014, employers are eligible for the credit for  a maximum of 2 years.
PPACA, § 1311(b)(1), 124 Stat. at 173 (codified at 42 U.S.C. § 18031(b)(1)).
SHOPs and individual exchanges may change in future years. CMS  officials stated that as of September 2014, Nevada was planning to begin  using the FF-SHOP platform, while Idaho was planning to begin using its  own state-based platform, in 2015.
section_title: SHOPs Were Operational in All States, Although Many Expected Features Were Not Yet Available and Enrollment Was Low as of June 2014
paragraphs: Though SHOPs were operational in all states as of June 1, 2014, many  expected features were not yet available for a number of SHOPs.  Enrollment for the SB-SHOPs, as of June 1, 2014 for most states, has  been lower than expected, and CMS officials said they do not expect the  enrollment trends for the FF-SHOPs to be significantly different, although  they are still in the process of collecting enrollment data. Most SHOPs  had multiple plans available in each county, though in some states there  were a few counties with no plans available. Premiums varied across  states, though were generally comparable to premiums for small group  plans within the same state offered outside of the SHOPs.
subsections: section_title: SHOPs Were Operational in All States, Although Many Expected Features Were Not Yet Available, Particularly for the Federally Facilitated SHOPs
paragraphs: All of the FF-SHOPs and most of the SB-SHOPs were operational as  required—that is, accepting enrollment applications—as of October 1,  2013. According to CMS, four of the SB-SHOPs—Hawaii, Maryland,  Mississippi, and Oregon—were not operational as of the October 1, 2013,  deadline, although all have since become operational. Hawaii became  operational on October 15, 2013, Maryland became operational on   April 1, 2014, and Oregon and Mississippi became operational on   May 1, 2014.
Websites where employers could review plan information, including  premiums and benefits, were available on October 1, 2013, for all FF- SHOPs and most SB-SHOPs. This information allows employers and  employees to make meaningful comparisons about available SHOP plans  in their state. Plan information for the FF-SHOPs was provided by CMS  through its website. According to CMS, on October 1, 2013, the SB- SHOPs in Maryland, Oregon, and Mississippi lacked websites where  employers could review plan and premium information. Mississippi has  since added plan and premium information to its websites. Oregon and  Maryland have directed employers to contact agents and brokers or  issuers to review plan options.
According to CMS, most SB-SHOPs created online enrollment portals by  October 1, 2013, though a handful of states—Maryland, Oregon,  California, and Mississippi—did not have online enrollment portals  available or had to take them offline, requiring employers to enroll directly  through issuers. For example, the California SHOP initially offered online  enrollment but took its enrollment portal down in February 2014 due to  technical challenges, leaving small businesses in California able to enroll  in SHOP plans only through direct enrollment. Online enrollment for the  Mississippi SHOP began when it became operational in May 2014, while  Maryland and Oregon have yet to implement online enrollment for their  SHOPs.
CMS did not implement online enrollment in the FF-SHOPs in 2014. As a  result, employers enrolling in any of the FF-SHOPs, starting in October  2013, had to enroll in SHOP coverage either through agents and brokers  or directly through issuers. CMS is currently preparing to implement  online enrollment for the FF-SHOPs for 2015, and expects to launch  online enrollment fully in all FF-SHOPs by November 15, 2014, when  SHOP enrollment begins for 2015. The online enrollment system will  allow, among other functions, enhanced features for agents and brokers,  notification to employees of their employers’ annual open enrollment  period, online employer payments, transmitting of enrollment and  payment transactions to issuers, and the processing of coverage  changes.
According to CMS, fifteen SB-SHOPs offered employee choice in 2014  through a variety of approaches, though employee choice was delayed  for the FF-SHOPs until 2015. These approaches included enabling  employers to offer a choice of plans across all metal tiers and all issuers;  a choice of plans across one metal tier but for multiple issuers; or a  choice of plans from one issuer but across multiple metal tiers. Some  states allowed the employer to choose which employee choice model to  use, while other states only offered one approach. Four states, including  California, required that employers offer their employees a choice of  plans, while others, including Rhode Island and Kentucky, gave  employers the option of choosing one plan or offering wider plan choice to  their employees.
The majority of enrolled employers in SB-SHOP states where data was  available took advantage of the employee choice feature. For example,  exchange officials in Kentucky and Rhode Island said that approximately  65 and 61 percent of enrolled employers, respectively, decided to offer  their employees a choice of plans. In Rhode Island, in cases where  employers offered the choice of any plans through the SHOP, just over   50 percent of their employees chose the reference plan the employer had  selected, 14 percent selected a different plan within the same tier,   13 percent purchased a lower metal tier—or less expensive—plan than  the reference plan, and 21 percent purchased a higher metal tier—or  more expensive—plan than the reference plan. CMS officials said that  two additional SB-SHOPs, Colorado and New York, reported that a  majority of employers decided to offer their employees a choice of plans.  However, three SB-SHOPs did not offer employee choice in 2014:  Maryland, Massachusetts, and Oregon. Massachusetts was unable to  offer employee choice because its online system for employee choice is  still in development, according to CMS officials. Maryland and Oregon  were unable to offer employee choice because SHOP enrollment was  only available through direct enrollment, according to CMS and state  officials, respectively.
section_title: State-Based SHOP Enrollment Was Significantly Lower than Anticipated, While Enrollment Data for Federally Facilitated SHOPs Were Not Yet Available
paragraphs: SB-SHOP plans had enrolled approximately 76,000 individuals—including  employees, spouses, and dependent children—into plans purchased  through 11,742 small employers, as of June 1, 2014 for most states, with  end dates ranging from May to September 2014. Enrollment varied widely  among the 18 states with SB-SHOPS, from 33,696 individuals (purchased  through 3,580 small employers) in Vermont, to 1 individual (purchased  through 1 small employer) in Mississippi. (See fig. 1.)
Based on the average number of employees who enrolled in each state  per small employer, it appears that the employer groups that enrolled in  the SHOPs generally had few employees, particularly given that states  allowed employers with as many as 50 employees to enroll in the SHOPs  in 2014. Overall, the average number of employees per employer was  3.7, although the average number of employees enrolled per employer in  each state varied. Employers that enrolled in Utah had the largest  average number of employees enrolled per employer, 8.3, while New  York had the smallest average number of employees enrolled per  employer, 1.6. (See app. II for additional details on SB-SHOP  enrollment.)
Based on official estimates and stakeholders’ expectations, SB-SHOP  enrollment—as of June 1, 2014 for most states, with end dates ranging  from May to September 2014—was significantly lower than anticipated  and, at its current pace, is unlikely to reach expectations by the end of  2014. that 2 million employees would enroll in coverage through the SB-SHOPs  and FF-SHOPs in 2014, with the number of enrollees rising to 3 million in  2015 and leveling off at 4 million enrollees by 2017. In general,  stakeholders we spoke with said that SHOP enrollment has been low,  often lower than anticipated. For example, officials from the three SB- SHOPs we spoke to all said that enrollment has been low, with officials  from two of the states indicating enrollment was lower than expected.  Officials from the third state said challenges related to implementation  and the lack of resources for marketing the SHOP had already lowered  their expectations for enrollment, though they acknowledged that  enrollment was generally low. Further, other stakeholders, including  issuer, employer, and agent and broker representatives, also said that  enrollment to date has been lower than anticipated.
CMS officials cautioned against inferring future enrollment trends from the partial-year  enrollment data for 2014. Officials said that employers may enroll in the SHOPs at any  point in the year, unlike individuals pursuing coverage in the individual exchanges, which  have limited open enrollment periods. According to the officials, more employers will likely  become eligible for SHOP coverage in later months, when their existing non-SHOP plans  end.
Enrollment data for the FF-SHOPs was not yet available, though CMS  officials reported that the agency was in the process of collecting the data  from issuers. According to officials, because CMS was not ultimately  prepared to implement online enrollment it has had to require each issuer  involved in an FF-SHOP to manually report enrollment data. This data  reporting role for issuers had not originally been anticipated, and so CMS  has had to work with issuers to develop protocols to submit the data.  CMS officials said that they are working on a system through which  issuers can report their 2014 SHOP enrollment data, and that they expect  to have initial data by fall of 2014 but will not have complete data for 2014  until early 2015. However, CMS officials said they do not have reason to  expect major differences in enrollment trends for 2014 between the SB- SHOPs and the FF-SHOPs. Beginning in 2015, CMS officials said they  plan to have online enrollment that will likely facilitate the more timely and  accurate collection of enrollment data.
section_title: Most SHOPs Have Multiple Plans Available in Each County, and Plan Premiums Varied Across States and Were Generally Comparable to Similar Plans Outside the SHOPs
paragraphs: In nearly all states, multiple issuers offered multiple plans in the SHOPs in  2014. The total number of participating issuers and plans in each state  varied widely from 1 to 13 issuers and 3 to 320 plans. Forty-five states  had more than one issuer participating in their SHOP and 31 states had 3  or more participating issuers and each issuer offered, on average, 12  plans in each rating area.
In looking at silver-tier plans specifically, we found that most states had at  least one silver-tier plan available in each county, though New York,  Washington, and Wisconsin had counties where no silver-tier plans were  available. Further, most states had at least two silver-tier plans available  in each county. When looking at the total number of silver-tier plans,  Washington, D.C., offered the most, with 89, while Arkansas, New  Hampshire, and West Virginia each only had one silver-tier plan available.  Regarding issuer participation in the SHOPs, we found that just over half  of states offered silver-tier plans from two or more issuers in each county.  Maryland had the most issuers offering silver-tier plans in its SHOP, with  13, though six states—Arkansas, Mississippi, New Hampshire, North  Carolina, Washington, and West Virginia—had only one issuer offering  silver-tier plans.
The type of plan with the highest enrollment also varied across SB-SHOP  states, as did the proportion of employees enrolling in these plans. The highest enrollment plans in each state were most often gold-tier. The plan  with the highest enrollment was a gold-tier plan in seven states, a silver- tier plan in five states, and a platinum-tier plan in five states. The  proportion of individuals enrolled in the highest enrollment plan ranged  from approximately one-fourth of enrollees in California, Connecticut,  Kentucky, and Vermont to less than 10 percent in Minnesota, New  Mexico, New York, and Utah.highest enrollment SB-SHOP plans.)   (See app. II for additional details on the  Premiums for silver-tier plans varied within and across states, clear patterns emerged. Monthly silver-tier plan premiums for enrollees  aged 21 ranged widely from $138 for the least expensive Hawaii plan to  $523 for the most expensive Alaska plan, with the median plan costing  $262. For enrollees aged 40, the monthly premiums varied from $176  for the least expensive Hawaii plan to $669 for the most expensive Alaska  plan, with the median plan costing $335. Finally, for enrollees aged 60,  the monthly premiums varied from $375 for the least expensive Hawaii  plan to $1421 for the most expensive Alaska plan, with the median plan  costing $711. The differences between the premiums of the most  expensive and least expensive silver-tier plans within a given state also  varied widely. Arizona had the largest difference, with the most expensive  plan costing almost three times as much as the lowest-cost plan. North  Carolina had the least disparate silver-tier plan premiums, with the most  expensive plan costing only approximately five percent more than the   (See app. III for additional details about SHOP  least expensive plan.premium variation across states.)
We focused our analysis of plan premiums on silver-tier plans.
In the three states where we compared SHOP premiums to non-SHOP  small group market premiums in the state, we found that premiums for  silver-tier plans were generally comparable. PPACA requires that prices  for identical plans within a given state be the same, regardless of whether  plans are offered on or off the SHOP.said that SHOP premiums were generally comparable to premiums for  plans outside of the SHOPs. As previously noted, PPACA requires that  small group plans meet a number of requirements. These requirements  limit the overall variability between PPACA-compliant plans offered within  or outside of the SHOPs, including variation in premiums.
section_title: Stakeholders Identified Several Factors That May Have Led to Current Low SHOP Enrollment and That May Affect Future Enrollment Growth
paragraphs: Stakeholders we interviewed reported that the primary incentive for  employers to use the SHOPs has been the small business tax credit.  However, stakeholders identified several factors that may have hindered  enrollment, thus leading to current low SHOP enrollment. Stakeholders  also described factors that may help stimulate or detract from SHOP  enrollment in the future.
subsections: section_title: Stakeholders Reported that the Small Business Tax Credit Has Been the Primary Motivator for Employers to Enroll in SHOPs
paragraphs: Many stakeholders, including issuer, employer, and agent and broker  representatives we interviewed, reported that the primary incentive for  employers to use SHOPs has been the small business tax credit.  Employers must generally purchase coverage through a SHOP and meet  certain other criteria, including having fewer than 25 employees, to be  eligible for the credit, which they may receive for a maximum of two years  beginning in 2014. Most employer group representatives reported that  those small employers that were interested in and taking steps to enroll in  the SHOPs were largely doing so in order to be eligible for the tax credit.  Exchange officials in Kentucky also reported that the tax credit has likely  been an important incentive for small employers enrolling in the state’s  SHOP, and that most employers that had enrolled as of April 2014 had  less than 25 employees, indicating that they may have been pursuing the  credit. Similarly, as discussed previously, we found that the average  number of enrolled employees in SB-SHOPs ranged from 1.6 to 8.3  employees, suggesting that many enrolled employers may have been  eligible for the credit.
However, several stakeholders noted that the tax credit is too small and  administratively complex to motivate many small employers to enroll.  CMS officials and one employer group representative noted that the  temporary nature of the tax credit—that is, the fact that employers may  receive the credit for only 2 years beginning in 2014—may deter some  employers from offering coverage for the first time through the SHOP to  obtain the credit. This is consistent with our prior work, which revealed  low use of the credit even prior to the establishment of the SHOPs. In  2012, we reported that the take-up of the small business tax credit in tax  year 2010, the first year the credit was offered, was much lower than the  estimated number of eligible employers. According to tax preparers and  other stakeholders we interviewed for that work, small employers likely  did not view the credit as a sufficient incentive to begin offering health  insurance, particularly given the complexity of, and time required to claim,  the credit.
section_title: Stakeholders Identified Several Factors That May Have Hindered Current SHOP Enrollment
paragraphs: Although the small business tax credit may have led some employers to  enroll in the SHOPs, stakeholders identified several other factors that  may have hindered enrollment, thus leading to current low SHOP  enrollment.
Delays in key SHOP features. Stakeholders, including  representatives of national employer, agent and broker, and insurance  commissioner groups, said that the delays in implementation of online  enrollment and employee choice in the FF-SHOPs may have hindered  SHOP enrollment. These key features, which have also been delayed  in certain SB-SHOPs, are not typically available to small employers  purchasing coverage through other means. According to  stakeholders, until these key features are implemented, employers  may not have as much incentive to enroll in coverage through the  SHOP.
Limited awareness of and misconceptions about SHOP  availability. Many stakeholders, including state exchange officials  and national- and state-level agent, broker, and employer  representatives, reported a lack of employer awareness of the ability  to enroll in SHOP plans beginning October 1, 2013, largely due to  misconceptions about whether the SHOPs were open for enrollment  and a lack of outreach by states and CMS. Stakeholders said that  media reports announcing delays in certain SHOP features—in  particular, the delays in FF-SHOP online enrollment and employee  choice—led many employers to assume that the overall  implementation of SHOPs was delayed and that enrolling in plans was  not yet possible. In addition, stakeholders said that low awareness  stemmed from a federal and state emphasis on highlighting the  availability of the individual exchanges. For example, exchange  officials from one SB-SHOP state noted that employer awareness of  the SHOP remained low in part because the state initially focused  outreach and marketing efforts on the individual exchange. However,  exchange officials from this and another SB-SHOP state reported that  with the end of their individual exchanges’ open enrollment periods,  the states are now focusing outreach and marketing efforts on their  SHOPs, which must provide for rolling enrollment.
Renewal of existing, noncompliant plans. The majority of  stakeholders—including national-level groups as well as stakeholders  representing four of the five states included in our study—said that the  ability for employers to renew their existing, non-PPACA compliant  plans may have limited SHOP enrollment. National-level employer  and agent and broker groups we interviewed said that most small  employers chose to renew their existing plans in states where this  was permitted, in part due to a general preference for the status quo,  as well as other factors, such as concerns about potential premium  increases associated with new plans. Kentucky, California, and  Illinois exchange officials, as well as CMS officials who participated in  the implementation of the SHOP in Illinois and Texas, said that the  renewal of these plans may have limited SHOP enrollment in these  states.
Technical challenges and administrative burden. Some  stakeholders said that the ongoing technical challenges and  administrative burden associated with many of the SHOPs have  served as a barrier to entry for employers, in part by discouraging  some agents and brokers from recommending the SHOP to  employers. National- and state-level employer group representatives  reported hearing from small employers that they have avoided SHOPs  due to technical challenges with SHOP websites, as well as  administrative burdens, such as difficulty reaching customer service  and, in some cases, the need to send application paperwork by mail.  State exchange officials reported that they worked closely with agents  and brokers to establish their SB-SHOPs, particularly given that most  small employers have traditionally relied on agents and brokers when  purchasing coverage for their employees. However, state exchange  officials and other stakeholders, including CMS officials, noted that  agents and brokers still faced challenges associated with using  SHOPs. These challenges included, in some cases, poor or  inaccessible customer service for brokers; poor training for brokers on  SHOP requirements; the extra time required to explain SHOP  requirements to clients; challenges receiving compensation; and the  lack of a dedicated broker “portal” on some SHOP websites that  would allow brokers to set up and help manage accounts for their  clients.challenges such as these have led some agents and brokers to avoid  recommending that their small employer clients use the SHOP.
section_title: Stakeholders Identified Various Factors That Have the Potential to Contribute to or Detract from Future SHOP Enrollment Growth
paragraphs: Despite the various factors that may have restrained SHOP enrollment to  date, many stakeholders noted that certain other factors suggest that the  SHOPs have the potential to experience future enrollment growth.  According to some stakeholders, central to enrollment growth will be the  phasing out of noncompliant plans, the resolution of the technical  challenges and reduction of the administrative burden cited as hampering  current enrollment, and the demonstration of a “value proposition” that  gives employers a reason for preferring SHOP-based coverage to  coverage available outside the SHOP. Stakeholders suggested several  additional factors that could help stimulate future SHOP enrollment  growth.
Improved coordination with agents and brokers. Stakeholders,  including CMS officials, state exchange officials, and issuer,  employer, and agent and broker representatives, emphasized the  importance of coordinating with and providing improved web- or  phone-based tools to agents and brokers in order to facilitate SHOP  enrollment. States and CMS reported taking steps to resolve certain  challenges faced by agents and brokers when using the SHOP. For  example, Kentucky exchange officials said that they are working to  develop a tool that will allow agents and brokers to easily provide  price quotes across multiple SHOP plans to their clients, and are  considering allowing SHOP-certified agents and brokers to initiate  applications on behalf of employers. Illinois exchange officials  reported developing a dedicated section for agents and brokers on the  state’s SHOP website through which agents and brokers can obtain  updated information on the SHOP, in response to feedback from  agent and broker community leaders. CMS officials said that  establishing a broker portal for the FF-SHOPs is a key agency priority,  and that the agency plans to have a broker portal in place when FF- SHOP online enrollment becomes available in fall 2014. According to  CMS officials, the portal will, among other functions, allow agents and  brokers to search for and communicate with employer clients; monitor  employees’ enrollment progress; make changes to employee rosters;  and receive messages regarding employers’ monthly invoices,  including any late payment warnings.
Availability of employee choice. Some stakeholders stated that the  employee choice feature, when fully implemented in all states, will be  a key value proposition for the SHOPs. For instance, CMS officials  said that employers will likely value being able to offer employees a  choice from among multiple plan and issuer options—an ability that  small employers typically have not been able to offer. Employer group  representatives reported that their members consider employee  choice to be an important benefit of the SHOPs, as employees will be  able to decide on their own the coverage that best suits their needs  and, if necessary, will have the option to spend more to purchase  more comprehensive plans. Evidence from Kentucky and Rhode  Island, whose SHOPs offer, but do not require, the use of employee  choice, further suggests that employers may value this feature. As  discussed previously, according to state exchange officials, the  majority of employers in Kentucky and Rhode Island that enrolled in  the SHOPs chose to offer their employees the choice of multiple  plans.
However, some issuer representatives and other stakeholders were  uncertain about the value of employee choice, noting that it is  challenging for issuers to implement and that too many choices may  be overwhelming for employers and employees. Representatives from  national issuer and insurance commissioner groups reported that it is  time consuming and expensive for issuers to build the information  technology systems required for premium aggregation and other  issuer-specific functions necessary for employee choice. In addition,  issuers and other stakeholders have reported concerns regarding  whether employee choice would lead to adverse selection among  plans in the SHOP—a concern that has, in part, led some states to  delay their implementation of employee choice until 2016.
Increased marketing to employers. Some stakeholders said that  states need to better market the SHOP to small employers to increase  SHOP awareness. Some employer group representatives said states  need to improve outreach by more aggressively targeting small  employers and highlighting the value of the SHOPs in their marketing.  Exchange officials in one state emphasized the importance of  marketing the SHOPs to small employers as a product that offers  value, rather than performing traditional outreach, which is more  characteristic of public programs. The officials also noted that  marketing must be conducted continuously throughout the year, given  that employers renew their coverage at different points in the year.
Robust issuer participation. Although stakeholders representing  four of the five states included in our study reported that issuer  participation has not been a challenge, CMS officials said that robust  issuer participation will be important in ensuring the SHOPs’ long-term  viability. Issuer representatives noted that, due to the requirement that  certain issuers must participate in a state’s FF-SHOP if they wish to  participate in its federally facilitated individual exchange, some issuers  will be required to participate in the SHOPs. However, according to  the representatives, other issuers may be hesitant to participate given  factors such as uncertainties regarding delays in SHOP functionality  and technical readiness; potential new requirements, such as those  related to the adequacy of provider networks; the expense and  complexity of implementing employee choice and other SHOP  features; and the ability for employers to renew noncompliant plans.  CMS officials said that although some issuers may be reluctant to  participate in the FF-SHOPs in the early years of implementation,  once information technology systems have been fully developed and  refined, issuers may be more eager to participate.
Expansion of the SHOPs to larger employers. Exchange officials in  one state noted that as eligibility for SHOP enrollment expands to  employers with up to 100 employees—which must occur no later than  January 1, 2016—and, eventually, to larger employers in some states,  additional employers may consider the SHOP as an option for  purchasing coverage. However, based on the small average number  of employees per employer enrolled in SB-SHOPs, it remains to be  seen whether larger employers will enroll when given the opportunity.
Financial sustainability of the SHOPs. Exchange officials in one  state noted that an essential element of SHOP viability will be  ensuring the SHOPs are financially sustainable. They and other SB-SHOP exchange officials we interviewed said that their states have  proposed or finalized funding mechanisms in place. In two of the  states, these funding mechanisms will draw from either all exchange  plans—both individual and SHOP—or all health plans in the state;  therefore, low initial SHOP enrollment is not likely to significantly  affect SHOP operating revenues in those states.stakeholder expressed concern regarding whether SHOPs will be  sustainable in the long run if enrollment remains low, particularly given  the expense required to maintain the SHOPs’ information technology  systems.
Stakeholders also described factors whose future effects on SHOP  enrollment are more uncertain or have the potential to detract from SHOP  enrollment growth in the long term.
Loss of the tax credit. As noted previously, stakeholders and our  analysis of SB-SHOP enrollment data suggested that many  employers currently enrolling in the SHOP may be eligible for the tax  credit. However, employers may only receive the tax credit for a  maximum of 2 years. It therefore remains to be seen whether  employers will continue to purchase coverage through the SHOP  once they have exhausted their ability to receive the tax credit, and  how this will affect overall SHOP enrollment. One employer  representative suggested that an extension of the credit, or a re- design of the credit such that larger businesses are eligible, will help  ensure SHOP enrollment growth moving forward.
Comparability of prices on and off the SHOP. Issuer  representatives and other stakeholders noted that prices for SHOP  plans are likely to remain similar to prices for non-SHOP small group  plans, which may limit the incentive for small employers to enroll in  coverage through the SHOP. According to stakeholders, small  employers’ coverage decisions are largely driven by price. However,  as we noted previously, premiums are currently similar for plans  offered on and off the SHOP in part due to the requirement that prices  for identical plans in a given state be the same, regardless of whether  they are offered on or off the SHOP. In order for issuers to offer more  competitive prices through the SHOPs, they must offer unique,  SHOP-only plans that are lower in price when compared to non- SHOP options. However, according to issuer representatives, there  are limited mechanisms by which issuers could do so. As PPACA  requires that all plans offer a set of minimum essential health benefits,  issuers are limited in the extent to which they can lower prices by  restricting the benefits they offer in SHOP plans. In addition, though  issuers could lower prices for SHOP plans by offering narrower  provider networks, issuer representatives cite the high administrative  costs of creating and maintaining new networks as a deterrent.
Competition with private exchanges. Some stakeholders, including  issuer, agent, and broker representatives, as well as exchange  officials from one state, reported that private exchanges for small  group coverage—or online health coverage marketplaces managed  by private companies, such as issuers or benefits consulting firms— are becoming more prevalent and may compete with SHOPs for  employer enrollment. According to some agent and broker  representatives, private exchanges may appeal to employers  because, in some cases, they offer employee choice—a key value  proposition of the SHOP that has not yet been implemented in all  states—without many of the requirements associated with the SHOP.  Exchange officials from one state said that recently created private  exchanges in that state have been able to spend more on advertising,  which has made it difficult for the SHOP to compete. However, the  officials noted that the SHOPs provide increased value in that they  offer full transparency and choice of SHOP plans—whereas some  private exchanges, despite claiming to offer full choice of plans,  simply offer plans from the carrier operating the exchange.
Possibility of sending employees to the individual exchanges.
Exchange officials from two states and some agent and broker  representatives reported that some small employers have chosen, or  may choose in upcoming years, to drop coverage for their employees  altogether, particularly in light of the availability of premium and cost- sharing assistance for eligible low- and moderate-income individuals  obtaining coverage through an individual exchange. CMS officials said  they have heard anecdotal information that this may be occurring, but  have no data. Several recent employer surveys have found that, while  the majority of surveyed small employers were not considering  dropping coverage for their employees, a minority were intending to or  considering whether to drop coverage and, in some cases, direct their  employees to the individual exchanges in 2014 or 2015.
Potential for adverse selection. If it were to occur, adverse selection  between SHOP and non-SHOP plans could lead to increased SHOP  premiums and thus inhibit SHOP enrollment in the long term.  However, issuer representatives said that the similarity in premiums  seen thus far has diminished concerns about such adverse selection.  The issuer representatives said a greater concern is the risk for  adverse selection between PPACA-compliant plans—that is, both the  SHOP and non-SHOP plans that comply with PPACA’s insurance  reforms—and the existing, noncompliant plans that have been  renewed. This risk may be temporary, as CMS’s current transitional  relief policy, under which noncompliant plans may continue to be  offered, permits issuers of such plans to offer renewals of these plans  only for plan years beginning on or before October 1, 2016. In addition, PPACA established mechanisms to mitigate adverse  selection if it does occur among PPACA-compliant plans, and  stakeholders said it will be at least 1 year, if not several years, before  it becomes clear if adverse selection is occurring in the SHOPs, as  well as how well these mechanisms will mitigate its effect.
section_title: Concluding Observations
paragraphs: The SHOPs are an important element of PPACA, intended to provide a  new mechanism by which small employers can shop for and purchase  health insurance coverage for their employees and to offer features not  typically available to the employees of small employers, such as the  ability to choose among multiple health plans. While much progress has  been made by CMS and states to ensure all SHOPs are now operational,  early evidence suggests enrollment is significantly lower than anticipated  amid the delayed availability of key functions among many SHOPs and  misconceptions by employers about the availability of SHOPs. CMS  officials and other stakeholders point to structural factors to help explain  the current low enrollment—such as the temporary ability for employers in  many states to renew their existing plans even if they do not comply with  PPACA insurance reforms—and suggest reasons for optimism about  future SHOP enrollment trends. They point to such factors as the phase- out of the noncompliant plans, the expected availability of online  enrollment and employee choice functions in many more SHOPs, and  intended CMS or state efforts to improve SHOP awareness and  coordination with agents and brokers. Nevertheless, other factors may  temper such optimism, such as the loss of the small business tax credit  for some employers, the potential for adverse selection, and the  challenge SHOPs may face in competing with plans offered to small  employers outside of the SHOPs. These collective factors will vary across  states and continue to evolve, suggesting that a determination of the  long-term impact of the SHOPs remains premature at this time.
section_title: Agency Comments
paragraphs: We received comments from HHS on a draft of this report (see app. V).  HHS described steps it is taking to improve the SHOP program based on  lessons learned from the first year of operation and emphasized the  future role SHOPs could play to produce more competition in the small  group health insurance markets as the SHOPs improve and mature. HHS  also provided technical comments, which we incorporated as appropriate.
We are sending copies of this report to the Secretary of Health and  Human Services and other interested parties. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  John E. Dicken at (202) 512-7114 or dickenj@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix VI.
section_title: Appendix I: Small Business Health Options Program (SHOP) Features as of June 1, 2014
section_title: Appendix II: State-Based Small Business Health Options Program (SB-SHOP) Enrollment Generally as of June 1, 2014
subsections: section_title: Employer enrollment 1,360
section_title: Appendix III: Small Business Health Options Program (SHOP) 2014 Average Monthly Premiums for Silver-Tier Plans
subsections: section_title: Low 244
paragraphs: Vermont does not allow variation in plan premiums based on age.  The West Virginia SHOP had only one plan available.
section_title: Appendix IV: Small Business Health Options Program (SHOP) Silver-Tier Plan Availability
section_title: Appendix V: Comments from the Department of Health and Human Services
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact name above, Randy DiRosa, Assistant Director;  Priyanka Sethi Bansal; Sandra George; Eagan Kemp; Laurie Pachter;  and Kate Tussey made key contributions to this report.