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

Letter

Background

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.

SHOPs Were Operational in All States, Although Many Expected Features Were Not Yet Available and Enrollment Was Low as of June 2014

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.

SHOPs Were Operational in All States, Although Many Expected Features Were Not Yet Available, Particularly for the Federally Facilitated SHOPs

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.

State-Based SHOP Enrollment Was Significantly Lower than Anticipated, While Enrollment Data for Federally Facilitated SHOPs Were Not Yet Available

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.

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

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.

Stakeholders Identified Several Factors That May Have Led to Current Low SHOP Enrollment and That May Affect Future Enrollment Growth

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.

Stakeholders Reported that the Small Business Tax Credit Has Been the Primary Motivator for Employers to Enroll in SHOPs

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.

Stakeholders Identified Several Factors That May Have Hindered Current SHOP Enrollment

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.

Stakeholders Identified Various Factors That Have the Potential to Contribute to or Detract from Future SHOP Enrollment Growth

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.

Concluding Observations

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.

Agency Comments

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.

Appendix I: Small Business Health Options Program (SHOP) Features as of June 1, 2014

Appendix II: State-Based Small Business Health Options Program (SB-SHOP) Enrollment Generally as of June 1, 2014

Employer enrollment 1,360

Appendix III: Small Business Health Options Program (SHOP) 2014 Average Monthly Premiums for Silver-Tier Plans

Low 244

Vermont does not allow variation in plan premiums based on age. The West Virginia SHOP had only one plan available.

Appendix IV: Small Business Health Options Program (SHOP) Silver-Tier Plan Availability

Appendix V: Comments from the Department of Health and Human Services

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.