Why small Hoosier employers aren’t dropping their health plans—yet

On Wednesday, Indianapolis-based WellPoint Inc. reported—again—that its small employer customers are ending their group health plans faster than expected. (If this sounds familiar, WellPoint executives said the same thing in July. Since then, the pace of this trend has only accelerated).

A process that WellPoint initially expected to take five years will now happen in two, WellPoint CEO Joe Swedish told analysts during a conference call. In the past year, WellPoint has lost 300,000, or 19 percent, of the members in its small employer health plans.

“I think now that you’ve got exchanges up and running and functioning well, that small group employers will have an opportunity to re-evaluate whether they choose to go to an exchange for their employees,” added WellPoint CFO Wayne DeVeydt.

But that trend appears to be on hold here in Indiana, according to Matt Kleymeyer, Indianapolis market leader at Bernard Health, a Tennessee-based benefits consultancy.

After a small wave of employers ended their group plans a year ago, most of the rest are holding steady now, Kleymeyer said.

“We’re seeing a lot of continuous complacency,” Kleymeyer told me this week.

There is one big, overarching reason for this. It’s a part of Obamacare called community rating.

It’s one of the least understood, but most consequential, portions of the health reform law.

Obamacare requires that the oldest worker in an employer’s health plan—a 64-year-old—can only pay three times as much in premiums as the youngest worker—a 21-year-old. Before Obamacare, Indiana had no such community rating rules, and insurers typically charged the oldest customers five or six times more than the youngest.

Essentially, Obamacare’s community rating rules mean that younger customers have to pay more than they had been for coverage so that older customers can pay less.

How much more? In rough terms, Obamacare’s community rating rules give a 25-percent-off coupon to boomers while sticking millennials with a 75-percent surcharge.

I get that 25-percent figure from new data from employer-sponsored insurance plans published this week by the Health Care Cost Institute.

As you can see in this spreadsheet of the HCCI data, the oldest group of workers—those aged 55-64—were spending nearly $8,500 per person in 2010, the year Obamacare became law, or 3.76 times as much as the youngest group of workers—those aged 19-25.

If Obamacare allowed insurers to charge the oldest workers, say, 3.75 times more than the youngest, then premiums would correspond perfectly with spending. But the Obamacare rules don't perfectly match the differences in spending that exist in the employer marketplace.

The potential “rate shock” for younger-than-average workers would be more modest, of course. But it could still be large.

That is a big reason why so many employers, if they have a lot of workers under age 45, are holding onto their pre-Obamacare plans as long as they can.

WellPoint’s Indiana health plan, Anthem Blue Cross and Blue Shield, told me this week that two-thirds of its small employer customers—which cover about 125,000 Hoosiers—renewed their 2013 health plans late last year so they would not have to adhere to Obamacare’s new rules, including community rating.

The Obama administration has said small employers can renew their pre-Obamacare plans again for 2016, if insurers allow them to do so.

Not everyone thinks there will be this kind of rate shock. A 2013 study by the Urban Institute found that Obamacare’s community rating rules roughly corresponded to the difference in spending that existed in the individual insurance market before the rules took effect.

The youngest workers (those aged 21 to 26) could join their parents’ health plan—if, of course, their parents have a health plan and can afford to add them as a dependent.

And, to the extent premiums did rise for younger workers, most of them could qualify for Obamacare’s generous tax credits, which would mostly offset their premium increases, the Urban Institute noted.

But for employers, those subsidies would only be available via Obamacare’s SHOP exchange, which has yet to become operational in Indiana. Or, if the employer ended its group plan and told its workers to find coverage via the Obamacare exchanges.

Some employers have done that, as I have written about before.

But most, at least here in Indiana, appear to still be waiting until all these changes shake out.