Ask a Zenefits Advisor: What’s the Difference Between Small Group and Large Group Employers for Health Insurance?

Bud Bowlin has been advising business owners about health insurance and benefits for more than 35 years. For his 70th birthday, we gave him his own advice column. Got a burning benefits question for Bud? Send it to [email protected].

Dear Bud,

My company has 49 employees, and as we grow, we’re conscious of the evolving ACA definitions of small and large group employer. What’s really the difference here, and how does it impact our health insurance rates?

Growing Under ACA Regulations is Nettlesome

Dear G.U.A.R.I.N.,

Under the ACA, small groups are defined as organizations with 2-50 employees, and large groups have 51+ employees. You probably read about how the definitions were going to change on January 1, 2016, but bipartisan opposition prompted Congress to recently pass a law upholding the current definitions.

Why are these definitions important? It has to do with how rates are applied to specific size groups, which ultimately affects the bottom line in the premiums you pay. Insurance carriers often “pool” several small groups together based on location, industry, and number of employees. Carriers then measure losses for the pooled group over a fixed period of time. Based on this, they make a universal decision about which benefits need changing and what rates to increase to keep the pool profitable. Those decisions are then applied to every group within the pool.

Small group rates are also “age banded,” which means there’s a unisex rate for ages 0-19, followed by an ever-increasing rate for each subsequent year up to age 65. Age banded rates are calculated separately for every member of a family, as opposed to having one fixed family rate as with a large group employer. With 49 employees, you are a small group employer, but right on the cusp.

Now, a couple of things are going to happen when you hire your next employees. One new hire puts you into FMLA (Family Medical Leave Act) territory. Two new hires, and you are now a large group employer. So, how does this impact your rates?

Large groups rates, unlike small group rates, are affected by large claims—and one big claim can have a major impact on the following year’s renewal. For example, if you have an employee submitting claims for chemotherapy, you may not “feel” it in your rate currently, but you could as a large group. However, you may find large group rates to be otherwise favorable. Large groups usually use average rates to cover employees in a 4-tier scheme of Employee Only, Employee+Spouse, Employee+Child(ren) and Family. These composite rates take averages of the specific ages, number of children, location, and gender of the individuals—making them somewhat easier for carriers to apply and for consumers to understand.

The biggest change up under the ACA is that now carriers must first gain approval from the State Department of Insurance for rate approval. After each rate period (usually a calendar year or portion of a year), the necessary rate action has to again be approved by the state, and the carrier is forced to justify why they are seeking an increase. States often modify or reduce the amount of increase the insurance company seeks.

Some states are more efficient in approving carrier rate requests while other states take an inordinate amount of time in the approval process. This process is meant to protect consumers from unjustified rate increases, but it can also slow down new group plan approval if the carrier doesn’t know what rates to use. This is why it is crucial to have a good broker staying on top of carriers when setting up new insurance. Zenefits has a Carrier Relations team tasked with working directly with carriers on innovation and keeping costs manageable for our clients.