AB 1672: The Birth of an Enduring Small Group Market in California
AB 1672: The Birth of an Enduring Small Group Market in CaliforniaJuly 24, 2018
Michael Traynor, Chief Executive Officer
Twenty-five years ago this month AB 1672, California’s small employer health reform law, went into effect, revolutionizing the small employer market and creating tremendous advantages for employers and the brokers who serve them. It’s worthwhile on this 25th anniversary to remind ourselves of AB 1672 and its enduring impact.
AB 1672: A Simple Rule with a Big Impact
On July 1, 1993, 1.5 million employers and millions of their employees became eligible for health coverage in California — affecting 1/3 of employed residents in the state. By some accounts, the law opened up the option for health coverage to 2/3 of California employers with between 5 and 50 employees that had been previously excluded from the market.
The effects of this law are still felt on the market today. With over half of employed Californians working for businesses with fewer than 100 employees in 2017 (EDD), the small group market is big.
AB 1672 accomplished this significant expansion with a simple rule: carriers offering coverage to any one small employer are required to offer the same to any other small employer.
Prior to AB 1672, this was not always the case. Small group applicants might be subject to underwriting, with group-specific rates and contracts. Premiums for coverage could be lower for employers in good health and higher for those that included individuals in poor health. Carriers could exclude coverage outright and contracts were subject to termination or non-renewal.
AB 1672: The Key Provisions
Small Employer Definition
In 1993 a small employer was defined as one with 5 to 50 regular full-time employees during 50% of the preceding calendar quarter and offering coverage to all full-time regular employees. This definition changed over the years, expanding the number of eligible employers and broadening the pool by millions more lives. California continued to expand the small group market periodically, by extending the definition of small employer to those with two eligible employees, permitting employers to define full-time eligible as those working 20 hours and extending the eligibility period to the whole of the preceding calendar year. (The California small employer market only narrowed in 2014 with the implementation of the ACA when the so-called “owner-only” businesses were deemed ineligible.)
Modified Community Rating
Prior to 1993, composite rates were the norm for small group plans. With the new law, age-bands were established. In a market where the carrier was not permitted to set rates based on a group’s characteristics (nature of business, health experience, participation, other carrier offerings, male to female ratio, turn over, etc.), age bands were an important tool for fitting the premium to the enrollment.
Because the average age of a small group changes considerably with each additional enrollee or deletion, the age-banded rate structure meant that each group’s premium changed automatically, adjusting as changes to the enrollment occurred. Under AB 1672, the carrier determined the relative rate for each age-band and family status. Starting in 2014 the ACA’s standard age curve dictates the relative difference in premium for each enrollee based on age.
Guaranteed Issue and Renewal
Every small employer has the right to buy any benefit plan design offered or sold by a health plan to other employers.
Association Health Plans are limited in California due to AB 1672 (and subsequent revisions). Carriers may offer to qualified associations only those plans and rates offered to qualified small businesses.
AB 1672 today
The law has been periodically amended and expanded. The current legislation guiding the market in California, known as SB 1083, aligned California law with the ACA, and retains many elements of the original 1993 law.
Impact on The Market
Overnight the law created a large and vast market by declaring that all businesses that met the description of a small employer in California were eligible for group health coverage. Carriers couldn’t pick and choose segments or isolated channels. In order to reach and serve the broad market successfully, carriers leveraged insurance brokers. The broker “channel” remains the most efficient way to reach the millions of small employers in the state, and the thousands of new businesses entering the market every year.
Not only was the broker channel an efficient and effective way for carriers to sell into this expanded and redefined market, but it also contributed to the success of a stable and healthy small group pool.
AB 1672 prohibited discrimination by the carrier. During the run-up to implementation, carriers were concerned that small employers might “game the system.” As all small employers were eligible and could not be denied or offered limited benefits, the sick were allowed to join and subject the carriers to adverse selection. Employers with sick employees did join. And each carrier in the market then (and now) gets its share of this enrollment. To balance this, it’s in the carrier’s best interest to get its share (or greater share) of the good risk. That is employers who buy coverage when their employees are well and who stay well.
The broker’s motivation is to find and maintain those employers who are in it for the long term. It’s not in the broker’s interest to find and serve the employer who has only a short-term contract in mind. So, in effect, the interests of the broker align with the interests of the carrier — long-term clients who are in the market to attract and retain employees – not game the system. Over the years, we’ve seen that carriers who make it easy or attractive for brokers to do business benefit from long-term contracts.
The law affected the broker product as well. With the establishment of a “level playing field,” where carriers offered standard plans to all small employers, brokers no longer competed with unique price and product. (Gone were proprietary pools, association plans, field underwriting, negotiated rates, etc.) In order to differentiate themselves in the market, brokers began to compete on the value of the service they brought to the employer.
The law specified that upon demand, the carrier must produce product and rate information to any qualified employer. This deviated from the market practice where each group contract was subject to unique plan design and rate. Most carriers responded by publishing standard brochures with product, rate, eligibility and administration descriptions. By the end of the 1990s, this product and rate information was made available to quote engines.
This change further leveled the playing field for brokers in the small group market. Through services like HealthConnect, brokers are able to deliver product and rate information more efficiently and timely. Freed from time-intensive proposal administration, brokers added more value to their client relationships by providing consultation and guidance to small employers.
As a result of AB 1672 small employers in California gained a valuable partner in their broker, who brought: consultation, human resource management and administration, technical guidance, and other human resource and benefit administration services. Because the broker provided these services, California’s small businesses avoided the cost and in turn, could invest in their business.
Benefits for Employers
After AB 1672, small employers were able to compete with larger employers for talent because health coverage was available to all employers, even start-ups. (Google, Verisign, 23andme, and Pinterest — all businesses whose brokers submitted applications for small group coverage through our office and countless other employers all at one time had small group coverage made possible by AB 1672). After July 1993, entrepreneurs all over the state launched new ventures without concern that coverage might not be available.
AB 1672 and its descendants have served California small business well by assuring access to a stable market that includes a wide choice of carriers and plans. (Affordability in the bigger sense is a topic for another day.) The consequences of implementation of AB 1672, both the intentional and unintentional are well ingrained. Even if some or all of the ACA is rolled back, many components of California’s small employer laws will likely remain. Until then, happy silver anniversary AB 1672.
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