Untold Story of Small Biz Delay under ACA, Just Déjà Vu from Massachusetts

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The revelation that the Obama Administration will delay the roll out of the “choice option” for small

English: Mary Landrieu Senate portrait

Senator Mary Landrieu (D-LA) has been credited with advocating for small business employee choice in the ACA. (Photo credit: Wikipedia)

business until 2015 came as a huge surprise to many, including Joe Klein at Time, however anyone familiar with the Massachusetts experiment will feel a strong sense of déjà vu. In a 2010 paper I authored for the Heritage Foundation, I documented the delayed and failed effort by the Massachusetts public exchange (Connector) to offer real choice and savings to small businesses. My report suggested the experience served as a warning to other states. I suppose I should have targeted  it toward the federal government instead. Small companies should be even more uncertain of the law now that the cost–saving mechanism they were sold is now on the back burner. Yet the penalties for not offering insurance, new taxes on fully-insured plans, and EHB requirements all remain on schedule.


Governor Romney’s orig­inal health reform proposal envisioned a statewide health insurance exchange that would have offered small businesses a robust choice of plans with a wide range of deductible and benefit levels. His proposal provided for defined contributions from employers, used the exchange as a “premium aggre­gator,” and created a pooling mechanism to allow employees of small businesses to purchase group insurance together to spread risk and provide greater premium stability.

His plan would have helped elevate the individual employee as the primary decision-maker and inject some competition into the system. Even with the policy compromises required to pass the health care reform bill in 2006, the final version still included mechanisms that would have helped small business in the short term—if they had been implemented.

This same rationale was used to garner Democratic support for the ACA in Congress, as Robert Pear from The New York Times documented in his recent article on the delay:

In the weeks leading up to the passage of the health care legislation in 2010, [Senator Mary] Landrieu provided crucial support for the measure, after securing changes to help small businesses.

One problem: The Massachusetts reality didn’t match the rhetoric at the time, and should raise serious questions about the federal experience even after the employee plan choice is launched in 2015, 2016, or 2020.

Vision Altered During Implementation

The 2006 health care reform law tasked the Connector with developing a small business program. The original launch date was July 1, 2007, but coverage was not finalized until January 2009, almost three full years after the health care reform bill was signed. Even with this lengthy delay, the original Contributory Plan (CP), suffered from design and incentive issues. The CP was the Connector’s first pilot program marketed to small businesses with fewer than 50 employees. In this scenario, a company would select a benchmark plan within a benefit-level tier (gold, silver, or bronze), and then the employee would choose a plan within that tier.

Instead of engaging with a broker community that is geared to small businesses options, the Connector allowed only 20 brokers to sell CP and only to the companies that were already their clients. The Co­nector offered these brokers a 2.5 percent fee, compared to the 4 percent standard commission that they could earn outside of the Connector. (Congress decided to go around brokers in the ACA and hire navigators, and HHS invented “assisters” to fill this role instead.)

The health insurance products offered through the Connector lacked creativity, because the governing board voted to over-standardize plan designs. As a result, the products looked similar to those available outside the Connector and often more expensive.

Not surprisingly, the program drew limited interest from the small business community and failed to draw its initial goal of 100 employers out of the 185,000 in the state. As a result, the Connector launched a new small business program called Business Express (BE) in order to put “its resources into one effort for small businesses,” and froze enrollment for CP.

BE had a grand total of seven plans, and enrollment was largely boosted through a deal with a third-party administrator, the Small Business Service Bureau, to transfer members into the Connector. That contract has since ended.

Small Businesses Have Voted With Their Feet

After six years, millions of dollars in advertising, hundreds of free media stories on the Connector, and a controversial mailing to all small businesses in the state, the numbers speak for themselves.

 Success of a Public Exchange?

 How Employee Choice Was Added to the ACA

The untold story about employee choice and the ACA revolves around Jon Kingsdale, former executive director of the Connector, who was responsible for implementing the first contributory plan. Yet after failing to launch a successful program, he traveled to DC to lobby Congressional Democrats and Obama Administration officials to include the same type of program in the ACA.

The media doesn’t understand the full history of this program, so we are left with Jon Gruber from MIT telling a reporter from the National Journal recently, “The main message, I think, is optimistic. Overall it’s [exchanges] going to work, and over time it’s going to work out…” I guess he is still holding out hope for things to turn around in the Connector as a Board member, six years into the experiment.

The open question is whether the federal and state run exchanges can learn from the experience in the Commonwealth.

My advice is to promote defined contributions through the exchange, set up premium aggregators, allow for any willing insurer to sell in the exchange, reduce the number of mandates, and focus on allowing market forces to control underlying health care costs. Finally, if the goal is truly to expand access to insurance, not just retain government control, a paradigm-changing reform should allow for premium tax credits to be utilized in private exchanges. This will test the true value proposition of a public exchange. If they add value they should survive, if not, they should go out of business and not be propped up by government favoritism.

Find me on Twitter: @josharchambault

Posted on Forbes.com