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Taking Stock of SHOP Insurance Marketplaces for Small Businesses

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The Small Business Health Options Program (SHOP) under the Affordable Care Act enables businesses with 50 or fewer employees to purchase private health insurance for their employees, and employers with fewer than 25 employees and lower-wage workforces to earn a tax credit for doing so. A recent Commonwealth Fund brief by Sarah Dash and colleagues carefully reviewed the state-by-state implementation of SHOP.

But, you may well ask, why did the Affordable Care Act (ACA) create the SHOP program in addition to the marketplaces for individuals and families? And is it likely to succeed?

Why SHOP?
The rationale for the SHOP program is fairly straightforward: to make the health insurance market work better for small companies, which are much less likely than large firms to offer coverage. This reflects market dysfunctions that have tended to make small-group health insurance a bad buy.

Small employers lack the bargaining power of large employers, so they pay more for comparable coverage. Because their risk pools are small, a serious event affecting a single employee, such as cancer or a car accident, could lead insurers, prior to the ACA, to raise rates or even terminate coverage. Still another problem has been that in return for offering coverage, health insurers generally insist that a small employer contract only with a single company. This means employees often have no or limited choice of coverage and, thus, little opportunity to tailor insurance to their and their family's needs.

Combined with the Affordable Care Act's insurance market reforms that went into effect this year, the SHOP marketplaces could remedy a lot of these problems. The ACA forbids insurers from terminating plans or pricing them based on the health of a particular business's employees or their line of work. By bringing lots of small businesses together, the SHOP marketplaces aim to increase the number of groups purchasing plans, attract more insurers, increase the number of plans available to small businesses, and drive down rates through new competition among plans. In addition, an employer using a SHOP marketplace will have the opportunity to offer employees a choice of plans, though this option isn't currently available in all states.

All this makes sense, but leaves other questions unanswered. Aren't the individual marketplaces supposed to accomplish many of these same goals? Could the creators of the ACA have avoided the complexity of SHOP by encouraging businesses to transfer their employees to the individual marketplaces, and get out of the difficult small-group market altogether? The law does not penalize employers with fewer than 50 employees for not offering health insurance to their workers.

The law doesn't get small employers out of the insurance game because that would have disrupted the insurance arrangements of many working Americans -- something that Congress had hoped to avoid. Some employees who lost coverage might have found themselves ineligible for subsidies in the individual marketplaces, and facing higher premium costs or penalties for going without insurance. Employees who qualified for subsidies would increase the government's costs, substituting taxpayer contributions for small employers', another undesirable outcome from the standpoint of the federal budget.

More conceptually, the ACA is in many ways an effort to support and strengthen the current private health insurance market in the United States, which is primarily organized around employer-sponsored insurance. Through SHOP, the ACA is investing in the continuation of this model, with all its pluses and minuses.

So if SHOP was necessary, why couldn't states just set up one marketplace to serve both individuals and small businesses, and save the time and trouble of setting up two infrastructures?

In fact, the ACA does give states considerable flexibility to manage the two marketplaces together (while keeping risk pools separate) or even to completely merge the two insurance markets (combining risk pools). However, from a management standpoint, individuals and small businesses are very different customers, with different needs. To serve small businesses, the SHOP marketplaces have to offer many of the functions currently performed for small businesses by insurance brokers and human resource departments, such as payroll administration.

So far only Vermont, Massachusetts and Washington, D.C. have tried to merge the individual and small-business markets, combining their risk pools. The concern here is that such mergers could raise premiums for small businesses, since the risk pool in the individual market will be somewhat unpredictable for the next few years. However, merging the two markets entirely once the individual market has stabilized could have the advantage of broadening the risk pool for both individuals and small business and lowering premiums, particularly in smaller states.

Whither SHOP?
Whatever the rationale for SHOP, the program is clearly off to a shaky start. The federal government has postponed some important aspects of the program, including the requirement that SHOP marketplaces offer online options for enrollment and that SHOP be able to offer employees a choice of plans. Some of the 17 states running their own marketplaces are implementing both these aspects of SHOP but none of the 33 states relying on the federal government are doing so.

These delays add to the impression that the long-term success of the SHOP is uncertain. Compared with the individual marketplaces, public subsidies will not play as great a role in attracting enrollees to the SHOP marketplaces; they will need to prove their value on their own merits. The determining factor will be whether they offer a product competitive enough to attract a stable risk pool. In this respect, they will face competition not only from the traditional small-business insurance market, but also from private exchanges, which may prove more agile.

Those of us who have followed the implementation of the ACA over the past four years may be forgiven for losing track of the SHOP in the drama that has surrounded the individual marketplaces and Medicaid expansion. However, one way or another, the ACA must address the problems facing small businesses in purchasing insurance for their employees. Whatever happens to the SHOP itself, its experience will offer essential lessons on reforming this segment of the U.S. health insurance system.

This post was co-authored by David Squires.