Virginia: Important development re. #TinyGroupLaw (MAJOR UPDATES!)

Several weeks ago I wrote about a bit of a bombshell development in Virginia:

Members of local advocacy group Charlottesville For Reasonable Health Insurance had provided testimony at the Virginia General Assembly and organized an email campaign, helping to ensure passage of the bill through the legislative session. Introduced by Sen. Creigh Deeds and effective July 1 2018, SB672 will allow self-employed people to take advantage of the much more affordable health plans in the small group business marketplace, without having to hire employees.

...Charlottesville and surrounding counties (Albemarle, Green, Fluvanna) have by far the most expensive healthcare premiums in the nation in 2018. Rates more than tripled for consumers buying coverage on the ACA Individual Exchange, making comprehensive insurance unaffordable for people who do not qualify for subsidy assistance. A typical family of four is being charged $3000 per month for high deductible plans.

“SB672 will provide critical relief for our self-employed community, who are unable to afford the 300% premium increases foisted upon us this year by Optima” said Shawn Cossette, who made numerous trips to Richmond to lobby for the bill. “These small group policies are ACA compliant covering pre-existing conditions and preventative care, which I feel is as important as being affordable.”

...“The new law will help many people in our group who operate their own business but don’t have a full-time employee on payroll to qualify under the old regulation. But it’s a work-around, not a fix to the issue of the BOI approving Optima’s scandalous rates in the individual market. And there are many people in our group still out in the cold, like early retirees.”

Two weeks ago, Virginia Gov. Ralph Northam signed SB672 into law, but there remained several major potential problems, some legal, some economic, some logistical:

1. It would, of course, damage the remaining ACA individual market even further, since perhaps 24% of the unsubsidized ACA market would flee that risk pool...and presumably it would mostly be a fairly healthy 24% (on the other hand, given how dire the situation is at the moment, most of these folks can't afford to pay full price for indy policies now, which is the whole reason they came up with this workaround in the first place).

2. It might violate the ACA outright, since the ACA actually requires at least one paid employee for small group status

3. It's possible that these policies would end up being categorized as Association Health Plans (AHPs) instead of Small Group...which, thanks to Trump's #ShortAssPlans executive order, could mean they'd end up being treated as Large Group plans, which in turn would allow them to have some ACA protections stripped.

4. Even if they're allowed legally and categorized as Small Group plans as intended, it's possible that none of the carriers will want to offer them, since Group plans can be sold year-round under the ACA instead of being restricted to the Open Enrollment Period.

I've decided to shorthand this new law as #TinyGroupLaw for the moment until I come up with something better.

Anyway, for good or for bad, it sounds like there's been one more hurdle cleared:

Big win today. The VA Bureau of Insurance has firmly and clearly upheld SB672 in response to Insurance industry’s appeal, which will allow self-employed individuals to purchase small group plans. Good day for consumers! #Healthcare

— Cville Healthcare (@cvillehlthcare) June 4, 2018

The Charlottesville Healthcare folks say they plan on posting a link/details on what this development means soon. It sounds like this just clears things at the state level; it would presumably still have to survive rulings by CMS (and possibly a federal court?) without being morphed into large group plans (which would defeat much of the purpose of allowing them in the first place), and again, I suppose it's conceivable that the carriers would just bail on the small group market altogether if they're that unhappy about it, though that seems unlikely.

Stay tuned...

UPDATE: From the Charlottesville Healthcare Facebook group:

Update on 672: We received a copy of the BOI's response to the Virginia Association of Health Plans and are happy to report that the BOI has firmly and clearly upheld SB672, which will allow self-employed individuals to purchase small group plans. We are still awaiting details from brokers on actual timing.

Thanks to everyone who provided the personal testimonials that we shared with the BOI.

Here's the text of the letter itself:

June 4,2018

To: All Health Carriers Licensed in Virginia in the Individual and Small Group Markets and All Interested Parties
Re: Implementation and Enforcement of Senate Bill 672
§§ 38.2-3406.1 and 38.2-3431 of the Code of Virginia, as Amended

The purpose of this Administrative Letter is to provide guidance to health carriers regarding the implementation and enforcement of the above-referenced statutes that were amended and reenacted by the 2018 Virginia General Assembly, and that will take effect on July 1, 2018.

Whoa. A July 1st start date is gonna play havoc with the current 2018 ACA risk pool for the second half of this year...then again, I'd imagine that very few people earning over 400% FPL in the Charlottesville rating area are enrolled in ACA policies right now anyway, which is kind of the problem in the first place...

The current law requires that a "small employer" employ at least one employee but no more than 50 employees on the first day of the plan year and on business days during the preceding calendar year.

The new law broadens the definition of "small employer" in §§ 38.2-3406.1 and 38.2-3431 of the Code of Virginia ("Code") to include a "self-employed individual,"1 and to allow a sole shareholder of a corporation or a sole member of a limited liability company ("LLC"), or an immediate family member of such sole shareholder or sole member, to count as an employee of the corporation or LLC, provided that the individual has performed a service for remuneration under a contract of hire.

In other words, you can include your spouse, child or parent on the "small group" plan as long as they're actually employed by the company and earn a living at it. Fair enough.

The Bureau of Insurance ("Bureau") has received several questions regarding the potential conflict between the provisions of SB 672 and the manner in which federal laws, rules and guidance define a small employer who is eligible to purchase health insurance coverage in the small group market. While the inclusion of sole proprietors in the definition of "small employer" does conflict with the definitions of "small employer" as administered by the Department of Health and Human Services, the Department of Labor, and the Internal Revenue Service, § 1321(d) of the Patient Protection and Affordable Care Act ("ACA") specifically provides that federal law shall not be construed to preempt any state law that does not "prevent the application" of the ACA. This provision grants states the flexibility to enact laws and regulations that broaden the protections in the ACA, but that do not inhibit them. SB 672 does not prevent the application of the ACA in the sense that it broadens the definition of "small employer," and does not limit it further than contemplated by the ACA.

In other words, the Virginia BOI has decided that as far as they're concerned, SB672 doesn't violate the ACA because it "broadens the protections" without "inhibiting them". Again, I presume this will get kicked up to the federal level at some point...

In contrast, had SB 672 required that a small employer consist of at least two employees in addition to the employer, it would have prevented employers with just one employee from purchasing coverage in the small group market as permitted by the ACA, and would have clearly been preempted by federal law. Given the fact that SB 672 does not restrict application of the ACA, we find no federal preemption issue.

Interesting take. I'm no lawyer, so I haven't a clue whether this reasoning is sound or not.

Additionally, Virginia is not the only state that has enacted a law that requires health carriers to treat a sole proprietor as a small employer group. Other states require carriers to comply with state laws similar to Virginia's, and carriers in those states have managed to do so while also complying with federal rules pertaining to medical loss ratio ("MLR") and risk adjustment.

I assume this refers to other states with similar laws on the books prior to the ACA, though I don't know which states those are.

In addition to these general questions regarding the feasibility and legality of enforcing SB 672, the Bureau has received several specific questions regarding its implementation. These questions, and the Bureau's responses to such questions are as follows:

  • 1. Would the Bureau consider limiting these signups to January 1, 2019 so as to allow those enrolled in an individual plan to finish their coverage year?

No. As stated above, these statutory changes take effect on July 1, 2018. Pursuant to §§ 38.2-3432.2, 38.2-3448, and 38.2-508 (2) of the Code, the Bureau is not permitted to create an enrollment period for sole proprietors that is separate and distinct from the enrollment period that is created for all small employers. To do so would be unfairly discriminatory.

  • 2. Would the Bureau consider limiting the small group signups for these sole proprietors to once a year, ala an enrollment period similar to the individual market?

No. We understand that health carriers may want a limited enrollment period to prevent adverse selection. However, as described above, Virginia law does not allow the Bureau to provide a limited open enrollment period for a portion of the small group market but not the entire small group market. A carrier should administer enrollment of these sole proprietors and apply reinstatement provisions in the same manner as with other small groups. For example:

  • Open enrollment will occur only once per year and will be set by the employer;
  • The employer will offer an initial enrollment period during the year to any new subscribers or dependents only when first eligible;
  • Coverage for new subscribers or dependents who join the group during the year (not the initial enrolling sole proprietor) may be subject to a waiting period not to exceed 90 days; and
  • Subscribers or dependents who did not enroll when first eligible may only enroll at the next open enrollment period, unless they qualify for a special enrollment based on a qualifying event.

The carrier may require any of the above information to be included in application materials as may be done currently for small groups.

  • 3. Does the Bureau envision a change in MLR calculations to account for the sole proprietors added to the small group risk pool?

No. Sole proprietors that join the small group risk pool will be part of the individual risk pool for purposes of the federal MLR calculations. The changes to §§ 38.2-3406.1 and 38.2-3431 of the Code do not alter the federal definitions related to MLR calculations. However, for the purposes of filing rates in Virginia, the experience of sole proprietors should be included in the small group risk pool if a small group plan was issued.

Huh. This one is interesting--they'd be enrolled in the small group risk pool...but would be considered part of the individual risk pool. I'm sure actuaries throughout Virginia will love that one..which brings us to...

4. How does the Bureau plan on calculating risk adjustment under the new rule?

We assume that the question is whether sole proprietors will be included in the small group risk pool for purposes of risk adjustment. Again, this is a federal calculation and therefore, this adjustment is based on the federal rules related to risk adjustment.

I have no idea what that means. Sounds messy to me...

5. Does the bill violate guaranteed availability statutes at either the state or federal level?

No. This new law will require a carrier that offers any health plan in the small group market to offer that plan to a sole proprietor, pursuant to § 38.2- 3448 of the Code. Likewise, any carrier that offers coverage in the individual market must offer coverage to a sole proprietor as an eligible individual. The only exception is for the Federally-facilitated Small Business Health Options Program ("FF- SHOP"). Federal rules do not permit a sole proprietor to obtain coverage through the FF-SHOP.

In other words, if a carrier offers any policies in the individual market they have to also offer policies in the small group market including to "tiny groups" of one or two. They aren't gonna like that one bit, I'm guessing...

UPDATE: Hmmm...Louise Norris suggests that the "required to sell" part may simply mean that a carrier offering both Indy and Sm. Group plans might have to let self-employed folks enroll in either one. That makes more sense, but also seems self-evident to me since the carriers don't want indy enrollees moving to sm. group plans in the first place. Hopefully this will be cleared up...

UPDATE x2: OK, Norris says she's confirmed that all this means is that if a carrier offers Indy plans they would still have to offer them to the self-employed folks and vice versa. In other words, the self-employed demographic would be able to choose either the ACA Indy market or the Sm. Group market.

  • 6. Would plans be allowed to request a sole proprietor's W-2 for the purposes of employment verification?

A W-2 cannot be required for a sole proprietor since the more relevant documentation is the tax documentation cited in the definition of "self-employed individual" in § 38.2-3431 of the Code.2

  • 7. If the Bureau directs plans to allow immediate enrollment on July 1st, will plans be permitted to update their rates in both the individual and small group markets?

No, not for July 1, 2018. Pursuant to 45 CFR § 156.80(d)(4)(i) and (ii), a carrier may not establish the index rate and make market-wide adjustments more frequently than annually, except for the small group market rates, which may be adjusted quarterly. Thus, while federal law prohibits a carrier from adjusting rates in the individual market for 2018, an adjustment can be filed for the small group rates effective October 1, 2018. The timeframe to adjust small group rates for July 1, 2018, has passed. A rate revision may also be filed for the 2019 individual and small group market rates, as applicable, based on valid actuarially-sound assumptions.

Ouch. Yup, as I noted above, this could potentially mean a significant exodus of ACA indy enrollees starting as soon as next month, hitting the individual market risk pool mid-year. Again, though, I can't imagine too many unsubsidized enrollees are in that market now in the Charlottesville area anyway?

  • 8. Does the bill permit plans to enroll joint owners of a "mom-and-pop" business in small group coverage?

No. If they are both owners of the corporation or both partners in an LLC, there is no sole shareholder or sole member, and thus, no employees under the new law. If, however, either of the owners is the sole shareholder of the corporation or sole member of the LLC, then that owner and an immediate family member of that owner would qualify as employees and coverage could be obtained in the small group market.

Whoops! OK, that's actually an unexpected twist--it would only work if one spouse is the owner and the other one is an "employee", but not if they're both partners. Huh.

Given the short timeframe for carriers to implement these changes, it will not be necessary for carriers to refile forms and coverage documents for the 2018 plan year to include the new small employer definition. However, forms filed for the 2019 plan year must not conflict with the new definition for small group coverage outside of the FF- SHOP. If a carrier determines that forms for the 2018 plan year will need to be revised for purposes of managing enrollment as described in #2 above, the carrier should contact the Bureau immediately to discuss any necessary changes and the best method for accomplishing such changes.

On the other hand, the carriers are already gonna have to refile their 2019 rates due to the impact of the just-passed Medicaid expansion bill anyway (since a good 25% of current exchange enrollees will likely be moved over to Medicaid in January), so this is just more fun number-crunching for everyone!

There's also some footnotes:

1 The new law defines "self-employed individual" to mean, "An individual who derives a substantial portion of his income from a trade or business (i) operated by the individual as a sole proprietor, (ii) through which the individual has attempted to earn taxable income, and (iii) for which he has filed the appropriate Internal Revenue Service Form 1040, Schedule C or F, for the previous taxable year."

For purposes of this Administrative Letter, the term "sole proprietor" will be used to describe all individuals that qualify as a small employer pursuant to Senate Bill 672.

2 The Bureau acknowledges that the new law does not require equivalent documentation for a sole shareholder of a corporation or a sole member of an LLC, but the Bureau will permit carriers to require appropriate tax documentation from the previous calendar year for such a sole shareholder or sole member as well as the immediate family member of such sole shareholder or sole member.

Whew! There's a lot to absorb/digest here. It sounds like the folks who crafted the precise wording of the law did some pretty intricate work to work around the various state and federal regulations, resulting in some really interesting results (especially the bit about a husband/wife team not being able to enroll unless only one of them is officially an LLC owner). It also sounds like this will prevent any carriers from taking their ball and going home altogether--if they want to sell on the individual market at all, they have to also sell to the #TinyGroupLaw...the only way out of it appears to be to bail on both the small group and individual market, leaving only the large group market?

Assuming I'm not misunderstanding any of the above too much, and assuming this makes it through to actual implementation, it sounds like the 2nd, 3rd & 4th problems I listed above ("might violate ACA", "might be categorized as AHPs instead of Sm. Group" and "carriers might bail altogether" should be effectively scratched off the list.

If so, that would just leave the first (and most glaring) problem: These folks shifting to the Sm. Group market would, once again, likely worsen the already-ugly ACA-compliant Individual Market for the remaining ~76% (?) of unsubsidized enrollees. Once again, however, things are so drastic in Charlottesville that I'm not sure that matters much at this point.

Anyway, I'll leave it there for now; I'm sure others more knowledgable than I about this stuff like Louise Norris, Wesley Sanders etc. will set me straight if I have any of my comments above wrong.

UPDATE: Bonus! I've acquired the letters to the Virginia Insurance Commissioner from the Virginia Association of Health Plans opposing the law as well as the letter from Charlottesville for Reasonable Health Insurance supporting the law (see below).

UPDATE: Commenter M E below notes that while the disruption to the individual market probably (and to the small group market) wouldn't be very big of a deal in the Charlottesville area, it very well could be in other parts of the state.

In short, this is still a very awkward, shaky workaround; I like it better than I did before but still have severe reservations.