Health insurance reform: Good or bad for your bottom line?
By Phillip M. Perry
The federal “Affordable Care Act (ACA)” comes at a time of rising health insurance costs for small business owners. Annual premiums for employer-provided family coverage grew to just under $16,000 in 2012, a rate some four percent higher than 2011, according to a report from the Kaiser Family Foundation (kff.org).
Will the new federal law help put a cap on rates? If you have 50 or fewer employees you have a good chance of turning the new federal law to your advantage.
“Generally speaking the law is more favorable to smaller businesses,” says Shawn Nowicki, director of health policy at Northeast Business Group on Health (NEBGH), a coalition of 175 employers, unions and health care providers (www.nebgh.org). Nowicki points to a number of advantages geared toward the smaller operators. These include competitive state wide insurance exchanges, premium reform, and tax credits.
Here’s a rundown of how you may benefit from some of the law’s provisions:
Competitive exchanges. Competition is good. That’s the theory behind the new state wide health insurance exchanges, designed to allow small businesses to shop for plans from competing carriers. These exchanges will be available for employers with 50 or fewer people in 2014.
“To understand how the exchanges will work, imagine navigating to a travel website that aggregates airfares,” says Karl Ahlrichs, benefits consultant for Indianapolis based insurance broker Gregory & Appel (gregoryappel.com). “You type in your parameters and the site sorts your options and you pick what you want. That’s what employees will be doing with the exchange sites.”
Under the best of conditions the new exchanges will also help trim the human resources overhead, by providing a host of robust administrative services. “Businesses that send employees to the health insurance exchanges will be getting out of the health insurance management business,” notes Ahlrichs.
Premium reform. Small businesses have long been the targets of prohibitive premium hikes when one employee is hit with a costly illness. The new law levels the playing field. “Starting in 2014 insurance carriers will not be able to set premiums based on health status, sex or claim history,” says Julie Stich, Director of Research at the International Foundation of Employee Benefit Plans (IFEBP), a research organization based in Brookfield, Wisc. (ifebp.org). “That will help small group plans where one catastrophic claim can cause health costs to go up.”
Penalty exemption. If you have 50 or fewer full time employees you will be exempted from penalties for not providing health insurance. If you have more than 50 employees and your employees purchase insurance from the new state exchanges, you will pay a fine of $2,000 per employee who does so, excluding the first 30 employees from the assessment.
Tax credit. Finally, the law provides for a tax credit for businesses with 25 or fewer employees if the company pays at least half of the employee premiums. (See sidebar, “Figuring the Tax Credit.”)
Downward pricing pressure. The law may also encourage more transparency in the area of fees for medical services, says Ahlrichs. In consumer driven health plans people will be given a set amount of money with which they can shop for services. They will be able to go to a website, enter a service such as an “appendectomy” and get a list of physicians that perform that procedure, a quality rating and a cost. “Comparison shopping should put downward pressure on prices,” notes Ahlrichs.
Transparency. Do you know how much your broker is being paid for arranging your insurance? Today such commissions are buried in your premiums. This may change under the new law as pressure mounts to reduce administrative costs. Brokers may start charging fees for their services, which may well dampen overall costs while promoting accountability and performance.
There is another hidden benefit the new law may provide smaller businesses: access to higher quality personnel.
“Today at larger employers there are many high quality mid career professionals who are frustrated because they cannot be very entrepreneurial,” says Ahlrichs. “They would love to join a smaller organization where they can try things out, or they might want to band together and start something.”
In the current system, says Ahlrichs, if such people quit their current positions they are uninsurable. “They may have a daughter or wife who is a diabetic or cancer survivor. Or they themselves may have some chronic condition. As a result, they are handcuffed to their desks because of healthcare.”
When the exchanges come online the handcuffs come off. “There will be a significant shift in high performing talent out of the larger organizations and into smaller ones,” says Ahlrichs. “This could be a huge benefit to small entrepreneurial organizations which position themselves as places where talented people can exercise some freedom.”
Many business owners are upset about the minimum level of benefits required by the new law. In some cases those levels are higher than what is currently being offered in the workplace. That means greater expense in the form of higher premiums.
Will employers, as a result, drop health insurance coverage completely and opt to pay the fine? Ahlrichs thinks some will be tempted. “A lot of CEOs may want to tell their employees, ‘I want out of the health care business. Go to the exchange and I’ll pay the $2,000 fine.’”
Employers who decide not to offer the insurance should realize there are additional ramifications, points out Ahlrichs. The first problem is that the $2,000 fine is not tax deductible. The second problem is that the employees who go to the exchanges find out insurance is not free. “Maybe the premium for a family is $8,000 annually,” poses Ahlrichs. “Who pays it? If the employer wants to keep the employees, the employer may want to make them whole and give them the $8,000 needed to pay for their insurance.”
The story doesn’t end there, adds Ahlrichs: The premium payments are now taxable, so paychecks have to be grossed up to around $10,000, in the above example, so the employees can pay premiums out of after-tax dollars.
Put it all together and cessation of a health insurance program can backfire, concludes Ahlrichs.
Realistically, though, the decision to retain or drop health insurance might depend less on the costs of noncompliance than on what other businesses in the same employment market are doing. No one wants to lose top talent to other employers offering better benefits.
As a result, many businesses seem to be playing a waiting game. “We keep hearing statements such as ‘We are afraid to be the first one to drop coverage, but we are not afraid of being the second or third,’” says Nowicki.
Maybe that’s why most employers say they will continue to offer health insurance. “Employers see health insurance plans as important tools for employee satisfaction, retention, and for attracting talent in the future,” says Stich. “In our surveys only one or two percent of employers say they will not provide health insurance coverage.”
What steps should you take today? Start getting up to speed on the opportunities and requirements of the new law. Then take steps toward compliance.
“Now is the time to get some education,” says Nowicki. “Meet with your broker or health insurance advisor and learn what is coming down the pike from the perspectives of benefits and taxes.”
Employers need to take a look at their current health insurance plans and make the changes required to be in compliance. Then communicate these changes to employees and revise the plan descriptions and handbooks.
As for the decision whether to continue or drop coverage altogether, you will need to tackle that one before the end of this year. The so-called “play or pay” provision will activate in 2014. That means employers with over 50 employees must either offer health insurance with minimum requirements or pay a fine.
“It's not too early to look at this area,” says Stich. You will need to determine if your organization falls over the 50-employee threshold. That can be more difficult than it seems. You will need to calculate how many casual, part time and seasonal individuals fall into the category of “full time equivalent” employees.
As you tackle the vagaries of the ACA, keep in mind that the entire law is very much a work in progress. The federal government will continue to issue regulations that interpret the law for real world operations. State governments will jockey to set up exchanges of various kinds, or opt to let the federal government do the job. Finally, organizations competing for your employees may or may not set up attractive health insurance programs.
Perhaps the only thing that’s certain is that change is on the way. Now’s the time to get a handle on how the marketplace is changing. Then design a health insurance program that maximizes employee satisfaction while minimizing cost.
Figuring the Tax Credit
Answer the following questions: Do you have 25 or fewer full time employees? Are their average annual wages less than $50,000? And do you contribute more than 50 percent of your employee’s total premium costs?
If your answers are “yeses,” you may well receive some assistance with your health insurance premiums under the federal Affordable Care Act (ACA). You may be entitled to a tax credit of up to 35 percent of your contribution toward your employee’s health insurance for this tax year. The credit will increase to up to 50 percent for tax year 2014 and 2015.
For 2013, the full tax credit is available to employers with 10 or fewer employees whose average annual wages are $25,000 or less. The tax credit gradually scales down as workforce sizes and average wages increase.
Here’s an example. Suppose your business employs 10 fulltime workers and the average wages are $25,000. If your annual employer health care costs are $70,000 you are entitled to a $24,500 credit in 2013. Starting in 2014 the credit will be $35,000.
For some help on calculating your own credit, see the guidance recently posted on the web site of the Internal Revenue Service. Go to www.irs.gov and click on “Affordable Care Act Tax Provisions” then see “Small Business Health Care Tax Credit.”
Or, visit www.smallbusinessmajority.org and go to “Healthcare Tax Credit” in the upper right hand corner. Click on “Go to Calculator.”
Get some help
Knowledge pays. That goes double for a vast piece of legislation such as the Affordable Care Act (ACA). Want to learn more? Check these resources:
The U.S. Department of Health and Human Services (HHS) has launched a website to provide information about the health care reform legislation. Information: www.healthcare.gov .
The Kaiser Family Foundation has created an outstanding compendium of documents summarizing the health reform legislation. Information: http://healthreform.kff.org/ .
The Small Business Administration (SBA) has posted information on how health care reform will affect small businesses. Go to http://www.sba.gov/content/health-care-health-care-reform
Mercer, the New York based consulting firm, has mounted a useful site with documents and guidance about health care reform, geared primarily toward larger employers. Information: www.mercer.com/us-health-care-reform .
The success of the federal Affordable Care Act (ACA) will depend on the cooperation of insurance companies. Will they come through with competitive offerings in the state wide exchanges? So far the feedback is positive.
“Insurance carriers want to offer coverage in the exchanges,” says Robert Zirkelbach, spokesman for America’s Health Insurance Plans (AHIP), the national trade association representing the health insurance industry. “Our members have made significant operational changes and responded to the new rules and regulations. Despite the short time period, carriers are doing everything they can to be ready when open enrollment begins in October.”
Other sources agree. “Health insurance carriers have generally been cooperative and have put forth a number of ideas to make the exchanges successful,” says Shawn Nowicki, director of health policy at Northeast Business Group on Health (NEBGH), a coalition of 175 employers, unions and health care providers (www.nebgh.org ). “They are likely to participate because of the huge new market opportunity. The law may account for some 16 million new covered individuals nationwide.”
Award-winning journalist Phillip M. Perry has published widely in the fields of business management, workplace psychology and employment law..