Small business’ insurance costs
Employers weigh options as insurance regulations fall into place
Andy Carlson’s plans to expand from two Colorado hardware stores to three will largely depend on three things, he says: potential profits, estimated expansion costs and the Patient Protection and Affordable Care Act.
With two hardware stores in Denver, Carlson’s payroll qualifies as a small business under the Affordable Care Act. But he might not with a third store. Small employers do not face a penalty for full-time workers who buy insurance through an exchange and receive a federal subsidy to do so. All other businesses, however, could pay fines should full-time employees end up with a subsidized health plan purchased through an exchange.
The penalties, and other provisions in the law that will affect how insurers set premiums and benefits, go into effect in roughly one year along with a mandate that nearly all workers have insurance or pay a penalty of their own.
With a flood of proposed regulations for the law’s insurance provisions in the past six weeks and time running out before rules go into effect, employers are looking more closely at what coming changes will mean for the cost of doing business, with some reportedly choosing to slash workers’ schedules to keep their hours below 30 per week, the law’s definition of a full-time worker.
The policies—and other provisions in the law that more closely regulate insurance markets and subsidize insurance for lowand moderate-income families—seek to bolster access to insurance through an employer, the nation’s primary source of coverage and one that has eroded and grown increasingly costly for businesses and households. The law also created specific exemptions and incentives for small businesses, where employers have been less likely than large companies to offer health benefits.
“It’s extremely expensive, and every year it goes up and up,” Carlson said. “To me, the Affordable Care Act is a misnomer. Affordable care isn’t about insurance. Affordable care is about addressing the cost of healthcare. The cost of healthcare is out of control.” Combined with a provision that allows states to expand Medicaid, the law’s combination of insurance market rules and incentives is the underpinning for the law’s massive push to reduce the nation’s uninsured by 14 million next year and as many as 30 million by 2022.
“Expect to see more activity,” said Peter
Marathas, an employee benefits attorney with Proskauer Rose in Boston. One newly released rule said businesses will use employment levels this year to determine the size of payroll and number of full-time workers under rules next year. Marathas said that will likely prompt employers to react to the law this year. “It forces their hand,” he said.
That activity may be some “trial and error” as employers weigh their options, said Paul Fronstin, an economist and director of the health education and research program at the Employee Benefits Research Institute.
Calculating the cost of the law is not limited to the added expense of health benefits, say experts in health policy and employee benefits. Other factors include unemployment rates, turnover and training costs and demand for skilled workers. Fronstin said he’s skeptical employers will move quickly to cut workers’ hours.
“It’s not that simple,” he said. Slashing hours for one worker may mean hiring another to pick up the workload. Hiring and retaining that employee could be tricky, depending on the skills needed, competing employers and the job market, which varies regionally. Employment trends which are gradually improving are also restoring some of workers’ leverage in the labor market, he said.
Judith Feder, a health policy professor with the Georgetown University Public Policy Institute, said companies that rely on exchanges for insurance coverage leave workers without the tax benefit of employer-sponsored coverage (workers’ contribution is paid with salary before taxes; that’s not the case in the exchange) and risk competitors luring workers away with more attractive offers. Those that gamble “may lose in the process,” Feder said.
“The decision about whether or not to offer benefits and how to offer benefits really comes down to more than cost,” said Shawn Nowicki, director of health policy for the Northeast Business Group on Health. She said debate over reaction to the law among the group’s members falls between the extremes of complete employee coverage and no benefits whatsoever.
Penalties in the law apply to businesses with 50 or more full-time equivalents, or workers with enough hours to equal 50 employees who work at least 30 hours per week. Employees who work at least 30 hours may trigger the penalty if they buy coverage through insurance exchanges created by the law and receive subsidies available through the law for low-income buyers.
An employer that does not offer insurance will pay $2,000 for every full-time employee on the payroll if any worker triggers the penalty, though the law exempts 30 full-time employees from the total.
An employer that does offer insurance faces an alternative penalty. If benefits meet the law’s standard for an affordable policy, an employer won’t face any penalties for full-time workers who turn to the exchange. But if the benefits are deemed unaffordable and any full-time worker triggers the penalty, an employer will pay the lesser of $3,000 per employee with subsidized insurance through an exchange or $2,000 for every
full-time worker beyond the first 30.
Small employers with fewer than 50 fulltime equivalents are exempt from any penalties, and the law offers premium tax credits for two years to the smallest businesses with the lowest average salaries.
Insurance marketing and administrative costs, which get added to premiums, will likely drop as small businesses shop through an exchange instead of separately, said Linda Blumberg, a senior fellow at the Urban Institute who has modeled possible employer reactions to the law. Another directive that sets rules for how insurers set premiums prohibits insurers from adjusting premiums based on health status, which Blumberg said will lead to more stable year-over-year healthcare costs.
However, small businesses with largely young, healthy workers will likely see premium costs climb as insurers adjust premiums for the new standards.
The law’s new rule to establish a minimum set of essential health benefits may also raise premiums as small companies are forced to expand benefits to meet the new requirements. The law also mandates financial coverage for small business insurance, which could require employers to shoulder a greater share of the expense, said Michael Miller, director of strategic policy for Community Catalyst, a not-for-profit healthcare access advocacy group based in Boston.
Federal officials will finalize proposed rules in coming months that will affect employers’ incentives, Miller said, such as one that could determine whether workers’ spouses and children are eligible for subsidies when an employer offers health coverage considered affordable. (Tax credits are not available to workers whose employers offer coverage deemed affordable under the law’s criteria.)
It’s unclear yet how employers will respond, he said. “We just don’t know where it’s going to land.”
Molly Brogan, a spokeswoman for the National Small Business Association, said even without the risk of penalties, the trade group believes policies such as the restrictions on premium adjustments and standards for essential health benefits will increase costs for small employers. “They’re going to have to charge everybody more,” she said.