Think Tank

How Small Businesses Can Make Most of Health Care Reform

Businesses — particularly small businesses — over the next several years will face several changes in the way their employees get health care. The health care reform law includes new regulations governing employers’ responsibilities, new tax credits for employers and the possibility of new insurance options for employers.

Tax credits, expected to be a relatively quick boon to small businesses, have been largely offset in California by insurance rate hikes. Because of recent increases, some businesses face higher coverage costs now than before reform.

California’s health insurance exchange, in the formative stages now, is expected to offer new, more affordable options for small businesses, but not until 2014.

Long-range navigation in the new system will be challenging enough for small businesses in California, but the next two or three years may be particularly tricky — and important.

We asked small business experts and insurers:

  • How can small businesses deal with new administrative burdens related to health care reform?
  • What will the state’s new health insurance exchange need to deliver to make it a good thing for small businesses and their employees?
  • What are the biggest benefits in the law? What is your greatest hope for long-term improvement?
  • What are the biggest challenges? What is your biggest fear — either short term or long term?

We got responses from:

Benefits, Premiums Both Increase

In the debate over health care reform, the bill’s proponents often talked of helping small businesses to cover their workers. Now that health care reform has been enacted into law, what can small businesses expect?

As with much of the bill, the changes affecting small businesses are a mixed bag. Small employers are the beneficiaries of one of the most tangible and immediate benefits written into the bill — the small business tax credits. Under this provision, employers with 25 or fewer workers and average wages of less than $50,000 are eligible for credits of up to 30% of their benefit costs if they contribute at least 50% of the premium. In 2014, the maximum credit will rise to 50% of benefit costs.

Small businesses will also benefit from the creation of state health insurance exchanges. While the details of how California’s exchange will operate have yet to be determined, we do know that it will offer small employers a kind of “one-stop shopping” — a way to offer their employees a broad array of health plan options without having to negotiate with multiple insurers.

The law will have a varied effect on premiums for small businesses.

Employers with primarily older workers will see some savings from the requirement that insurers vary rates based on age by no more than 3 to 1 starting in 2014. Today, insurers typically charge at least five times more for an enrollee in his early 60s as for one in his early 20s, which reflects average differences in medical costs. The limit on age-based rating, of course, means that employers with younger workers will see their premiums increase.

Premiums will also rise slightly for small employers due to the various mandated benefit enhancements, such as the requirement to cover dependents up to age 26, the elimination of lifetime coverage limits, guaranteed coverage for children and preventive benefits at no cost to employees. Over time, however, those increases may be more than offset by programs designed to incentivize more efficient and coordinated medical care.

Until those programs bear fruit, the impact of reform on insurance premiums will be marginal compared to the significant increases resulting from the relentlessly rising cost of hospital care, prescription drugs and other medical services.

Not Easy To Change $2.5 Billion Industry

I’m not sure we know all the administrative burdens small businesses will face.  There are literally thousands of regulations that will be written in the coming years and this could result in more administrative burdens. The changes we know about include:

  • In 2011, employers will be required to report the value of health benefits on their W-2s;
  • In 2012, companies will be required to complete 1099 forms for every business-to-business transaction of $600 or more; and
  • In 2018, the so-called Cadillac Tax will be implemented and while this currently has a fairly high threshold, medical inflation could put significantly more people into this category.

Jon Kingsdale, the former executive of the Commonwealth Insurance Connector in Massachusetts, said it best, “The Health Connector runs a market that makes the purchasing transaction relatively easy and inexpensive, offers trustworthy choices, and is transparent about the value of its offerings.”

California’s health insurance exchange also must be allowed to aggregate purchasers like small business and negotiate rates from a position of strength.  It also needs to reduce administrative costs.

Lastly and most importantly, the exchange must be able to market itself.  As Kingsdale says, the exchange sells insurance.

The biggest benefit of the law is the possibility of lowering health insurance costs for small businesses through the exchange and through implementing cost controls in the health system.  Quite frankly, it is not clear at this point whether that will happen.

A second benefit is that the millions of sole proprietors in the country will be able to obtain insurance regardless of their health conditions.

The biggest challenge will be reducing the cost of our health system.  The current bill that was passed does not have enough cost control measures. We need to make sure our health system of the future pays for quality, not transaction.

My biggest fear is that the special interest providers, insurance companies, and even some consumer groups will take over the implementation of the health bill. I also fear government intervention such that, instead of lowering costs, they use regulation as the vehicle to control costs.

Put simply, I hope the people who profit from our current health system and are opposed to change don’t drown out those who recognize our current health system is inefficient and unsustainable.  It is not easy to change a $2.5 billion industry.

Benefits Could Go Beyond Small Businesses

The Affordable Care Act will benefit many small businesses, their employees and self-employed Californians, reducing a major obstacle to small business creation and competitiveness.

The law has significant potential to make coverage more affordable in the small group market by reducing administrative costs and increasing bargaining power with insurers through the new exchange, and by providing $4.4 billion in health insurance tax credits to California small businesses over 10 years. We estimate that 450,000 Californians will be eligible for subsidized coverage through their small employer or a family member’s small employer in 2016.

Nearly one million additional self-employed and small business employees who are currently uninsured or purchase coverage in the individual market will be eligible for subsidized coverage in the exchange and another 660,000 will be eligible for Medi-Cal.

These changes should serve to make small businesses more competitive in attracting employees and help open the door to greater entrepreneurship. Expanded access to health care can be expected to raise productivity through improved workers’ health, increase labor-force participation and create better matches of jobs to workers’ skills. Decreased “job-lock” provides the greatest benefit to smaller firms that cannot currently offer coverage comparable to that offered by their larger competitors.

The biggest challenge will be avoiding risk selection between the exchange and the small group market outside of the exchange. Tax credits are only available to businesses that purchase coverage in the exchange, but, unlike with individual coverage, the credits will affect a relatively small part of the total small business market (about 12%).

The law requires insurers to charge the same premiums for any product inside and outside the exchange, but is silent on which levels of coverage are offered outside. If insurers offer lower benefit products in the outside market, it could lead to adverse selection against the exchange. Risk adjustment will mitigate this in part, but is unlikely to fully resolve the problem.

The state Legislature is currently considering legislation to standardize products in the individual market between the exchange and outside market. Further steps will be needed in the small group market as well. The new exchange will have significant market clout from an anticipated 2.5 million to 4.6 million lives in non-group coverage.

In the end, success will depend on using that clout to drive delivery system reform and reduce the overall rate of premium growth. If successful, the benefit would go well beyond small businesses.

Small Businesses Must Stay Informed

For years, small businesses have spent significantly more for health insurance than larger firms, which blunts their competitive edge and threatens their bottom line. The new health care reform law aims to level the playing field and get them some relief from skyrocketing costs, and it’s imperative that small business owners learn about how the law will affect them so they can reap the benefits now and in the future. 

One of the biggest benefits of reform for small businesses will be the creation of health insurance exchanges — marketplaces where small businesses and individuals will have more coverage options with more reasonable prices, thanks to their pooled buying power. In California, 3.76 million small business employees and their dependents, as well as 840,000 self-employed people, will be able to purchase insurance through the state exchange. This will create maximum competition that improves quality, increases choice and lowers costs.

The one-stop shop model will also greatly decrease the administrative burdens small businesses without human resource departments currently face when they shop for, compare and enroll in plans. But the exchange must be implemented correctly for these benefits to come to fruition. It needs to be as large as possible, to spread risk, reduce insurers’ administrative costs and invite more competition; it should have the authority to actively negotiate prices with insurers; and the same rules must apply to insurance sold both outside and inside the exchange.

One of the biggest challenges small business owners will face is staying informed. Health care reform is complex, and there’s a tremendous amount of misinformation out there. It’s imperative that we separate fact from fiction. There are a number of resources that break health care reform down into easily digestible portions, including the Kaiser Family Foundation website and an Internal Revenue Service page that gives a good overview of the small business tax credits. Small Business Majority’s site includes an in-depth frequently asked questions section, as well as an online tax credit calculator.

Many of these reforms should finally effect real change that will bolster California small business owners’ bottom lines, which in turn will help jumpstart the state’s economy at a time when we desperately need robust economic growth.

Mixed Bag for Small Business

When health care reform passed earlier this year, many small businesses held their breath — and waited for the other shoe to drop.  The other shoe being what else besides health care reform was in the bill that was signed into law.  As most now know, some of what is in the new health care law has nothing to do with health care and many wonder why such things were included.

To be sure, for some businesses, there are some benefits to be found in the new law — and for many, any benefits are quickly erased by the increased cost of doing business.  For example, if you happen to “grow” your business or already have more than 50 full-time-equivalent employees, you will quickly find yourself facing an employer mandate that penalizes you with hefty fines if you don’t offer coverage and even fines if you do offer coverage but don’t provide a contribution that the government deems to be “affordable.”  These kinds of regulatory hoops force small business owners into difficult situations when trying to determine whether or not to offer coverage, grow their business or hire that next employee.

Another provision in the health care law that creates similar challenges for small businesses is the small business tax credit.  Without a doubt, a small segment of the small business population will see some temporary relief provided from the small business tax credit.  But to determine your eligibility, you must understand and complete the three-part test that helps you determine whether you qualify.  Specifically you must: 

  • Offer health insurance and pay at least 50% of the premium;
  • Have an annual average wage of less than $50,000; and
  • Have fewer than 25 employees.

However, the biggest concern for small businesses in the long and the short term remains the same: costs.  Small business has long cited cost as its number one issue and sadly, there is little to nothing in the new health care law that provides permanent and long-term cost savings for small business.  The Congressional Budget Office predicts plans in the small group market will see 1% to 2% percent savings in 2016, while those in the individual market will experience a 10%-13% increase in their health insurance costs.

Another cost concern is the new health insurance tax that will be levied on plans that are purchased in the fully insured market.  This is not the “Cadillac” tax that you heard so much about, but instead, it is a tax (called an insurer fee) that will be levied on the very plans that more than 80 percent of small businesses purchase today.  This is an especially hard hit for Californians struggling to afford health care because there is a large proportion of consumers buying their insurance in the fully insured market.  And to add insult to injury, most large businesses and labor unions won’t have to pay this insurer tax.

While there are limited benefits for some, there is no doubt that the new health care law will leave many small businesses with significant new costs and responsibilities.  That is why NFIB remains focused on other legislative solutions that can increase affordability, choice and competition for health insurance. One small businesses-centric solution is a voucher or defined contribution-type approach that would allow small business owners to voluntarily make tax-free contributions to their employees’ health care plans, and that allow those employees to spend that money tax-free to select the health care plan that best suits their families’ needs.