How Much After Healthcare Reform?
How much will healthcare reform cost or save your small business? It depends.
The intent of federal legislation is to make healthcare coverage more affordable for small businesses. The definition of a small business in regard to eligibility criteria, requirements, incentives, and disincentives vary. In general, though, companies with 50 employees or less that offer healthcare coverage stand to benefit most from recent legislation
Cost savings could be realized through 1) tax credits, 2) lower costs of medical coverage based on SHOP Exchange rates along with changes in insurance underwriting guidelines, and 3) lower administrative costs associated with streamlined delivery of services through Exchanges.
However, certain small businesses might spend increasingly more if they purchase relatively expensive health plans for their employees, triggering an excise tax. Though the policy issuers, generally insurance carriers, are responsible for paying this tax, there is concern that they may pass these expenses back to businesses in the form of higher premiums.
Tax credits starting in 2010, up to 6 years
For starters, small businesses that offer healthcare coverage (medical as well as dental and vision) could save money. Beginning in 2010, if your company has 25 full-time equivalent employees (FTEs) or less, and the average wage of your employees is less than $50,000 (not counting owners and family members), and your company pays at least 50% of employee-only insurance premiums, then you may be eligible for tax credits.
Businesses could recoup up to 35% of premium costs from 2010 to 2013 and 50% of these expenses for two more years, starting in 2014. For more information, see the IRS's three-step process to determine initial eligibility and the White House's Health Reform Small Business Guidance.
Cost savings on healthcare premiums and administrative costs, starting in 2014
Small businesses should have greater access to affordable healthcare insurance plans primarily because of Small Business Health Options Program (SHOP) Exchanges and related legislative mandates. Underwriting guidelines favoring community rating rather than individual rating and consumer protections address insurance practices that often resulted in excessively high expenses for many small businesses.
Specifically, Kaiser Family Foundation's Health Reform Implementation Timeline indicates these new requirements mandated for implementation by 2014 consist of "guarantee issue and renewability and allow rating variation based only on age (limited to 3 to 1 ratio), premium rating area, family composition, and tobacco use (limited to 1.5. to 1 ratio) in the individual and the small group market and the Exchanges."
The Exchanges allow pooling of risk among many employees of multiple employer groups, similar to the risk advantages that large corporations with thousands of employees enjoy.
In addition to the possibility of lower rates initially, rates should hold steady over time; for example, one employee with a serious illness will have much less or even negligible impact on premium rates compared to dramatic increases that would have likely occurred prior to reform legislation.
There has been some controversy regarding unfair risk spreading due to community-rating requirements. However, federal rules are less strict than many states. For example, federal legislation limits age rating variation to a 3:1 ratio (that is, older employees can be charged up to 3 times the amount of younger employees) whereas New York and Vermont make age rating illegal and other states control variations at rates lower than federal rules. Wherever a company is on the age spectrum now, limits to age ratings should allow the business to control fluctuations in costs over time, even as its employee population ages.
Excise tax on high-value plans, starting in 2018
The 40% tax on relatively expensive healthcare coverage (commonly referred to as "Cadillac" plans) will be charged to the company that issues the insurance policy, which might in turn add to the policy fee, causing costs to spiral upward. The tax is on the amount that exceeds the value of the thresholds, which are $10,200 for individuals and $27,500 for families.
However, these thresholds will be higher for employee groups that have higher healthcare costs because of factors such as age or high-risk occupations. And, the threshold will be increased for all groups if healthcare costs rise higher than expected in 2018.
Steps to take now in order to control spending later
1. Consider the value of offering healthcare insurance in attracting and retaining a qualified workforce, often the cornerstone of an employee benefits package.
2. Decide whether you want to begin or continue offering medical coverage to your employees.
3. Evaluate your current plan coverage, its appeal to your employees, and its value compared to employer plans in your geographic area and industry.
4. Monitor the development of state-based SHOP Exchange offerings and insurance programs (see RAND Health COMPARE for information on state initiatives).
5. Read more about federal legislation (see Summary of Health Reform Law) and stay alert to possible changes in guidelines.