Reform and Rising Health Care Costs: What Is the Impact of Proposed Changes on Your Business?
Looking for a Cure: Analyzing the impact of the Obama health care reform and rising costs on your business.
By Matthew Harrison
Date Posted: 12/1/2011
As 2011 comes to a close, questions about President Obama’s highly publicized Patient Protection and Affordable Care Act linger for many small businesses still reeling from the nation’s worst economic crisis in decades. Companies large and small are struggling to turn red balance sheets to black and recoup losses sustained over the last three years. Some employers fear that federally mandated health care reform may only add to their fiscal burden without alleviating any of the current financial strain.
Data from the Kaiser Family Foundation and the Health Research and Education Trust survey of employer-sponsored health benefits indicate that premiums for single and family coverage have increased over 9% since last year. For families, the cost of premiums jumped from $13,770 in 2010 to $15,073. In 1999, the average cost of premiums for an entire family was only $5,791 but the same amount of money would barely cover the cost of individual coverage today.
Michael Doyle, owner of Memphis-based The Pallet Company, recently expressed frustration with the challenges rising health care costs pose to the industry. “The premium increase doesn’t represent fairly what that increase was because our benefits went down,” Doyle explained. “You’re trying to keep your premiums at a reasonable rate, so then your co-pays go up.”
Prescription drug costs and co-pays for specialists have steadily increased, too, which means employees are frequently footing the bill for rising healthcare costs. “We certainly don’t like to see that,” said Doyle.
One of Doyle’s top priorities as a business owner has been to keep his staff healthy, but he also encourages them to have the freedom of choice. He currently offers tiered health benefits, which ranges from complete coverage for an employee and his/her family to employee-only coverage.
Some of the employees getting their hands dirty and working the lines refuse health coverage in lieu of bigger checks at the end of the pay period, according to Doyle. Even though The Pallet Factory offers health benefits, its premiums may not be as high as it could be because employees willingly opt-out of the plan. “If I have to pay for all the employees, it puts a tremendous strain on us,” Doyle added. “We’ve just battled through one of the worst recessions I’ve ever seen in the 34 years that I’ve been in this business.”
The Affordable Care Act officially became law in March of 2010, but changes impacting small businesses and health care consumers are being implemented incrementally through 2015. Legal reforms protecting consumers that have already taken place include the elimination of lifetime limits on insurance coverage, prohibiting denial of coverage for children with pre-existing conditions, and establishing federal grant funding for local consumer assistance programs.
One of the most vilified aspects of the reforms is a penalty for companies that do not offer employee coverage. In assessing the impact of the Affordable Care Act, the size of a business should be taken into account. For the most part, businesses with less than 50 employees will be largely unaffected. Effective March 1, 2013, large businesses that average greater than 50 full-time equivalent employees during a calendar year will face income tax penalties of $2,000 annually for each uninsured employee (or about $167 per employee per month without coverage).
Firms offering minimum essential coverage that pays at least 60% of medical expenses from eligible employee-sponsored plans will be exempt from the penalty, but premiums paid by employees must cost less than 9.5% of the employee’s household income. However, if either of these two conditions is not met starting in 2014, the penalty for employers increases to $3,000 per employee annually, even if employees refuse coverage and opt for insurance through state-operated healthcare exchanges. Additional exceptions exist for large businesses that employ seasonal workers, or if an employer’s workforce exceeds 50 employees for fewer than 120 days of the year.
While the Affordable Care Act focuses on consumer empowerment and increased accessibility for health care options, there are opportunities for employers to benefit from the law. Businesses will need to assess the availability of new tax credits and health care exchanges to stabilize their health care costs during the coming years.
Tax Credits Help Ease the Burden
One of the proposed benefits to smaller businesses of the Affordable Care Act is the availability of new tax credits to offset potential rises in premiums. Small businesses meeting eligibility requirements will be able to apply for a 35% (increasing to 50% in 2014) credit by submitting an application to the Internal Revenue Service. Essentially, the available tax credit will reimburse employers for costs incurred by paying health insurance premiums.
Requirements for obtaining tax credits may restrict many businesses currently providing health coverage in the United States from being eligible. According to the IRS, qualified businesses must have fewer than the equivalent of 25 full-time staff for the tax year, and average wages for these employees must be below $50,000.
Employers must prove involvement in a qualifying arrangement, in which a requisite amount of premium coverage is paid for employees by the company. For an employer to be included in a qualifying arrangement, at least 50% of employee premiums must be covered by the employer, which also includes single (employee-only) coverage. However, certain exceptions are available for employers that pay varying amounts of premiums depending on staff positions, or if business owners only provide single coverage to employees.
Also, businesses applying for the tax credit will need to be aware that they are entitled for reimbursement only toward the amount spent on employee premiums. Some employers may offer “cafeteria” style health coverage that enables a broader range of care catered to individualized employee preferences. If an employer only covers 75% of the premiums costs, and employees pay the rest, an employer can only apply tax credit funds to the 75% paid toward the premium. Federal tax credit reimbursements are also limited to average premiums paid by an employer as a part of a state-sponsored small group market, where applicable.
It is important to note that employee contributions to other employee health benefit packages are excluded from the available tax credit. For instance, any amount paid by employers into health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs) will not be eligible for tax credits under the Affordable Care Act.
Dr. Robert Graboyes, senior fellow of health and economics at the National Federation of Independent Business Research Foundation, expressed concerns with the efficacy of the proposed tax credits. “It will help some small companies with relatively low wages for a relatively short period of time,” he said. “We’re not opposed, in principle, to the idea of tax credit, but we think this one was quite badly structured.”
Since the tax credit is only applicable for business owners with staff averaging less than $50,000 annually, Dr. Graboyes worries that it will stifle both hiring and salary increases, which has the potential to reduce an employer’s competitiveness in the labor market.
“We think relatively few businesses in the country will get it,” said Dr. Graboyes of the new tax credit. A November report from the Congressional Budget Office indicated that fewer companies applied for the tax credit in 2010 than anticipated. Even though only 228,000 out of over 4 million potentially eligible businesses applied for the tax credit, Dr. Graboyes recommended that companies should still apply. “If a company is qualified for it, we say, certainly, go ahead and get it,” he said.
Health Care Exchanges Transform the Healthcare Landscape
Another facet of the Affordable Care Act will be nationwide implementation of health care exchanges at the state level. Health care exchanges are designed to provide an open and accessible marketplace for individuals and small businesses to evaluate insurance options.
In a July presentation to the International Health Economics Association, Principle Analyst Paul Jacobs from the Congressional Budget Office reported that possible advantages of participating in a healthcare exchange include increasing the bargaining power of smaller businesses, as well as potentially reducing and stabilizing costs associated with providing coverage for employees.
According to the Kaiser Family Foundation, 12 states in the country already have health care exchanges in place, and another 22 states are studying exchange options of attempting to establish health care exchanges.
Small Business Health Options Programs, (SHOPs), will be created under the umbrella of state health care exchanges. Specifically designed for businesses with less than 100 employees, SHOPS provide small businesses and their employees an expanded selection of coverage options. Furthermore, SHOPs allow employees greater freedom to select a health care plan that suits their particular needs or family status.
Employees and employers alike may find cheaper health care alternatives with SHOPs because they deviate from the current principle of one-size-fits-all health care coverage provided by employers. With SHOPs, employees will have an opportunity to compare various plans from qualified healthcare providers and select an option appropriate for their budgets.
Consumer Operated and Oriented Plans (CO-OPs) represent yet another method small businesses can participate in health care exchanges. CO-OPs will enable small businesses and individuals to purchase their own insurance through non-profit organizations, which can be established by loans from the federal government.
Similar to SHOPs, CO-OPs aim to yield higher competition and lower costs in the health care market, while improving industry transparency. However, CO-OPs can be created by contingents of small business owners or individual employees seeking to improve their access to a wider range of healthcare options.
One of the defining features of the proposed CO-OPs is mandated participation of members in the group’s leadership. A majority of the CO-OP’s board of directors must enroll in and receive healthcare benefits through the organization.
Members of a CO-OP will also have full voting rights whenever the organization is confronted with major decisions. By increasing member participation in the decision-making process, CO-OPs may provide fairness and equity in smaller markets targeted to specific employer or worker circumstances.
Even though health care exchanges offer new possibilities for obtaining coverage, no federal regulations mandate that businesses must join, regardless of size. “Employers can continue doing what they have been doing,” said Paul Fronstin of the Employee Benefits Research Institute.
Of the advantages health care exchanges will bring to business owners, and perhaps the most alluring, is predictability in estimating annual health care spending. “In most cases where small businesses offer coverage, they pay the full amount,” Fronstin noted. “If the cost of coverage goes up 10%, then they are paying 10% more.” Under the proposed exchange system, businesses can limit the amount spent on health coverage to a fixed amount per employee. If employees desire costlier plans that provide more coverage, then they can pay for that difference at their own expense without further burdening the business owner. Thus, more responsibility in acquiring and funding health care options may shift to employees.
Dr. Graboyes predicts that many of the states currently without health care exchanges will struggle to have them in place by 2014. “The National Governor’s Association has just issued a document that I would interpret as a cry for help saying the federal government isn’t giving [states] information fast enough to get these things up and running,” he cautioned.
Delays in founding healthcare exchanges may not have much impact on current business practices. Even if it takes an extra year or two for states to arrange the appropriate infrastructure, Fronstin suggested, most companies can continue to provide the same benefits as now. “It’s just business as usual.”
The legal showdown over the Patient Protection and Affordable Care Act could change everything now that the U.S. Supreme Court has agreed to hear one of the cases challenging the health care reform law. The key issue appears to be whether in requiring most Americans to buy insurance by 2014, Congress exceeded its power to regulate interstate commerce. The justices also will address whether or not the entire law is doomed if that insurance mandate falls. The Supreme Court is expected to hear arguments in the case next March and render a decision by next summer.
The Future of Employee-Sponsored Healthcare
Speculation about the long term effects of the Affordable Care Acts seems to gravitate toward a consensus that employee-sponsored health care as we know it may become extinct within the next decade.
Dr. Graboyes does not expect healthcare benefits to continue being a bargaining chip for contract negotiations. “I think lot of companies, quite frankly, will simply drop health insurance,” he cautioned. Employees instead may need to find insurance coverage on their own, but they will expect higher compensation as a result.
Conversely, there are market incentives for business to continue providing healthcare. Fronstin noted that the majority of today’s businesses, even those with as few as 50 employees, offer health insurance on a voluntary basis. Calculations from the Kaiser Family Foundation indicate that 95% of firms with 50-199 employees provided coverage in 2010, as did 99% of companies with 200 employees or more.
“Employers are [covering employee premiums] for business reasons, they’re not doing it out of the goodness of their hearts,” Fronstin remarked. “They’re doing it to be competitive in the labor market, and they’re doing it because they want a healthy workforce. They feel that not offering coverage will have a negative impact on the overall success of the business.”
Still, Fronstin warns that companies reducing or cutting healthcare benefits could trigger a snowball effect. For instance, if one employer drops coverage in 2014 and earns a profit on the year, it may tempt other companies in 2015 to do likewise, and even more in 2016. “But you have to ask, ‘Why has the employer been offering coverage for all these years. They’re getting something out of it, but will they lose that something?’” he said.
For companies like The Pallet Factory, these questions have no simple answers. Simultaneously maintaining a healthy workforce and high-quality, high-volume production has become one of the most complex issues facing businesses today, and the Affordable Care Act is likely to make the next few years even more challenging. As Michael Doyle attempts to navigate the difficult decisions ahead, he is certain about one thing, and experts agree: “It’s going to be a real shock to a lot of people.”
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