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SMB HUB for Small Businesses, Like Yours

Edward Smith

Hutchinson Traylor

12/29/11

Since the Patient Protection and Affordable Care Act (PPACA) passed last year, business owners and human resources managers have been engaged in learning how the new health care reform legislation will affect their companies.  This preparation proceeds while our country’s judicial system debates the constitutionality of certain key provisions in the legislation.  With the Supreme Court’s recent decision to hear the debate, we should have an answer to this critical question by June of 2012.  Meanwhile, a frequent question for our firm is how health care reform in its present form will impact small businesses.

Define “Small”

Health insurance plan options and laws vary when it comes to what is considered “small group” and “large group” employer-sponsored plans. Typically, the dividing line is 50 full-time employees. Once an employer reaches 50 or more employees the game changes. So much so, in fact, that more than 95 percent of employers with more than 50 employees offer health insurance, in contrast to just over 60 percent of employers with fewer than 50 employees. 

This discrepancy can be explained at least partially by the fact that small employers are at a disadvantage when trying to provide health coverage to workers. Currently, small businesses pay premium rates that are about 18 percent higher than larger companies for similar coverage. Still, small group coverage through an employer may be more affordable for the employee than purchasing individual policies because the claims “risk” is spread among all members of the group.  Insurance companies also mandate minimum participation requirements for small group plans.  In other words, a specified number of employees, typically 50 to 75 percent, must enroll in the plan in order to qualify for the “group rates”.  Finally, the insurance company generally requires that the employer pay a portion of each employee’s premium; for example, a minimum of 50 percent.

What’s in it for you?

Under health care reform legislation, employers of different sizes are treated differently.  Groups with up to 10 employees can qualify for tax credits up to 100 percent if the employer pays at least 50 percent of employee health insurance premiums and the average annual wage is less than $25,000. Employers with 11 to 25 employees qualify for a tax credit of up to 35 percent if the employer pays at least 50 percent of employee premiums and the average annual wage is less than $50,000. Groups with 26-50 full-time employees do not qualify for tax credits, but are exempt from “Play or Pay” requirements, which require that an employer either offer qualifying coverage to employees or pay a statutory fine beginning in 2014.

Employers with more than 50 full-time employee equivalents have a decision to make in 2014: whether to “Play” or “Pay.” Employers choosing not to “play” (by offering health insurance) will pay an estimated annual fine of $2,000 for every full-time employee beyond the first 30 if just one employee receives subsidized coverage through the individual health insurance Exchange. The penalty amount will be adjusted annually after 2014 to reflect the national increase in insurance premium costs.  For a quick summary of PPACA impact on businesses of different size, please see the chart here (link to chart below).

I would like an Exchange (or would I?)

For small businesses, a significant component of PPACA is the creation of a new mechanism for purchasing coverage called Exchanges.  These are entities that will be set up in states to create a more organized and competitive market for health insurance by offering a choice of health plans, establishing common rules regarding the offering and pricing of insurance, and providing information to help consumers better understand the options available to them. Initially, Exchanges must serve primarily individuals purchasing insurance on their own and smaller employers; states will have the option of opening Exchanges to larger employers a few years after implementation. 

Last month, in a carefully chosen small business setting—a Washington DC hardware store—Health & Human Services Secretary Kathleen Sibelius released draft regulations for the health benefit exchanges called for by the Affordable Care Act.  The exchanges, required to be established for every state, are predicted to serve some 24 million consumers by 2019 (provided that the PPACA is neither significantly changed nor found unconstitutional), with the majority receiving federal subsidies to help pay for coverage. So far, a dozen states have enacted bills to create exchanges, while in nine states such legislation has failed.

Responding to strident opposition to the PPACA requirements from conservatives and from many business owners, Secretary Sibelius emphasized the flexibility of the draft regulations, which would allow considerable variation among states, give participating businesses considerable latitude in coverage selection, and interpret states’ readiness for exchange operation more loosely than implied by the PPACA itself. In describing the intent of the exchanges, she stated that they will “offer Americans competition, choice, and clout.”

It is uncertain whether or not Secretary Sibelius’ attempts to mollify small business owners will be rewarded. The so-called SHOP exchanges (Small Business Health Options Program) have been granted design flexibility, and clearly have potential to lower premiums by creating larger risk pools. However, the lack of success of existing small business exchanges—including those in Massachusetts and Utah—suggests that many businesses will be very wary indeed of such exchange participation, and may choose simply to terminate existing coverage.

We don’t yet know exactly what exchange coverage will look like and whether employees with employer-based insurance will view it as a reasonable or even desirable alternative. Will employees be willing to give up something they know for something new? Or, will a good job mean one that still comes with health benefits? For the answers to these questions, we’ll likely have to wait until 2014 and beyond, as employers consider their options – probably very cautiously – while looking behind their backs at competitors doing the same thing.

So what's next?

The implementation of PPACA (and even its existence) remains a very fuzzy picture which creates significant uncertainty for the small business owner.  But what’s new.  Small business owners have always faced and succeeded in uncertain environments which is why they remain such a large part of our national economy.  For further information on PPACA’s impact, I recommend the following resources:


About the Author:

Edward Smith

In the past 15 years as co-owner and Executive Vice-President of Hutchinson Traylor,  Edward has obtained his resident and surplus lines licenses in Life & Health and Property & Casualty insurance.  He has also earned his Series 6, 63 & 65 Securities Licenses and obtained the Certified Insurance Counselor (CIC) designation.

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