First, the Small Business Health Options Program (SHOP) health insurance exchange was delayed. That was followed by a delay in the release of community ratings for small group programs. On top of that, there’s confusion about whether businesses with less than 50 employees, which are not governed by the Affordable Care Act (ACA) mandate to provide health insurance, can utilize health reimbursement accounts (HRAs) to buy individual coverage.
“The ACA places significant limitations on HRAs, and they are the only vehicle these companies have to distribute dollars employees can use to pay for premiums. The question is whether businesses that are exempt from the mandate are impacted by other aspects of the ACA. There will need to be some guidance as to whether it applies,” says William F. Hutter, CEO of Sequent.
The delays and uncertainty have left small businesses with few options for health insurance at a time when they need to finalize plans for 2014.
“That inherently creates a violation of rules because there’s a 60-day notice requirement to inform employees of any plan changes,” Hutter says. “We think the notice will be interpreted so that companies might be able to make a plan change, but not a cost change — the employer would have to pick up any difference. But that factor also has to be determined.”
Smart Business spoke with Hutter about problems with the rollout of the ACA exchanges and how reform continues to affect businesses of all sizes.
Should the 19 million people who were told their coverage was terminated have been surprised?
That was known back in 2010; it was written about. Plans were cancelled because the ACA changed requirements for insurers and the plans they provide. Plans are not only registered on a federal level but also on a state-by-state basis. Each state has a department of insurance to oversee plans and rate structures. A carrier needs to meet new requirements under ACA and state mandates, but when a plan design is changed, it is no longer grandfathered. It has to be terminated or withdrawn, and a new plan is submitted and approved. Whether this will be true going forward is uncertain.
If you are self-insured, the opportunity to keep the same plan is greater. Companies that self-insure can continue their plans as long as they don’t make significant changes.
Are self-insurance plans exempt from many ACA requirements?
Yes, that’s why companies have been exploring the option of self-funding arrangements. It’s a strange set of rules, but you can choose to cover or not cover certain things as long as they aren’t considered minimum essential coverage requirements. However, you can’t do it in a limited way; you can’t decide to cover autism, but only up to $10,000 a year. You have to choose to not cover it or cover it completely.
What self-funding does is create more predictability for companies because they purchase a stop-loss policy to limit their liability. Health insurance costs will continue to rise because of an aging demographic. The plan design can help keep increases to 4 to 6 percent annually instead of 30 or 40 percent.
Is that option also available to small businesses with fewer than 50 employees?
It can be, although you can’t do it like a big company would because a small employer doesn’t have the numbers to mitigate the risk of large claims.
Self-insurance is a design plan issue. Being self-insured with a specific stop-loss point might work. If you have 30 employees, you can have a stop-loss of $10,000 each. Then you need to figure out your actuarial funding for it and reserve that amount to pay for claims and expected losses. If you have a healthy group, it makes sense.
Small businesses also can join a pool for health insurance. That’s a service HR consultants or chambers of commerce provide, through an aggregation model, for clients or members to get health care. They don’t provide health care but establish a contractual arrangement with a company that does.
But the problem with the ACA is that new information is coming so quickly, and it takes months to rethink your health insurance strategy. This will continue to be difficult for companies to work through. ●
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At first glance, dropping health insurance for employees and sending them to the exchanges sounds like a win for everyone. Companies can give raises to make up the difference for employees, who then buy insurance for less, and everyone saves money.
But that’s not the result when you factor in all of the numbers, says William F. Hutter, CEO of Sequent.
“Drop your health insurance and give employees the same money is the mantra we keep hearing. It is not a simple decision and should not be treated as such for middle-market companies,” Hutter says.
Smart Business spoke with Hutter about the costs associated with this decision, and its potential impact on your business.
Would companies rather not worry about health insurance because of its volatility?
Companies are tired of thinking about health insurance; it’s becoming another distraction away from their business. Of course, that’s just considering cost and not taking into account the cultural issues involved with the perception of whether you’re taking care of your employees.
For example, a client was advised that it could save money by sending everyone to the exchange and just giving employees raises. That has proven to be a fallacy. When you review all of the numbers, the savings are not there.
The company has 109 employees, and 79 are covered by the health plan. It has a high deductible, so the company contributes to a health reimbursement account (HRA) for employees.
Basic costs of the plan are:
- Total insurance premiums — $653,000.
- Company share — $522,400.
- Employees’ share — $130,600.
- Company HRA cost — $200,000.
- Total cost to company — $722,400.
Dropping insurance and giving those employees $7,500 in raises each — a total of $592,500 — would appear to save the company $129,900. But you have to consider the total cost impact, including deductible burden, taxes and penalties.
What are the tax implications under this scenario?
Because of the loss of the pre-tax deduction, employees and the company both pay more in taxes on the $592,500 in raises — $199,937 by employees and $73,395 by the company.
There’s also an Affordable Care Act (ACA) penalty of $114,000 the company would be required to pay because it would no longer be a health plan sponsor. And now the employees also are paying all of the plan deductible, so that’s another $158,000, assuming a $2,000 deductible.
When you consider all of those factors, the total cost is $779,894, or about $57,000 more to not offer health insurance. When shown the entire picture, the client was blown away.
Are there other variables to consider, even if dropping health insurance for employees made financial sense?
In addition to how it would be perceived by employees, there’s a concern about making a decision based on the short term. Organizations need to think more strategically, rather than looking just at how to fix a current problem.
No one knows how the exchanges are going to shake out. They are getting a tax subsidy for the first two years in the form of a $62 annual tax on every employee covered by an insurance carrier outside of the exchanges. In theory, that provides a pool of money carriers can draw on until the exchanges find their own balance regarding enrollees, costs and risks. That could result in a significant increase in premiums in two years when the subsidy goes away.
Also, you want to be cautious about dropping insurance and giving up the tax advantage of sponsoring a plan because it’s difficult to go back. That’s really the objective of the ACA — it’s a revenue enhancement bill rather than a health care bill. That goes back to the 2005 study by Sens. Max Baucus and Chuck Grassley, which flowed right into health care reform.
This analysis and case study is a dramatic illustration of how the changes written into health care reform are really about closing tax loopholes. Companies may be better off keeping the tax advantage of health care for themselves and their employees by providing access to predictable health care coverage. ●
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Enforcement of the employer mandate has been delayed until 2015, along with the annual limit on out-of-pocket costs a patient pays above what insurance covers, but the rest of the Patient Protection and Affordable Care Act (PPACA) is still scheduled to proceed as planned — although it’s uncertain whether that schedule will be kept.
“Right now there’s been two official delays announced. In theory, all other elements of the PPACA are coming into play. But this is so fluid and volatile that we could see the Department of Health and Human Services (HHS) announce that the federal exchange is not ready,” says William F. Hutter, CEO of Sequent.
Open enrollment for the health insurance exchanges, aka marketplace, is set to start on Oct. 1 and continue through March.
“They’re trying to build awareness through a marketing campaign but aren’t sure what to do because they haven’t seen how it is going to work,” Hutter says.
Smart Business spoke to Hutter about the upcoming timetable for PPACA implementation and what to expect regarding scheduled deadlines.
What do these delays mean to the implementation of the PPACA?
Pieces of the PPACA are already in place. The Medicare tax is increasing, the decline in flexible spending dollars have come into play, and the underwriting criteria for carriers is going to change how they underwrite and create similarities in pricing models because plans have to be pretty consistent. The age compression standard — rates can only be three times as much because of age — has been set.
Additional taxes also have kicked in, including the Patient Centered Outcome Institute fee. Employer requirements to notify employees have increased, as well.
Major changes are occurring; no one knows how they are going to pull it off. There are so many variables at this time that no one can predict what’s going to happen.
There’s also the question of whether the exchanges will be ready to go on Oct. 1. As of now, only one is ready — California. There’s also Massachusetts, if you consider that an exchange. The HHS has been quiet following a flurry of releases months ago. Something was leaked that the federal exchange might not be ready and since then there’s been no information, which means they might push it close to the deadline.
Meanwhile, companies are left to fend the best they can in anticipation of open enrollment starting.
Are repeal or defunding possibilities?
The repeal votes are all pomp and circumstance. Defunding is possible, but unlikely. The real problem is that no one can figure out how to make the PPACA work. That includes insurance agents and carriers, enforcement entities and employers.
What difference does delaying the employer mandate a year make?
All it means is that employers don’t have to worry about fines or penalties for a year. We’re recommending that companies proceed based on what they think is the best course of action. Companies need to design solutions to fix some of the exposures of the PPACA; it doesn’t matter what type of business you have, what makes a difference is your financial wherewithal. It’s a matter of coming up with a basic solution to address PPACA requirements and deciding how much you want to spend — like getting a combo meal and choosing between small, medium and large. That decision will be based on factors such as company culture and environment.
One emerging tactic is to seek early renewal of plans because of the uncertainty surrounding the PPACA. If you can get your carrier to renew starting Dec. 1, 2013, then you don’t have to worry about the PPACA and its impact until December 2014.
Right now, there’s no breathing room for companies. What happens if you anticipate that the federal exchange will be ready and the HHS announces on Sept. 10 that it will be delayed? Then there are all of the challenges associated with technology, billing and verification of wages. There’s going to be a whole new system that will handle protected health information, is it going to be secure?
There are so many things to be considered; it makes sense to try to schedule your plan year to avoid the inevitability of the PPACA until there is more certainty.
William F. Hutter is CEO at Sequent. Reach him at (888) 456-3627 or firstname.lastname@example.org.
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