Small businesses brace for cost increases in 2014.

by Bob Kronemyer

Small businesses should plan for a significant cost bump in healthcare starting next January, as the federal government continues to roll out major reforms.

“Businesses with fewer than 50 employees should plan on new compliance challenges and the potential for larger than normal premium increases,” says Will Glaros, president and founder of Employer Benefit Systems in Dyer. “The reason for the assumed higher costs is a combination of taxes and fees in addition to new plan changes mandated by the law.”

This list of taxes and fees will include a research fee, a health insurance company tax and a reinsurance fee. These are in addition to prior taxes of 2.3 percent on medical devices and branded-prescription drug fees.

“To these costs must be added the expense of providing coverage for pre-existing conditions, limitations on deductibles to $2,000, and an out-of-pocket maximum of $6,250, which will now include co-pays,” Glaros says. Based on survey information provided by Glaros, 32 percent of plans in the North Central part of the United States currently have deductibles of $2,500 or higher. “All new changes combined with taxes and fees could drive up premiums by 20 to 30 percent a year,” he notes.

Small businesses also need to determine if they are going to maintain a health plan. One option may be to terminate a group health plan, “but continue to apply the same amount of dollars to each employee, so those employees can purchase their own coverage from an exchange or independently on their own from a private insurance carrier,” Glaros explains.

“However, I would hesitate telling any of our clients to terminate a plan without knowing the specifics about exchanges and the other options available in the individual marketplace. At this time, the required notice employers need to give to employees on the exchanges has been deferred to late summer or early fall, thereby creating an even smaller window in which to review your options.”

Glaros encourages employers to designate a point person within their organization to keep abreast of potential changes in healthcare. Companies should also be in close touch with their brokers and consultants to ensure compliance.

Community rating will apply for employer groups under 50. “This will eliminate the carrier's ability to adjust rates for many adverse risk factors, such as high blood pressure, cancer and diabetes,” says Tracey Gavin, healthcare reform practice leader at Apex Benefits Group in Indianapolis. “As it stands today, many carriers use a 6 to 1 rating scale for age bands (e.g., a 60-year-old male can be charged as much as six times what it costs to insure a 22-year-old male). But starting in January, those age bands will be limited to a 3 to 1 ratio. This age band compression and the elimination of the ability to rate based on gender could cause younger male populations within a small business to see significant rate increases.”

Alternatively, small businesses that may have an older and potentially unhealthy workforce “may experience rate stabilization reduction,” Gavin conveys.

Gavin points out that one large Indiana insurance company has indicated that 40 percent of its small group business will incur annual premium increases in excess of 50 percent. “It is incumbent upon employers to analyze the projected financial impact to both their business and their employees, factoring in their group demographics,” she says.

In addition, “by eliminating employer-sponsored coverage and having employees go on to the exchange, many employees could be faced with significantly higher costs within the exchange compared to what they would pay with an employer-sponsored plan, depending on their household income level.”

How a company's employee benefits are competitively positioned within its market should also be taken into account. “Are these benefits being used to attract and retain employees?” Gavin says. “It becomes an organizational strategy to balance the value of employee benefit programs, overall compensation and their philosophy as a business.”

Dekker Vacuum Technologies Inc. in Michigan City, with nearly 60 employees, is just one of many small businesses wrestling with the financial impact of healthcare reform. The company, which provides process vacuum solutions for industry, has already been federally mandated to cover employee dependents up to the age of 26 and the removal of lifetime benefit limits.

“These caused our premiums to increase significantly,” says president and CEO Rick Dekker. “It is the biggest check I write each month. And moving forward, I see premiums becoming more expensive. Sadly, the check gets larger while we have to adjust downward some of our other healthcare benefits such as deductibles and/or co-pays.”

With every increase in premiums, “it dips into our ability to be profitable and competitive,” says Dekker, who will continue to offer his employees health insurance next year.

“I also expect these additional reforms will lower the quality of healthcare because it is being run by the government. I can't think of an instance where a government program is run more efficiently than in the private sector.” He points to the inefficiencies in the United Kingdom, “where the elderly are not cared for very well with government-run healthcare. The government there and here is going to decide if you should or should not have an operation above a certain age.”

Ultimately, though, Dekker says that everyone agrees that rising healthcare costs must be addressed. “Government-run healthcare is not necessarily the best solution,” he asserts.

Kevin Sliwa, a partner and benefits consultant at Indianapolis-based MJ Insurance, observes anxiety and fear among companies, to the point where some are contemplating eliminating healthcare coverage. “But you can ditch healthcare insurance today. So why not do it?” he poses. Furthermore, mandates and penalties do not apply to small businesses with under 50 employees.

“I suspect these employers will continue to offer insurance, but perhaps there will be fewer employers offering benefits through employer-sponsored health plans,” says Sliwa, who envisions a shift from employer-controlled insurance buying to empowering the employee to do the same through an exchange and with a defined contribution from the employer.

“But it is too soon to tell whether the employee will be able to purchase equivalent coverage and deductibles though an exchange. I think there is a lot of apprehension about the individual market because of the elimination of the pre-existing condition clause next January,” says Sliwa. “I believe many insurers are very nervous about what that is going to do to the risk pool and, therefore, have announced major rate increases starting next year.”

Nonetheless, for employers with fewer than 25 workers, “there is a small employer tax credit, which for 2014 could be as much as 50 percent of the cost of employee-only coverage,” Sliwa notes. Employers will also be able to sponsor one or more specific plans within the exchange, which might offer an employee a financial incentive as opposed to purchasing insurance on the open exchange or in the individual market. “Today, an employer can write off as a tax benefit health insurance premiums; however, if you give an employee money to purchase insurance, that is taxable income,” Sliwa says.

Jan Phifer, a client executive in employee benefits at Gibson Insurance in South Bend, believes most companies will have a wait and see attitude on healthcare reform and continue to offer traditional plans. She likens the reform to buying a brand new car model. “People would rather someone else work out the bugs,” Phifer says. “Hopefully, there won't be too much of an impact.”

Phifer mentions that exchange plans will be priced the same as traditional plans, so there is no financial incentive for employers to switch. Another option is for employers to drop coverage and raise wages instead. “But wage-based benefits increase workers' compensation and funding requirements for retirement plans,” Phifer states.

Overall, each employer needs to assess their own unique situation, “so they can plan for a sustainable healthcare strategy going forward,” Phifer concludes.