The Effects of the Affordable Care Act on Small Business
Whereas large corporations typically self-insure - paying their employees' medical bills and hiring insurers to administer health benefits - small businesses purchase group health coverage from insurers and face cost-increasing regulations as they go through the annual ritual of renewing their coverage. Over the next few years, as regulations and mandates are finally implemented, Obamacare will affect how businesses operate - including hiring, employee compensation, growth and so forth.
The Mandate on Employers. Though media attention has focused on the federal and state health exchanges, much of the burden of complying with the Affordable Care Act will fall on business. Nearly two-thirds of Americans with health coverage have employer-sponsored health insurance - approximately 171 million people.
Health benefits are a significant expense for U.S. employers and a substantial portion of workers' total compensation. The Congressional Budget Office (CBO) estimates that the required coverage for an individual will cost $5,800 a year or more in 2016 - the equivalent of an additional $3 an hour "minimum health wage." Family coverage could cost more than twice that amount. For instance:
The cost of employee health benefits averages $2.70 per hour, according to the Bureau of Labor Statistics, representing 8.5 percent of private industry workers' total compensation.
The Kaiser Family Foundation's annual survey of employer health benefits found the average cost of an employee family plan was $16,351 in 2013.
The ACA includes an employer mandate designed to ******* firms to provide full-time employees with comprehensive health insurance. Enforcement of the mandate has been delayed until 2015 for employers with more than 99 full-time employees. Firms employing from 50 to 99 full-time workers have until 2016 to comply. Businesses with fewer than 50 employees will not be penalized. Employers are also required to limit the amount of premiums some employees pay as a percentage of their wage income. For example, health plans are considered "unaffordable" if workers earning less than 400 percent of the federal poverty level (about $46,680 for an individual) must pay a premium that is more than 9.5 percent of their income.
Health Insurance Mandate on Firms with 50 or More Employees. Employers with fewer than 50 full-time workers are exempt from penalties. The fiftieth worker, however, could be a very expensive hire. Firms that employ 50 or more workers and don't provide health insurance will be subject to a tax penalty of $2,000 for each uninsured employee beyond the first 30.
Furthermore, firms with 50 or more workers will be required to contribute at least 60 percent of the cost for individual minimum essential coverage.
Grandfathered" Health Insurance Plans. Many small firms were able avoid the costly mandated benefits and new regulations by renewing less-expensive (non-conforming) coverage prior to January 2014. When these plans expire in 2014, firms will be ****** to purchase more highly regulated plans.
In theory, firms could retain their current health plan by claiming "grandfathered" status, insulating employers from cost-increasing regulatory burdens. However, only a few small businesses will have grandfathered plans. The status is lost if a firm makes any substantial plan change, such as switching to a new insurance carrier. According to official documents, two-thirds to as many as 80 percent of employer plans will likely lose their grandfathered status.
Effect of Obamacare on Premiums. The conse-quences for employers (and individual workers) who must purchase coverage are already becoming apparent. A 2014 survey of 148 insurance brokers by the investment firm Morgan Stanley found that rates in the small group market have risen substantially. For instance:
Premiums for firms renewing in 2014 jumped 11 percent in the small group market.
For firms with coverage through BlueCross, the year-over-year renewing contract premium hike is nearly 16 percent.
For individuals, the increase was similar - about 12 percent.
However, premium increases were much higher in some states than others. The survey found that since December 2012, rates for small employers grew 588 percent in Washington state, though this astounding increase is likely due to the small sample size and additional state regulations. Premiums rose 66 percent in Pennsylvania, 37 percent in California, 34 percent in Indiana, 30 percent in Kentucky and 29 percent in Colorado.
Employers Are Responding. Some employers are reducing their costs by passing on more of the cost to workers. Some employers are raising copayments for workers; others are boosting costs for dependent coverage, according to Mercer, a benefit consulting firm.
The Affordable Care Act is also affecting personnel decisions. A survey of more than 600 small business owners by the Society for Human Resource Management found that more than four-in-10 small business owners have delayed hiring due to uncertainty about the effects of the ACA. One in five reported they have cut the number of workers they employ. Employers are not required to offer coverage for employees who work less than 30 hours per week. Those employees are eligible for subsidized coverage in the health insurance exchange. Mercer reports that 12 percent of employers nationwide plan to reduce workers' hours as a result of Obamacare.
Introduction
Four years after President Barack Obama signed the Affordable Care Act (ACA) into law, there is still uncertainty regarding its effects, due to delays and exemptions granted by the Obama administration and challenges still pending in the courts. So far, however, there is plenty of evidence that the ACA, or Obamacare, is raising the cost of health insurance to employers and individuals.
The effects on business vary - by state, firm size and the composition of firms' workforces - but the impact on small businesses is especially acute. Whereas large corporations typically self-insure - paying their employees' medical bills and hiring insurers to administer health benefits - small businesses purchase group health coverage from insurers and face cost-increasing regulations as they go through the annual ritual of renewing their coverage. Over the next few years, as regulations and mandates are finally implemented, Obamacare will affect how businesses operate - including hiring, employee compensation, growth and so forth.
The Role of Employer-Sponsored Health Plans
Though media attention has focused on the federal and state health exchanges, employers are responsible for much of the growth in the number of insured. And much of the burden of complying with the Affordable Care Act will fall on business. From September 2013 to mid-March 2014, according to RAND Corporation estimates, a net 9.3 million Americans gained health coverage.1
The majority of the gains during this period came from employer-sponsored coverage: 8.2 million people enrolled in employer plans rather than purchasing individual coverage in an exchange.2 These new enrollees include individuals who previously declined employers' offers of insurance but are responding to the individual mandate to obtain coverage or face a tax penalty. Only 1.4 million were newly insured by exchange plans. (Though 3.9 million people enrolled in exchange plans, most were previously insured.)
Why Do Employers Provide Health Benefits? The practice of getting health coverage through the workplace began with a series of laws that originated during World War II.3 In a tight labor market with wage and price controls, the War Labor Board ruled wage controls did not apply to fringe benefits. Thus, employers could provide health coverage in lieu of higher cash wages.4 A few years later, in 1954, Congress and the Internal Revenue Service agreed that the value of health coverage provided by an employer could be excluded from taxable income.5 Today, as a result of this policy, most Americans get health insurance through work:
Nearly two-thirds of Americans with health coverage have employer-sponsored health insurance - approximately 171 million people.6
Slightly less than three-fourths (71 percent) of firms that employ 10 to 24 workers offered coverage in 2011.
In contrast, only 48 percent of firms employing three to nine workers offered coverage in 2011.7
The proportion of small employers offering health coverage has been declining for years. Under the Affordable Care Act, many firms will find it in their self-interest to abandon their company health plans.
Employer Costs for Health Insurance. Health benefits are a significant expense for U.S. employers and a substantial portion of workers' total compensation:
The cost of employee health benefits averages $2.70 per hour, according to the Bureau of Labor Statistics, representing 8.5 percent of private industry workers' total compensation.8
The Kaiser Family Foundation's annual survey of employer health benefits found the average cost of an employee family plan was $16,351 in 2013.9
Health benefits substitute nearly dollar-for-dollar for cash wages.
The Value of Employer-Provided Insurance Varies by Employees' Incomes. The cash value of excluding employee health coverage from taxable income is substantial. This is the major reason why most Americans have health coverage tied to their employment. For example:
To a middle-income couple with a marginal federal income tax rate of 25 percent, payroll taxes add another 15.3 percent and state and local taxes could add another 5 percent to their tax burden.
Thus, at an effective tax rate of 40 percent to 45 percent, the tax exclusion is worth nearly half the cost of coverage. For instance, a family in an employer health plan costing $16,351 would only experience a reduction in take home pay of $8,993 [$16,351 x (1-0.45)] - a tax savings of $7,358.
Furthermore, because the value of the tax subsidy increases with income, high-income families receive a greater benefit than low-income families. For instance, a family with an income of $150,000 or more receives about $4,436 in tax relief, compared to only about $147 for families earning less than $10,000 annually. [See Figure I.]
http://www.ncpa.org/pub/st356
