By Jennifer Tsao -
During the healthcare reform debate, President Obama promised Americans that “if you like your health plan, you can keep it.” Indeed, section 1251 of Patient Protection Affordable Care Act (PPACA) entitled “Preservation of Right to Maintain Existing Coverage,” provides that, with a few exceptions, none of the healthcare reform requirements shall apply to any health plan in existence on March 23, 2010, the date of PPACA’s enactment.
Small businesses with less than 50 employees, however, must weigh the potential savings from their existing “grandfathered” health plans, which will almost certainly cost more over the next few years, against the costs of not providing employees with any healthcare coverage. In some instances, a small business may well decide to discontinue its existing health plan coverage, thereby undermining the President’s assurance.
What is the “value” of a grandfathered plan to a small business?
As a result of the healthcare reform laws, employer health plans will face certain requirements that likely will drive up the costs of health coverage for consumers, such as the requirement that, by 2014, all private and public plans cover “essential health benefits.” These benefits include yearly physical exams, mental health and substance use disorder services, and oral and vision care for pediatric patients. By 2014, the legislation imposes limits on the amount of money that a patient may spend out of his/her own pocket and also limits the amount that may be charged as deductibles on small group plans to $2000 for individuals and $4000 for families.
The concern for small employers stems from the fact that they generally carry leaner healthcare coverage and therefore stand to face substantially higher costs once the hefty 2014 requirements kick in. The value of the grandfathered plan will only be realized if a business can manage to hold onto it until after 2014.
What is the “price” of keeping a grandfathered plan?
The price of holding onto a grandfathered plan is potentially higher for a small employer than a large employer. The small business market is currently being hit with large hikes in their insurance premiums. According to an LA Times survey, five major insurers in California’s small business market are raising rates this year by about 12% to 23% for firms with fewer than 50 employees.
- Aetna will raise average premiums by 18%, although some members could see hikes of up to 23%;
- Blue Shield of California will increase average rates by 18%, although some small businesses could experience rate hikes of up to 76%;
- Health Net said its members would see “low double-digit rate increases”;
- Kaiser Permanente will raise average premiums by 12%;
- United Healthcare declined to release its rates.
Blue Shield has stated that their jaw-dropping rate hikes in the small business market were in part due to the poor economy and in part due to miscalculations on policies. In particular, Blue Shield stated that it was unfamiliar with the true costs of its high deductible policies that were paired with health savings accounts.
Even if a small business wanted to retain its plan, it may not be able to afford the 12% to 23% rate hikes. Small employers generally have smaller profit margins to absorb the extra costs, and lack the purchasing power of large employers to bargain down rates with insurance companies.
What will small employers choose?
I wonder whether it makes sense in the long run to suffer insurance premiums rate hikes over the next several years for the security of knowing that you get to keep the product you have and that you will not be subjected to the significant requirements going into effect in 2014.
Is a small business really “giving up” that much by releasing itself from its old plan? In addition to the freedom of shopping around for a cheaper plan over these next few years, health plans under the reform laws will cover essential benefits and provide protections to enrollees that employees will undoubtedly appreciate.
In the long term, health insurance premiums for small businesses are actually expected to decrease. In 2014, small businesses who purchase insurance on their own will gain access to the market Exchanges. These Exchanges will offer small businesses with greater choice of plans at more competitive rates. The Congressional Budget Office (CBO) estimates that premiums will be 14-20% lower than they would be under current law in 2016 due to the increased purchasing power. CBO estimates that a family policy for small businesses will be available at a premium $4,000 lower that it would be under current law.
It also seems like the struggle of holding only to grandfather status would inhibit a small business’s personnel decisions. Small employers tend to make substantial changes to their health plans to adjust to their hiring needs and budgeting. But if a small employer makes any changes to cost sharing, employer contributions, and health insurance issuers, its plan will lose its grandfathered status.
Hopefully, the dilemma with grandfathered plans isn’t so daunting that small business will choose to drop employee health coverage altogether. Regardless of whether or not the business will have to pay a penalty or whether or not it scoffs at the tax credit which maxes out at 35%, the cost to employee morale and the benefits of a healthy workforce should never be underestimated.