Wednesday, November 20, 2013

Small Group Health Insurance "Cancellations"––The Next Shoe to Drop But a More Complicated One

Obamacare is impacting the small group insurance market in many of the same ways as the individual health insurance market. While employers with less than 50 workers don't have to provide coverage, if they do they are required to comply with the same essential benefit mandates, age rating changes, and pre-existing condition reforms the individual market faces.

That means essentially all small group policies cannot continue as they are––they have to be discontinued.

What makes things a bit easier, if not any less expensive, is that small employers typically have health insurance brokers to run interference for them and help them through this change where individual consumers often get that dreaded cancellation letter telling them they will not have health insurance after a certain date if they do not act quickly in what is a confusing marketplace in the best of times.

The first small group renewals are now occurring––the January 1 renewals that typically have to be delivered during the month of November under state law.

Many employers are facing significant changes in order to comply with Obamacare and therefore price increases. One Maryland broker I spoke to this week has 90 small group accounts and he reports his smallest increase was 15%, his largest was 69%, and most are in the 30% - 40% range. (By comparison, Mercer just announced the average large employer health care cost increase for 2014 will be 5.2%, meaning small groups could have reasonably expected an increase under 10% without Obamacare.) The biggest rate increases are generally going to those employers with the youngest groups the most impacted by the new "age compression" rules.

Does this mean these small employers' coverage has been outright cancelled and they will now send their workers to the exchanges, as I have heard some commentators argue?

No, at least not anytime soon.

But that does not mean that lots of these small employers aren't angry and confused.

What are these small employers doing?

Some small groups, but only a very few, benefit from the grandfather rules if their plan was in place in March 2010 and they haven't made any but the slightest changes. Like the individual market that comes under the same grandfather rules, the Obama administration made those regulations so stringent almost no one is grandfathered.

Perhaps the most common means by which small groups are avoiding the big increases, at least for the first year, is through the early renewal strategy. Most states and health plans have allowed employers to change their renewal date to late in 2013 thereby allowing them to keep the old health plans for about another year. But this is a stay of execution, not a solution. Their old plans are toast when they next renew.

However, many brokers and small employers are hoping that this one-year delay will give the Congress some time to fix this. That said I don't see any real hope of Obamacare fixes until after the November election, if then. Republicans have no interest in saving any Democrats––and therefore small groups––from Obamacare before the first Tuesday in November.

If the small employer doesn't have access to the early renewal strategy, then they must face higher premium costs immediately. To offset these higher costs, at least in part, small employers are doing what they have always done––increasing deductibles and co-pays to try to keep the premiums close to what they were. This is also what the employers who used the early renewal strategy will have to consider come the end of 2014.

Will the small employer, faced with these increases, abandon their health plans and send their workers to the exchanges?

First, since so many have gotten that early renewal one-year stay of execution, we really won't know that for a while.

Second, the number of small employers offering health benefits was already on a years long steady and this certainly can't help.

But with all of that said, the simplistic, "Small employers are better off dropping coverage and sending them to the exchange," is just too simplistic.

It's a lot more complicated than that.

Let's say an employer pays $7,000 a year toward the average worker's health insurance benefit––typical in the small market. Let's further say the employer could just give the worker that money in a pay raise and send them to the exchange.

First, the employer can't just give them a payroll raise of $7,000. Increasing their wages has payroll tax and benefit cost implications––Social Security and Medicare taxes, workers compensation premiums, fringe benefit costs tied to payroll, vacation pay, and so on. That $7,000 would need to be reduced to about $6,000 to offset the employers payroll costs before it could go to the worker (and an employer with more than 50 workers would also be subject to the $2,000 fine for not providing health benefits and the "raise" would have to be further reduced).

Now the worker has $6,000 to take to the exchange. But wait, health insurance bought by an individual is not income tax preferenced––the worker has to pay state, federal, and payroll taxes of their own on this "raise." Even if the worker is only in a 20% marginal bracket, this means the $6,000 just melted to about $5,000.

So the worker ends up with $5,000 to take to the exchange––about $400 a month. A higher income worker in a higher tax bracket might end up with only $4,000 net of taxes with which to buy insurance.

How does the worker fare with $5,000 to spend in the exchange? Remember the lower your income the higher the subsidies. If the worker has a very low income, they do very well––maybe even make a lot of money. If they are lower middle-income, they do OK. If they are middle to upper income they lose.

Who wins under this scheme? The lowest paid and least skilled workers. Who loses? The highest paid and most skilled, and presumably sought after workers. This strategy suddenly doesn't look so smart if competing for skilled workers is what worries the employer.

It gets more problematic. The health insurance exchange subsidies are tied to family income, not what an employer pays their workers. An employee making $50,000 with a family could win under this scheme by being eligible for lots of subsidy. But if another $50,000 worker has a spouse also working and the household income is now $80,000 or $90,000 a year they would be disqualified for all or most of the federal health insurance subsidies.

So, this $50,000 worker does OK and that one has to pay most if not the full cost of health insurance out of their pocket.

It gets even more complicated. Employers often contribute more for family coverage and give single workers less because their coverage costs less. So, how do they pass out the raise when and if health benefits are terminated? Does a single worker get paid less for doing the same job going forward?

Just ditching the employer's health insurance plan can be more attractive to businesses that are filled with low-income and unskilled workers. But any business that relies on even a few skilled and key employees will likely find this simplistic, The, "Just dump the insurance, give them a raise, and send them to the exchange," idea has more holes than Swiss cheese.

What will employers do?

They will use the early renewal strategy when they can to buy themselves a year. Then they will likely increase employee premiums and deductibles to keep the wolf from the door for maybe another year. But Obamacare caps out-of-pocket costs and employers will quickly bump up against that in a year or two.

What will employers and their brokers do? They will tap dance as long as they can and hope for a rescue party.
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