Health Care Reform and Small Businesses:

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1 Health Care Reform and Small Businesses: The Heightened Role of PEOs The sweeping changes laid out in the Affordable Care Act (ACA), or health care reform, have left small business owners facing a number of uncertainties. What is certain is that health care reform will change the way employers even those with less than 50 employees will design and manage their benefits programs.

2 While the mandate requiring employers with 50 or more full-time employees to provide health insurance has been widely discussed, the effects of this legislation on businesses with fewer than 50 employees is not as well understood. This white paper will present several scenarios small businesses with less than 50 employees may face when health care reform is fully realized in While we ll point out particular issues, we ll also show how the Professional Employer Organization (PEO) and its co-employment model can help small businesses retain manageable, competitive benefits plans. WHAT S CHANGING FOR SMALL BUSINESSES? Under the ACA, all companies with more than 50 full-time employees or full-time equivalents will be required to offer health insurance. Companies with fewer than 50 employees face no such mandate. However, if you re a small business with a group health care plan, there are some key areas you should pay attention to. Community Rating System: Changes the underwriting and plan design requirements for companies with fewer than 50 employees Government-Run Exchanges: Online marketplaces where consumers can purchase health insurance Amid the complex collection of mandates under the ACA, there are two key elements that every small business owner must understand: EmPowerHR Health care Reform and Small Businesses 2

3 A NEW ERA OF COMMUNITY RATINGS How do health insurance companies figure out what premiums to charge their customers? The answer is fairly complicated, but the bottom line is they use sophisticated algorithms to predict illness among individuals and even more complex math to extrapolate those predictions to large populations or groups. Insurers plug in demographic factors such as age, gender, geographic area and past medical history to determine an individual or group s risk level. Groups with higher risk levels of becoming ill say, a 60-yearold-smoker would pay more in premiums. Those with a lower risk level such as a 24-year-old runner would be charged considerably less. But as of January 1, 2014, that will all change. The ACA established new underwriting standards that place limits on how insurance companies rate individuals and groups under 50 employees (small groups). Insurance companies will no longer be able to rate by gender or medical conditions, and the age band they are allowed to use to calculate their rates will shrink considerably. Under the ACA, insurers will have to reduce the size of the gaps between the premiums charged for the highest and lowest rated groups. The new variation will be limited to a 3:1 ratio. This means the most expensive insurance rate can only cost three times as much as the least expensive rate. In addition, insurance companies will no longer be able to take any kind of past, current or future medical condition, or gender into consideration when they re developing rates. So, a healthy 35-year-old male employee will cost exactly as much to insure as a 35-year-old female with a history of cancer. Insurance companies will have the ability to factor in self-reported tobacco use. Rates can also be adjusted based on geography, provided rating areas apply uniformly and don t vary by product. Factors Insurers Use to Determine Premium Rates for individuals and Prior to JAN. 1, 2014 After JAn. 1, 2014 small groups Past Medical Conditions Yes No Age Yes Yes Gender Yes No EmPowerHR Health care Reform and Small Businesses 3

4 What This Means for Employers These provisions are all subject to change because of the fluctuating nature of the law. So what could this mean for you? If you have traditionally employed a large proportion of people in the most favorable demographic groups, such as young, healthy men, your premium rates could jump significantly with this new underwriting process. That s because the cost burden is shifting in a way that will impact the younger, healthier groups much more so than it will older employees. For example, in the past, if the least expensive to insure on your small group plan was a 25-year-old single male at a premium of $100 per month, the most expensive may have been a 65-year-old single male at a premium of $700 per month. With the mandated shrinking of the rate band, it won t cost quite as much to insure your older employees, but the premiums for your youngest workers will likely rise. So, the 25-year-old might cost $250 a month, while the 65-year-old would be $650. potential effects of new community rating underwriting standards $700 $600 $500 $400 $300 $200 $100 Past Premium possible new Premium Male Age 25 Male Age 65 *Note: Scenarios are provided for information purposes only. They are based upon current provisions in the ACA, which are subject to change. To find out how the ACA will actually affect your business, please contact an HR professional. Deductible Limits In the past, companies could control health insurance costs by offering high-deductible health plans (HDHPs) that placed more of the out-of-pocket cost burden on employees. Their ability to mitigate costs in that way will be hampered going forward, because the ACA will likely place limits on deductibles of $2,000 per year for individuals and $4,000 per year for families. This will go into effect as of each group s first renewal in What This Means for Employers HDHPs were particularly effective for companies with young, healthy workforces that would have been overinsured with traditional, feature-rich plans. With the implementation of the ACA, you can no longer offer plans with sky-high deductibles, so you may be looking at increased premiums. All in all, rising health plan costs will continue to be a challenge for small businesses. In 2013, several major insurance carriers proposed rate increases of more than 20 percent for small businesses and individuals. Aetna CEO Mark Bertolini told Wall Street analysts that premiums could double for some small businesses when the ACA s major provisions go into effect in The trade association America s Health Insurance Plans (AHIP) cites estimates that small companies will see premiums rise over a10-year period by an average of $2,760 for single-employee coverage, and $6,830 for family coverage. EmPowerHR Health care Reform and Small Businesses 4

5 THE NEW INSURANCE MARKETPLACE: HEALTH EXCHANGES COMPETITIVE OFFERINGS FOR INDIVIDUALS Starting in 2014, the ACA will establish public, staterun and federal exchanges where individuals can go to obtain health insurance. Four levels of coverage will be offered. Insurance companies marketing plans on the exchanges will have to offer at least one of the two most feature-rich plans, known as the silver and gold plans. Low-income people who are not eligible for Medicaid and earn less than 400 percent of the federal povery level ($94,000 per year for a family of four), will be eligible to receive subsidies to purchase health plans on the exchanges. What That Means for Employers Employees might explore alternative health care options on the exchanges, particularly if they are young and healthy or earning low wages. If a large number of employees leave your plan to pursue those options, your demographics could change, which would impact your rating. Furthermore, in 2015 if you have 50 or more full-time employees and your plan is deemed unaffordable, unacceptable or inaccessible under the rules laid out by the ACA, you could receive a $3,000-per-employee penalty for any employee who buys an alternative plan on the public exchange and receives a subsidy or tax credit for doing so. Those fees will not be tax deductible for your business. EXCHANGES FOR SMALL COMPANIES Under the ACA, several states are setting up a Small Business Health Options Program (SHOP), a marketplace where businesses with fewer than 100 employees can purchase health insurance. The federal government will be operating SHOP exchanges in the other states. The SHOP exchanges in the first year will only offer one choice: the bronze plan. There will not be a broader choice of plans until What This Means for Employers If you are a small business and you choose a plan offered by your state s SHOP, the only package you can offer for the first year will be the least feature-rich option available on the public exchanges. For more on these new insurance marketplaces, go to: For more on SHOP exchanges, go to: html EmPowerHR Health care Reform and Small Businesses 5

6 NEED HELP WITH THESE CHANGES? Turn to a peo A PEO allows companies to outsource the management of human resource (HR) tasks such as payroll and tax administration, health and workers compensation insurance, voluntary benefits and retirement plans. A PEO and its client (the employer), enter into a co-employment arrangement, making the PEO the legal administrator of record. This model allows small employers to effectively offload their employment-related administrative responsibilities and in some cases, gain access to Fortune 500-level HR infrastructure and benefits programs. As the ACA rolls out, some small companies may find joining a PEO particularly valuable. Through the coemployment relationship, PEOs are able to aggregate their clients employees to leverage economies of scale and group buying power. PEOs provide many small businesses like yours: Access to health plan options that level the playing field with larger competitors Assistance developing the best benefits strategy for your employees Help navigating new requirements under health care reform Expert knowledge and administrative services for all of your benefits offerings Controlled costs PEOs and Underwriting The underwriting provisions of large groups (50 or more employees) will not change under the new legislation, so PEOs will fall into the large-group category and will be able to rate their groups accordingly. This also decreases risk across the entire group, thereby stabilizing and in many cases decreasing premiums for health and workers compensation insurance, as well as state unemployment tax rates. PEOs and Health Care Plan Design In addition, PEO-run health plans are expertly managed and offer less restricted plan design options than small companies can get on the open market or public exchanges. Therefore, a PEO can potentially help small businesses differentiate themselves by offering more robust benefits packages than other employers their size can provide. The PEO would help provide information and expertise to ensure [small businesses] are making the proper decisions and more importantly making sure the company is not doing anything that would knock them out of compliance or would otherwise harm them. Thom Stohler, NAPEO Director of Federal Government Affairs EmPowerHR Health care Reform and Small Businesses 6

7 NEED HELP WITH THESE CHANGES? Turn to a peo continued PEOs and Compliance As companies adjust to the changes required by the ACA, PEOs will play an important role as a resource for both employers and employees. For employers, PEOs can serve as expert advisors, helping you understand what your requirements are under the ACA. Even if you opt out of buying health insurance through a PEO, you can turn to the PEO for expertise and guidance. The PEO would help provide information and expertise to that small business to ensure they re making the proper decisions in regards to what the law requires, and more importantly making sure the company is not doing anything that would knock them out of compliance or would otherwise harm them, says Thom Stohler, director of federal government affairs for the National Association of Professional Employer Organizations (NAPEO) in Alexandria, Va. You need to follow the law. The core role of a PEO is to help you do that. PEOs and Employee Education PEOs can help employers provide educational materials to their employees, answer questions about health exchanges and other changes coming with the implementation of the ACA. The PEO can also walk employees through the choices and features of the group plan, and convey its value over public options. There are still a number of uncertainties surrounding the ACA. But if you are a small employer with an existing group plan, you need to be aware of upcoming changes under the law and how they will affect your decisions going forward. If rates go up will you continue to offer insurance? How will you compete with larger companies that will be required to provide insurance? Now is the time to start working out those issues, so you will be well prepared for 2014 and the entrance of health care reform. For more information about navigating health care reform, please contact your broker, the NAPEO or EmPowerHR by visiting EmPowerHR Health care Reform and Small Businesses 7

8 ABOUT EmPowerHR EmPowerHR, the Professional Employer Services (PEO) division of Laurus Strategies, provides integrated human resources solutions for growth-stage companies. Their mission is to be an essential component of their clients success by effectively managing HR responsibilities like payroll, benefits consulting and administration. Laurus Strategies is a business resource partner focused on helping its clients better manage all stages of the employee lifecycle. Their practice groups include Global Health & Benefits Consulting; Human Capital Consulting; Administrative and Payroll Services; HRIS Consulting (ihouse); Professional Employer Organization (EmPowerHR); International Consulting; Non-Profit & Public Affairs Consulting; and Property & Casualty Insurance. Laurus Strategies client-centric approach has helped hundreds of organizations improve practices, manage costs and maximize value. Questions or comments? Please us at APPENDIX United HealthCare, Adjusted Community Rating : provisions/adjusted_community_rating.htm American Cancer Society, New Federal Rating Rules : NewFederalRatingRules.pdf U.S. Dept. of Labor: Limits on Cost-Sharing Under the Affordable Care Act : US Dept. of Health & Human Services, Small Business and the Affordable Care Act : Kaiser Health News, A Guide to Health Insurance Exchanges : aspx Center on Budget and Policy Priorities, Making Health Care More Affordable : Community Catalyst and Georgetown University: Health Insurance 101 : tiers America s Health Insurance Plans (AHIP): Bloomberg, Aetna CEO Sees Obama Health Law Doubling Some Premiums : NAPEO: What is a PEO? : EmPowerHR Health care Reform and Small Businesses 8

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