How Health Reform Threatens Small Business Health Plans
Originally published: 07.01.10 by Mike Coyne
Many are likely to lose grandfathered status.
Recent suggestions that we have a few years to sort out the implications of the healthcare reform law do not apply to small employers. Many small employers will have to decide by the end of 2010 whether they can afford to continue group health coverage for their employees.
The problems facing small employers are two-fold. First, the law that allows existing health plans to be grandfathered is being guided by regulations that will cause many small employer plans to lose their grandfathered status immediately. Second, the non-discrimination rules that will apply to non-grandfathered plans beginning next year will make many group health plans too expensive for small employers.
During the healthcare reform debate, President Obama promised to allow employees who like their current health insurance to keep it. Consequently, the law included a provision that postponed the effective date for existing or “grandfathered” plans. It made good sense to allow existing health plans to continue for a few years, since the health insurance exchanges that would help individuals and small employers find affordable coverage will not be operational until 2014.
Unfortunately, a variety of common changes to health coverage that are typically considered by small employers to control costs will cause an existing healthcare plan to lose its grandfathered status. For example, a change in a plan’s co-payment by more than $5, any change in the deductible or out-of-pocket limit, and even a change of insurance companies will cause an existing group health plan to lose its grandfathered status. Unfortunately, many small employers have to consider these types of changes each year in order to keep their existing group health plans affordable. Indeed, a number of insurance agents have reported that clients are making such changes, knowing the grandfathered status will be lost, simply because the current economic situation forces that choice.
One might ask if an employer is willing to maintain health coverage for its employees, why are the non-discrimination rules even an issue? The nondiscrimination rules that apply to group health plans are very stringent, and many existing group health plans cannot satisfy them. Here is a real-life but anonymous example. Small Company employs an owner and seven other employees. The company offers group health insurance to all employees. The employee’s contribution for single coverage is $125 per month, and the cost for family coverage is $250 per month. Presently, the owner and four employees are covered under the plan. Three employees are covered under the plan of a spouse and have waived coverage. They have made this choice because their spouses work for larger employers who offer better or more affordable coverage
Without these three employees in the plan, the company’s health plan covers only 62.5% of its employees. Since this is a contributory plan, the plan must cover 80% or seven of the eight employees in order to satisfy the non-discrimination rules.
What are the company’s choices? It might force employees who have waived coverage to buy coverage that they don’t need or want. Alternatively, it might simply choose to terminate the plan.
This example shows the impact of decisions by individual employees on the ability of an employer to maintain a non-discriminatory plan. However, it does not illustrate the economic impact on an employer of having to expand coverage. We have analyzed the situations facing a number of our clients that employ less than 15 or 20 people. In most cases, the employer will incur a 30% to 45% increase in annual insurance premiums in order to comply with the non-discrimination rules. Many small employers simply cannot afford to do this.
Nearly every elected official in the country pays homage to small business and its importance to the economy. Unfortunately, government regulators seem to believe that small employers can never be trusted to do the right thing for their employees. This is unfortunate, both for the country and for those employed by small business.
Michael P. Coyne is a founding partner of the law firm, Waldheger Coyne, located in Cleveland, Ohio. For more information on the firm, visit: www.healthlaw.com or call 440-835-0600.
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