How the Affordable Care Act Could Impact Your Bottom Line
Originally published: 07.01.13 by Charlie McCrudden
4 health care reform provisions you need to be aware of
The most significant aspects of health care reform stemming from the Affordable Care Act are set to kick in at the end of this year. As a business owner, no matter how many employees you have, and whether or not you provide them with any form of health insurance coverage, you need to pay close attention to these provisions, because you are going to see some impact on your bottom line.
Since being signed into law by President Obama on March 23, 2010, the implementation of the Affordable Care Act ha occurred slowly but steadily, even surviving a legal challenge, which the Supreme Court settled on June 28, 2012.
Various non-controversial provisions of the wide-sweeping reform of our nation’s health care system were enacted almost immediately, including a prohibition of lifetime coverage limits, coverage of dependent children until the age of 26, and tax credits for qualified small businesses offering health insurance coverage to their employees.
Only a few of the dozens of changes in the law that have taken effect in the last three years have impacted employers directly. But that’s going to change soon, because the most significant reforms of the Affordable Care Act are scheduled for implementation at the end of 2013. These are: the individual mandate; the employer penalty; the essential health benefits; and the fees on health insurance providers.
The way these reforms intersect will impact most HVACR contracting businesses in one way or another. To understand how these four elements of health care reform will change the way our system works, you need to look at each one independently.
The Individual Mandate
This goes into effect on January 1, 2014, and will require all Americans to obtain health insurance or pay a penalty. The individual mandate says, with few exceptions, that all individuals must obtain coverage from their employer, through the newly expanded Medicaid program, from a private insurance program, or through one of the state-sponsored “Exchanges.”
An Exchange is a state-based entity that will serve as a one-stop shop where individuals can get information about their options; be assessed for eligibility for Exchange programs, tax credits for private insurance, or programs like the Children’s Health Insurance Program; and get enrolled in the plan of their choice. Small businesses will also have the option to purchase insurance through a program offered by each Exchange.
The Employer Penalty
A majority of Americans obtain some form of health care coverage through their jobs. That leaves many employers wondering whether they are required to provide health care coverage to their employees.
The short answer to that is no, nothing in the new law says any employer has to offer health care coverage to its employees. However, some employers may face a penalty if at least one of their employees ends up using one of the public options described above.
The Employer Penalty may be imposed on employers with more than 50 full-time equivalent employees. Don’t confuse full-time employees with full-time equivalent employees. The difference is based on a complicated formula: in a nutshell, a portion of any part-time employees you may have on your payroll is added to the count of your full-time employees to figure out the number of full-time equivalents. So an employer with fewer than 50 full-time employees but some part-time employees may find themselves in jeopardy of paying the penalty under certain conditions, based on a three-part test.
If you find you have more than 50 full-time equivalents, AND you do not provide your employees the opportunity to enroll in minimum essential coverage, AND at least one of your full-time employees receives a premium tax credit established by the law or cost-sharing reduction, you will be required to pay a penalty equal to $2,000 times all full-time employees (those averaging at least 30 hours a week).
Part-time employees whose hours were included in the calculation of full-time equivalents are not included in the penalty calculation. In addition, the employer can subtract the first 30 full-time employees from the penalty payment calculation (e.g., a firm with 51 workers that does not offer coverage will pay an amount equal to 51 minus 30, or 21 times the applicable per employee payment amount). The new law allows businesses to go over the 50-employee limit for 120 days when using seasonal employees without triggering the potential assessment liability. The penalty is not tax-deductible by the company.
Essential Health Benefits
The definition of “essential health benefits” will impact all employers who provide some coverage to their employees. Under the Affordable Care Act, all plans must contain specified essential health benefits – i.e. a bare minimum of services and coverage – in order to be qualified.
Essential health benefits include: ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services, laboratory services, preventive and wellness care, chronic disease management, and pediatric dental and vision care.
Plans offered to employees also have to be “affordable”, meaning the cost to participate in the plan is less than 9.5 percent of the employee’s income, and the employer has to provide an amount equal to 60 percent of the value of the coverage. In other words, no more than 40 percent of the cost is paid through deductable, co-pays, or other charges to the employee. If your plan doesn’t meet the standard of the essential health benefits, you will likely see a change in your premiums starting next year.
Fees on Health Insurance Providers
Finally, the one provision that will have the most impact on HVACR contractors who provide health care benefits to employees, especially those with fewer than 100 employees, is the fees on health insurance providers provision. Designed to generate more than $100 billion in revenue over ten years, these fees are expected to be imposed primarily on “fully-insured” plan providers; the insurance companies offering plans to small businesses and individuals. Large employers with self-insured plans are exempt from these fees.
As you can imagine, these fees are likely to be passed along to the insurance providers’ customers – i.e. business owners – in the form of higher premiums. And, once again, if the plans being offered don’t meet the essential health benefits standard, then premiums are likely to increase in order to meet that standard and offset the costs of these new fees.
One of the main selling points for health care reform was to make health care coverage affordable for all U.S. citizens. However, as is common, we are already seeing some unintended consequences.
Employers and individuals will have to make some hard decisions in 2014. Healthy individuals facing the prospect of complying with the individual mandate or paying the penalty ($95 in 2014, rising to $695 in 2016) may find paying the penalty on their taxes to be the economically rational choice. In addition, since the law eliminated pre-existing condition exclusions, some individuals may simply wait until they need insurance to purchase it.
A similar economic calculation can be made by employers with more than 50 full-time equivalent employees. The penalty for not providing affordable health insurance to employees may be less than providing that benefit. It may seem draconian, but those employees will still be covered in some form or another since they have to comply with the individual mandate.
Premiums for a basic health insurance plan offered to a small business may go up in the short-term, if not permanently, due to increased taxes for insurance companies, pharmaceutical companies, and other healthcare product manufacturers. However, the hope is that, with so many people searching for health insurance, a healthy competition between companies will arise, driving down costs.