Health Care Reform: The Individual-Small Group Seesaw

One of the most frequent questions I’m asked about health care reform is whether the Patient Protection and Affordable Care Act will result drive people from group plans to individual plans or vice versa. It’s an interesting question. We have enough information to make some guesses, but not enough to know. And there are reasonable scenarios that can be created for each conclusion.

An individual coverage scenario: No small business owner I’ve met got into business for the thrill of buying health insurance for the company.  Now health care reform makes it easy for them to get out of the insuring business: give every worker a small raise along with the URL for the state health insurance exchange. The employees benefit: they get to choose their own health plan and some may qualify for premium subsidies. Their coverage isn’t tied to their employment and they can keep their plan if they change jobs. They don’t even need to spend all of their raise on premiums nor are they locked into the exchange. Once the employer decides not to provide coverage they can obtain individual coverage where they please.

Employers benefit from no longer having to shop for health insurance for their workers (they’ll have to shop for their own families, but that’s a lot less stressful). No more complaints. No more  bookkeeping.

A small group coverage scenario: Small business owners aren’t required to purchase coverage today, but there are good reasons for their doing so — and those reasons aren’t changed by health care reform. Providing health insurance helps small businesses recruit and retain good employees. Employers’ contributions to health insurance premiums makes coverage more affordable for employees. Yes, the Patient Protection and Affordable Care Act provides subsidies to some workers, but only those earning less than 400 percent of the federal poverty level ($43,320 for an individual and $88,200 for a family of four in 2010).  So, depending on their salary, sending employees to the individual market will be perceived as a loss to some employees.

Even if employees receive a small raise to help them with buying their own coverage, employees may see the loss of work-based coverage. How long before that raise is considered just part of their salary? A month? A quarter? The connection between the raise and the coverage is tenuous and easily forgotten. Look at it from an employee’s point of view who …

  • Receives a raise and buys own coverage: my boss gave me a $200 raise. Coverage costs $250. Wow that’s a lot. Of course, after the raise it’s a net expense of $50, but still — $250 a month for insurance is a lot of money.
  • Has employer-provided coverage: My share of the health insurance premium is just $50. My neighbor pays $250. I’ve got a good deal.

Which way?

There’s a lot of other factors that will impact the movement of consumers between individual and small group plans. Employers may cover the cost of Bronze benefit plans and allow each employee to buy-up to a Silver or Gold offering. Companies could drop — or add — ancillary products like dental, life, long term care or disability coverage. The exchange could be easier to use than is anticipated today — or much harder.

Predicting whether health care reform will shift consumers from small group to individual or move them the other way is simply guesswork at this point. My advice to brokers who ask what they should do to prepare for this seesaw ride is to get engaged in both market segments. Brokers active in both the individual and small group markets will have plenty of customers regardless of which direction the teeter totters. I also suggest they become expert on assorted other benefit plans (voluntary benefits, group dental, life, long term care and disability). That way they’ll have additional opportunities to meet clients’ needs. Success under health care reform will go to the nimble and flexible.

What’s your guess? (Please vote only once)

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16 thoughts on “Health Care Reform: The Individual-Small Group Seesaw

  1. why not eliminate the employer out the equation? I get car insurance on my own – why can’t everyone just get their own individual insurance policy – take the employer out of it? its a paradigm shift in the way our system works, but that is what is needed. Also Earth to Republicans – this is Pro-Business and Pro-Individual – remember when you were all about that???

  2. Michael B

    The IRS.gov answer you gave was “the amount of premiums that can be deducted is reduced by the amount of the credit.”

    I think we could use some accounting advice in that it would seem to me that the amount of tax (income less deductible premiums) should precede the credit.

    It seems a little back to me.

    Malcolm

    • I’m still confused if the small business 35% credit is a big advantage for 2010 vs the standard 2009 deduction. Aren’t the insurance premiums deducted off of total revenue so if a company made $100,000 for the year and spent $20,000 in health insurance premiums then the companies taxable income would be based on $80,000?

      • Here’s a scenario that might help Michael: Assume a group that pays $20,000 in insurance premiums per year and is eligible for a 30% tax credit. Let’s also assume this company has an effective tax rate of 20%.

        1. With the tax credit only, the company would save $6,000 per year ($20,000 x 30%)
        2. With the tax deduction only the company would save be able to reduce its taxable income by $4,000 per year ($20,000 x 20%)
        3. Combining both the tax credit and the tax deduction, the company saves $6,000 from the credit and still reduces taxable income by $2,800 ($20,000 x 30% + ($20,000-$6,000) x 20%).

        At least that’s how I think this works. Any accountants out there want to take a shot at this?
        Alan

  3. Alan,

    As you review the employer choices under the health care reform, the question I cannot quite sort out is:

    Is the tax credit in addition to the tax deduction for employer premiums paid, or, is it in lieu of the deduction for premium paid?

    The in addition is very attractive, and the in lieu of does not seem to have a lot of benefit.

    I have not been able to find how it is handled in what I have read.

    Thanks.

    Malcolm

    • Saw this at the IRS website page http://www.irs.gov/newsroom/article/0,,id=220839,00.html
      Looks like the deduction is in addition to….

      20. Does taking the credit affect an employer’s deduction for health insurance premiums?

      A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.

  4. Great info. Surely the reform will cause more to be insured and hopefully fewer to suffer due to lack of insurance. Hopefully the insurance companies don’t raise premiums too high as a result of them accepting individuals that they typically would not.

    • The carriers are saying 15-20% premium increase. However, the New York individual market disaster indicates that’s it’s too low.

  5. I’m trying to better understand the massive bill that was just passed from both points of view. This is what I know about the bill thus far ( if my facts are incorrect plz provide proof for me to read on the subject.) And for all those who strongly opposed this bill plz explain why this bill should have been killed leave the # in your answer with your details so i know what part you feel was wrong for the citizens of this country.

    1. Once reform is fully implemented, over 95% of Americans will PAY to have MANDATED health insurance coverage, including 32 million who are currently uninsured but could possibly have a job in 4 years. Those that don’t will go on medicare

    2. Health insurance companies will no longer be allowed to deny INDIVIDUAL people coverage because of preexisting conditions—or to drop INDIVIDUAL coverage when people become sick. However, they may drop the coverage all together for everyone under that one particular group for that one particular condition.

    3. Just like members of Congress, individuals and small businesses who can’t afford to purchase insurance on their own will be able to pool together and choose from a variety of competing plans with lower premiums paid for with tax breaks that may not save them more money than the fine they will have to pay if they do not.

  6. I think we’ll see a big shift toward individual plans. The employer penalty for not providing plans to employees is too small; the majority of employers will take the fine rather than pony up more money to give workers good coverage, even though it can be a selling point to prospective employees.

  7. That is a pretty interesting article you wrote. No one really knows how the health care bill will affect the way people select their insurance coverage. There is a lot of change going on because of this bill. I just hope that people can find a coverage plan that best fits their needs.

  8. I happen to believe that a mass exit from group plans will occur. Why? The penalty for not providing is less than $200 per month. I haven’t seen a premium that low except on a healthy new born!

    Forget giving the employee a raise. That simply creates new tax revenue. Instead employ the use of a Health Reimbursement Arrangement. That way the employer can grant a monthly reimbursement (which can accumulate if not used) for premiums, co-pays, deductibles etc). It is a tax expense for the employer and non-taxable to the employee. That is a WIN-WIN.

    That is how I arrive at my guess.

  9. The individual market is unfortunately unworkable as drafted in the bill. The rating rules are very similar to NY and NJ where the individual markets have largely collapsed post state reform. By prohibiting pricing for health status, and limiting age rating to 3:1, Uncle Sam is effectively asking the healthy 15 year-old male to subsidize the unhealthy 64 year-old. The 15 year-old will quickly realize that paying the penalty is a much more cost effective way to go. (See the $1200 per month SINGLE policies in New York through Blue Cross, Aetna etc. ) When young, healthy people begin to forego insurance, it marks the beginning of the end.

    So health insurance utopia will last on paper through 2014, and then reality begins. I hope the small group market can work.

  10. As a small business owner the more I can lock good employees to my business the better. This is the major reason I offer group health insurance to employees, and feel that is the reason most of my small group customers do. I feel health care reform will have negligible effect on the small group market.

  11. According to the Whitehouse’s Council of Economic Advisors April report, small business owners will benefit quite a bit from the new health care reform and hopefully the benefits will be passed on in some way to the employees, as you mentioned. Currently, small businesses are even being taxed up to 18% more on insurance policies than large firms but soon many of these small businesses will qualify for a business tax credit to help alleviate that. Many small businesses will also qualify for purchasing health insurance through an insurance axchange which would provide more health care options and at lower costs than what is available to them now. Because of this, low-income employees (common in small businesses) would have access to sliding scale subsidies to help pay for health insurance. With these new options, hopefully small businesses will be able to offer health insurance policies through the workplace as “perks” without costing the employer as much as it has until this goes into effect. It will probably help small businesses gain quality employees and keep them around, which will result in healthy economic growth overall. I am not sure if the polices that will be available through the insurance exchange to small businesses will be the same polices available to the individual. Even if so, I figure that the business is better off offering the insurance rather than paying the employee the additional amount on their paycheck to help cover it because the small business employer can qualify for up to a 50% tax credit if the insurance is provided through them.

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