With a workforce of 80 people and no company-wide health insurance plan, Willan Johnson is a prime example of a small-business owner who feels uncertain about the Affordable Care Act. Johnson, CEO and co-founder of VivoPools, a swimming pool management service firm based in Monrovia, California, says he’s been discussing with benefits advisors and others how to accommodate provisions of the national health plan, popularly known as Obamacare, which go into effect next year.
“It’s still a little bit uncertain,” he says. “We understand that change is coming. We want everybody to have the opportunity to be insured. But how do you do that in a way that allows you to grow your business?”
That question and many others are on the minds of many business owners. And the answers aren't coming easy. The complexity of the law has bred vast confusion among owners, leading many of them to assume worst-case scenarios for their own businesses. However, this simply isn't the case: A small fraction of small businesses will actually feel the consequences of the Act. Of course, that doesn't mean you don't need to know the rules, and how it will impact you this year and what you need to do to grow your business in the coming years.
Since the national health plan’s 2010 passage, its elements have been phased in. One of the first provisions barred insurers from placing lifetime dollar limits on most benefits policyholders could receive. This year, states are to start setting up health insurance marketplaces to help individuals buy coverage in affordable plans. In October, open enrollment into those plans begins.
Starting next January 1, for the first time insurance companies won’t be able to refuse to cover people with preexisting medical conditions. In another change, insurers won’t be allowed to charge individuals and small groups higher rates because of policyholders’ gender or medical conditions. On the same date, policies will be barred from placing annual dollar limits—in addition to the already-prohibited lifetime limits—for most covered benefits.
Small Business Concerns ... and Confusion
Ordinary business owners face Obamacare requirements too. The major one is that, next year, firms with more than 50 employees will have to offer affordable health plans to workers who put in 30 or more hours a week, or pay annual penalties of up to $2,000 per worker.
The 2,400-page law and 15,000 pages of associated regulations are rife with complexity. For instance, the number of workers a company has is figured not just by counting heads but by dividing the total number of hours a workforce labors by the number of workers. Thus a company with more than 50 part-time employees might not fall under the coverage requirement, while a company with fewer than 50 employees might have to offer coverage.
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Complexity breeds uncertainty and concern. A November 2012 survey of small employers by Atlanta technology firm Cbeyond found 38 percent feared Obamacare will have a negative impact on their bottom lines this year. Just 15 percent expect it to positively affect firm profits.
These worries don’t necessarily mean firm profits will ultimately be harmed much or at all. Few business owners have the time, inclination and ability to draw firm conclusions about the future impact of a law that even experts have not come to a consensus on. “Many small businesses assume that any government regulation is going to be a net negative for them,” says Paul Carmody, Cbeyond’s chief marketing officer.
Cutting Through the Complexity
Nearly lost in the worry about Obamacare’s impact is the fact that only a very small percentage of firms will be directly affected by the coverage mandate. The Census Bureau says more than 21.7 million of the nearly 27.8 million U.S. businesses have no employees. Of slightly more than 6 million employer firms, 5.4 million have fewer than 20 employees. None of these firms will experience consequences for not providing health insurance, assuming they have fewer than 50 full-time and full-time equivalent employees.
A little more than 500,000 are like VivoPools, with 20 to 99 employees. Of the 127,000 remaining employers of 100 and more, almost all already offer company health insurance.
One of those too small to fall under the mandate is Scott E. Jordan, CEO and founder of SCOTTEVEST, a Ketchum, Idaho, maker of travel clothing. “We have about 15 full-time employees and are looking to hire four or five more,” Jordan says. “That will put us at 20 full-time employees. So I don’t think it impacts me.”
Like many smaller employers, Jordan does offer a company-sponsored health plan, paying 100 percent of premiums for employees. And he is joined by the vast majority of employers who have more than 50 on the payroll.
“It’s rare to the extreme that I would run into a company over 50 employees that doesn’t already offer health insurance,” says Matt Thomas, president of WorkSmart Systems, a professional employer organization that provides pooled health insurance and other human resources service. “That’s almost unheard of.”
That doesn’t mean many companies at or near the threshold don’t need to calculate whether they will fall under the coverage mandate. Thomas reminds business owners that the law’s coverage is based on full-time equivalent workers, not actual headcount, and includes part-time workers as well.
He warns against replacing full-time workers with part-timers to avoid having to meet the employer coverage mandate. Federal law prohibits interfering with a worker’s right to coverage. “You can’t just take one full-timer and turn it into two part-time positions because you want to avoid the ACA,” he says. “They will come after you for that."
Are Penalties and Credits Ineffective?
Some employers may consider just paying the penalty for not providing insurance. That comes to $2,000 per year per worker, but does not apply to the first 30 workers. Joe LaSpina, vice president with the family-owned Maple Lanes chain of bowling centers based on Long Island, New York, says the company has seen prices climb and benefits fall on the coverage it offers to eligible workers among its approximately 175 employees. If coverage gets more expensive, the company will face the question of whether to continue paying for insurance or pay the penalty.
“The easy answer is that we’ll stop paying for insurance and see if paying the penalty makes more sense,” LaSpina says. “But the real answer is 'I don’t know.'” Hiring more part-time employees who would not be eligible might not let them build the community relationships they need to generate business. “We’re better served by a better-trained full-time staff than having a bunch of part-timers,” he says.
Generally speaking, the penalties are not looking like a huge factor. “The penalties are not scaring anybody,” Thomas says. “With what people pay for health insurance, paying $2,000 when you exempt the first 30 employees is not that big a deal.”
Similarly, few companies are expected to take advantage of a tax credit designed to defray costs of offering the coverage. Credits are capped at 50 percent of the cost and will go only to companies that pay at least 50 percent of the cost of coverage and have 25 or fewer employees earning average annual wages of less than $50,000. The tight specifications rule out many companies. That, and the fact that only those with fewer than 10 employees get the maximum credit, means most employers who might use it are expected to simply deduct insurance costs as a normal business expense and forego applying for the special credit.
The Panic Over Premiums
As the public debate on Obamacare has unfolded the last several years, concern has focused on its separate aspects in turn. At one time, the employer mandate was expected to be a heavy burden, until it became clear that few firms would be affected. Now the hot issue is the cost of premiums.
Because the law requires plans to cover people with preexisting conditions and removes most benefit caps, insurers are warning that premiums are going up next year. One large insurer said premiums could rise more than 100 percent for some individuals and up to 50 percent for small group plans.
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Thus far, however, insurers have yet to set prices for 2014 coverage. And a Congressional Budget Office analysis said Obamacare would probably not cause premiums for small-business group plans to rise much more than they would have otherwise.
Still, most observers currently say higher prices, not mandates or penalties, should be the focus of business owners contemplating the impact of Obamacare. “It’s the insurance premiums that are the problem,” Thomas says.
Desperately Seeking Alternatives
One alternative is to self-insure. This is the route already taken by many larger companies, starting at about 100 employees. The companies allocate funds to pay employee health costs, usually working with insurance companies to set up and manage the plan and make sure they have enough set aside. Thomas says self-insuring is viable for many firms with 50 or more employees, assuming they work with a competent administrator. Self-funded plans can benefit if their employees are healthy, while not having to pay for other companies' unhealthy workers.
LaSpina says his company has been partially self-funding employees' health care by signing them up for high-deductible plans with health savings accounts , which have lower premiums, and then having the company pay the deductibles. “We’re kind of halfway there with the high-deductible plan,” he says. “But if something catastrophic happens to one of our employees, I don’t know if we can continue to do that.”
Another option is to have a company take over the role of employer and offer health insurance as part of the benefits. This is the solution offered by PEOs like Thomas'. “A PEO is a way for them to enter a self-funded plan that’s much larger than what they can get on their own,” Thomas says. For many, that means lower costs. He’s expecting his business to double next year as more employers look into PEOs to solve insurance woes.
The Upside
Not everything about the Affordable Care Act is causing worry. “If you peel back the provisions of Obamacare, there are some that are actually good for small business,” says Cbeyond’s Carmody. For instance, at least some small employers will get more tax credits to help pay for insurance that they were already providing.
Guaranteed issue provisions, which keep insurers from refusing to cover people based on medical history, are another potential plus. Obamacare could make coverage available, perhaps for the first time, to some small employers who have employees with preexisting conditions.
Carmody also speculates that some would-be entrepreneurs, especially older ones with family obligations and possible health issues, will be more willing to make the jump to business ownership. With guaranteed issue, they know they will be able to get health insurance, helping to manage an important risk.“Catastrophic health-care bills can destroy an individual and destroy a small business,” Carmody notes.
Crunching the Numbers
While the ultimate overall effect of Obamacare’s big 2014 rollout remains murky, business owners who study the matter carefully aren’t necessarily completely in the dark about their individual prospects. Johnson’s situation is more complex than many, with some workers covered by plans in effect when their former employers were acquired by VivoPools, but no company-wide coverage. He’s also in the gray area, with more than 50 employees, so he falls under the plan, but fewer than 100, where almost all employers have existing plans.
Johnson has put a pencil to it and come up with rough figures. He starts by assuming a pool tech makes $40,000 a year, and a quality insurance plan might cost the company $4,000 a year. “That’s a 10 percent increase in our overall labor costs,” he says.
Further assuming that labor is close to half of all costs, he has to find a way to cover a nearly 5 percent increase in total costs. That’s not nothing, but it doesn’t mean he can’t continue to grow the business.
“Part of that is trying to pass along some of that cost in a price increase to my customers,” Johnson says. “And certainly we’re going to try to operate more efficiently. Are there ways we can cut costs in other areas?"
Given the nature of his industry, Johnson isn’t sure that complying with Obamacare won’t improve his competitive position. Pool services is a highly fragmented business, with most players being too small to provide much in the way of employee benefits or to be affected by the health law. If VivoPools has to provide employees with insurance, it may give the company an advantage in hiring and keeping the better workers needed to lure more lucrative commercial customers.
“Regardless of how we deal with this, while there’s an additional cost, it’s going to give us an additional opportunity to attract higher quality folks to our company,” Johnson says. “And that’s our differentiation in the market.”
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