A number of facts indicate that small businesses are burdened more by the current healthcare system than large businesses. Fewer than half of firms with under 10 employees offer health insurance at all, according to a recent Council of Economic Advisors Report. In these cases, individual employees are left to purchase private insurance, which can cost in the range of hundreds of dollars per month for an individual to over a thousand dollars for a family. Small companies with more than 50 employees -- which are required by law to provide health insurance for their employees -- pay 18% higher premiums and have administrative costs that are three to four times higher than large businesses’. This can cut into small business profits and the competitiveness of the salaries they can offer.
President Obama has said that the “Affordable Healthcare Act” will take eight years to implement fully, but some of the earliest benefits will go to small businesses. In fact, it is predicted that small firms’ healthcare costs will decrease by as much as 30 percent over time. Small businesses would be wise to seek counsel from financial advisors and attorneys in navigating through the current 2,000-page plan, which is still evolving. The following primer on the latest developments should provide insight into how to proceed in the short term:
Insurance Exchange Program
An innovative development is the Small Business Health Options Program (SHOP), which will comprise state-run insurance exchanges where individuals and small businesses of up to 100 employees can shop. Rates promise to be less than half of current individual rates, since risks and administrative costs will be shared by all exchange participants and small businesses will have increased negotiating power. Although it will take until 2014 for the details of this federally mandated bill to be worked out by the states, more than 25 million individuals will eventually benefit.
The exchange program will be of particular value to lower-wage workers, who are prevalent in many service industries, as they may qualify for federal subsidies. Contrastively, employees with adjusted gross family incomes of more than $80,000 cannot receive the subsidies and would have to pay out of pocket for premiums that can cost more than $15,000 a year.
By 2014, insurance companies will be prohibited from denying coverage to individuals with pre-existing conditions. Additionally, they will not be able to continue the practice of charging higher rates to companies with more sick employees. Small businesses are at particular risk from this practice, since even one employee with a major illness can significantly impact their insurance rates. Insurance companies have also been curtailed in their ability to rescind coverage and to enforce lifetime limits on coverage for specific treatments, including psychotherapy, orthodontic and chiropractic care. In the interim, a temporary high-risk pool has been established to allow uninsured people with serious medical conditions to purchase insurance at affordable rates.
Small businesses would be wise to look, not only at health insurance rates but, at the potential tax ramifications of their healthcare choices. Companies that pay more than half of the cost of employee’s health benefits and have fewer than 46 employees who earn less than $50,000 a year are eligible to receive a tax credit equal to 35% of their premiums from now through 2013. From 2014 to 2016, the credit, which is applied against income taxes rather than employment taxes, will increase to 50%. Although companies with no taxable profits for the year cannot claim the tax credit, the benefit can be carried forward 20 years as a general business tax credit. Therefore, it is estimated that the tax credit will eventually have a positive impact on more then 3.5 million businesses and save businesses more than $40 million by 2019, according to the Congressional Budget Office (CBO).
Secondly, there is another hidden tax benefit to small businesses: The cost of providing medical treatment to 32 million uninsured people has been equivalent to an additional $1,000 tax on every insurance premium. When the national healthcare plan reaches more of the uninsured, that hidden cost should disappear.
One negative possibility to bear in mind: Small businesses deciding whether to apply for the tax credit should analyze whether the reporting costs of disclosing employees’ health benefits on their W2 forms will be prohibitively burdensome. For guidance about eligibility and risks/benefits, visit the IRS’s website (www.irs.gov), or “New Guidance” from the U.S. Department of Treasury.
“Pay or Play” Dilemma
Healthcare legislation doesn’t force employers with 50 or more employees to offer health insurance. However, the decision to withhold coverage can come with a price. Every employee who ends up finding health care coverage through the state-run healthcare exchange will cost their company a $2,000 fine. Since the average per-employee healthcare cost is $9,000, however, some companies might opt to pay the penalties instead. Another hidden risk small companies should watch out for is whether they will be required to purchase expensive add-ons to basic benefit packages.
However, there are other factors besides absolute costs that should be taken into consideration. These include attracting and retaining top employees, and the overall impact of healthcare reform on the economy.
Enhancing Employee Retention
Right now, some talented and experienced job candidates may focus their search efforts on large businesses because they can’t afford to take a job without health insurance. While their career trajectories, autonomy and even their salaries might be more generous at small companies, the cash flow challenges presented by purchasing private health insurance can scare many viable candidates away. The same challenge could also deter entrepreneurial individuals from starting their own small businesses. By contrast, being willing and able to offer health insurance as part of a compensation package can help small businesses attract their first-choice candidates.
Deficit Reduction for All
When all aspects of the healthcare act are implemented, the federal deficit will be reduced by an expected $119 billion, according to a February 2011 report from the Congressional Budget Office. The speculation is that costs will be cut through increasing the use of electronic medical records, minimizing administrative costs; and rewarding medical providers for positive outcomes versus number of billed procedures. Additionally, in the period between 2014 and 2019, the economy will get a boost through the fact that “cumulative personal healthcare spending would increase 2 % compared with status quo projections primarily as a result of increased utilization by the newly insured,” according to a February 2010 study by non-profit research organization RAND Health.
The impact of the Affordable Healthcare Act is yet to be seen; however, based on the facts the short-term impact looks promising. For more details on the Affordable Healthcare Act, you can visit the U.S. Department of Health and Human Services website at healthcare.gov.
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