Cost-Shifting to Cost-Sharing: Small Business Health Maneuvers

Premium hikes present three options: change carriers, change coverage or change employee contributions

By Andrew Sprung April 1, 2015

To date, the Affordable Care Act (ACA) has not strongly driven premium increases or cost-shifting to employees in health plans offered by employers. According to the Kaiser Family Foundation, premiums in employer-sponsored plans rose more steeply from 2004 to 2009 than from 2009 to 2014. Deductibles and out-of-pocket expenses have risen more or less steadily across that 10-year period.

While ACA taxes and coverage provisions are contributing to increases in employees’ premiums, according to Larry Levitt, senior vice president at Kaiser, on the whole “premiums have been growing very slowly, and at least part of that may be indirect effects of the ACA’s cost-containment efforts.” That is, slower overall health care spending growth has thus far at least partially offset new expenses that get built into premiums, such as the ACA’s new taxes on insurers and drug and medical device makers, and others that affect employers, such as the requirement to cover employees’ children up to age 26.

That said, continued price hikes hit small businesses particularly hard, and particularly unevenly, as their risk pools are small. ACA-mandated changes to the small-group market, Levitt notes—particularly the ban on pricing policies according to plan members’ individual health status or the employer’s industry, and limits on age rating—will lead to premium increases for some small businesses and decreases for others. A wash overall, in other words, but one that may swamp the ability of some small businesses to offer coverage.

Levitt adds that the full effects of those changes have yet to be realized because many small businesses have been able to keep their older policies under transition rules. Some 35 percent of covered workers in small firms were in grandfathered plans last year, compared to 22 percent in firms with more than 200 workers, Kaiser reported.

While there is no evidence as yet of a large-scale dropping of coverage by small businesses, a number of factors may lead increasing numbers to consider it: the continued phase-out of grandfathered plans, the uneven effect of new coverage rules, the delayed and stunted rollout of the ACA’s SHOP exchanges for small businesses—and the ACA’s creation of a viable individual market for those with incomes low enough to qualify them for subsidies.

The temptation may be particularly strong for small employers (those with less than 50 full-time employees) that are not subject to the employer mandate and so pay no penalty for declining to offer coverage.

What’s Best for Low-Wage Workers?

The case for dropping coverage may look particularly compelling to small employers of low-wage workers. While employer-sponsored insurance usually covers a higher percentage of the average user’s annual costs than does insurance in the individual market, that is generally not the case for buyers on the ACA exchanges whose incomes are below 200 percent of the federal poverty level (FPL). For those buyers, cost-sharing reduction subsidies raise the actuarial value of silver-level exchange plans to coverage of 87 percent of incurred costs (for buyers with incomes between 150 percent to 200 percent of the FPL) or 94 percent (for buyers with incomes up to 150 percent of the FPL)—coverage levels comparable or superior to those of high-quality employer-sponsored insurance.

With premiums also strongly subsidized, low-income workers may do better on the exchange than with insurance offered by their employer. Cost-sharing reduction enhanced silver plans may compare particularly favorably with small-business plans, which on average have higher deductibles than plans offered by larger employers. According to Kaiser, the average deductible for small employers in 2014 was $1,797, compared to $971 for employers with more than 200 workers.

Jody Dietel, chief compliance officer at benefits consultancy WageWorks in San Mateo, Calif., said that while she sees “a lot of discussion and interest in light of cost increases, we haven’t seen employers drop coverage so far.” She adds, “There’s continued concern about the public exchanges—the Supreme Court action doesn’t help.” That is, no one wants to send employees to the ACA exchanges only to see them crippled by a Supreme Court ruling in June that could bar the payment of premium subsidies to buyers on the federal exchange,, used by 37 states.

At the same time, Dietel said, some employers are thinking that they may be hurting employees by providing coverage. She cites one small employer that calculated that 76 percent of its employees would be eligible for premium subsidies on the exchange. “That raises a philosophical or moral question of what to do. So far, they’re looking at the issue, but we don’t see the movement yet. Employers still feel an obligation.”

Maxed Out on Cost-Shifting

Roger Howell, president of Howell Benefit Services in Wilkes-Barre, Pa., said that while most of his small-group clients have renewed, a steady trickle drops coverage every year. He has seen businesses and nonprofits max out gradually on health care costs. When an employer is faced with an insurance price hike, he said, “There are three ways to save money: change carriers, change coverage (that is, change the plan design or select a narrower network) or change employee contributions. Many clients get to the point where they have nowhere else to go: They can’t afford out-of-pocket contributions at the point of service or increased premium contributions.”

As of Jan. 1, 2014, individuals’ rates within a group plan in a given region were determined by age and tobacco use only, not by their health history or the industry in which they work. Accordingly, Howell said, “some of our older groups were hit with extremely large increases—over 30 percent. When an employee already has a $1,200-per-month family rate, a 30 percent hike is another $4,300 per year. They can’t sustain that kind of increase, and they’ve already passed as much to employees as the employees can stand.”

Cost-Shifting, then Cost-Sharing

One solution for businesses facing steep increases in the price of health insurance is to offer, and partially fund, tax-favored savings accounts that can be used to pay out-of-pocket medical expenses. There is an alphabet soup of options:

  • Health savings accounts (HSAs) are owned by the employee and must be paired with high-deductible health plans (HDHPs), which must meet minimum deductibles in 2015 of $1,300 for individuals and $2,600 for families (and are often much higher). HDHPs offer no benefits until the deductible is reached excepting the no-cost-to-enrollee preventive care mandated by the ACA.
  • Flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) are controlled by the employer and can be paired with any kind of employer-sponsored health plan, but usually one with a high deductible. FSAs give the employee more control than HRAs over which medical expenses can be paid with account dollars, and they can be linked to plans that provide some benefits before the deductible is reached.

Enrollment in HDHPs rose swiftly from 2009 through 2011 but has plateaued since 2012, according to Kaiser. HDHPs are also more prevalent among large employers than small ones. But the percentage of workers in small firms (3 to 199 employees) enrolled in HDHP plans paired with an HRA or HSA did double from 13 percent in 2009 to 24 percent in 2012 through 2014. Kaiser does not track the growth of HRAs paired with plans that are not HDHPs.

Historically, these plan types have been favored by higher-income employees who have more to gain by reducing their tax bills. But both Dietel and Howell have witnessed them moving down the food chain; lower-wage workers are getting used to them by necessity.

Dietel’s WageWorks specializes in helping companies implement consumer-directed benefits—HDHPs linked to an HSA or HRA—so she sees a lot of them and is a believer. “Change is hard for anyone,” she said, “but with proper communication, regardless of income—to some extent even more at the lower end—employees get more engaged in purchasing decisions,” she said.

In presentations, she works to get HDHP plan holders into a coupon-cutting mentality, presenting the tax break as a discount: “You’re buying a 12-pack of Coke; here’s a dollar coupon.”

Howell, in Wilkes-Barre, said that while HSAs remain unpopular among his clients because of the high deductibles, “HRAs are quite popular here.” He has helped establish a variety of cost-sharing arrangements between employers and employees:

  • Some make employees self-fund a portion of the deductible and then cover all costs (co-pays or co-insurance) beyond it.
  • Some split costs 50-50 or 80-20.
  • Some have a kind of reverse doughnut hole: The employee may be responsible for the first $500, the employer for the next $1,500, and the employee for expenses beyond that.

“We’ve gotten very creative,” Howell said.

Like Dietel, Howell has seen lower-wage workers adapt by necessity. Speaking about FSAs, which for 2015 have an employee contribution limit of $2,250, he noted that while the tax breaks are more valuable for higher-income employees, “even if you’re making $30,000, if you have $2,550 in expenses, you save $800 or $900 a year” if you fully fund the account.

Whether cost increases for employer-sponsored insurance surge anew or continue on their current relatively modest upward path, the employer tax exclusion for health benefits remains a powerful incentive to continue to offer coverage. That incentive has in large part created the sense of moral obligation that Dietel observes in employers. As long as employee wages are taxed and health benefits are not, businesses of all sizes are unlikely to renounce health benefits en masse.

Andrew Sprung is a freelance writer who blogs about politics and policy, particularly health care policy, at xpostfactoid. His articles about the Affordable Care Act have appeared in The Atlantic and The New Republic.

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