ObamaCare’s Mandates Are Harming Small Business

The Affordable Care Act’s employer mandate — intended to make employers provide employee health coverage — is having especially large effects on small businesses. Whereas large corporations typically self-insure — paying their employees’ medical bills and hiring insurers to administer health benefits — small businesses purchase group health coverage from insurers. Thus small firms face cost-increasing regulations as they go through the annual ritual of renewing their coverage. As the ACA is fully implemented over the next few years, ObamaCare will negatively affect how businesses operate — including hiring, employee compensation, growth and so forth.  If the early signs are representative of what the future holds, they are not encouraging.

The Mandate on Employers. Though most of the media attention has focused on the number of individuals who have lost health coverage and the rocky start of the federal and state health exchanges, much of the burden of complying with the ACA will actually fall on employers. About six-in-ten Americans with private health coverage get it through an employer. The cost is not trivial: The Congressional Budget Office estimates that the required coverage for an individual will cost the equivalent of an additional $3 an hour “minimum health wage.” Family coverage could cost more than twice that amount.

Employers are also required to limit the amount of premiums most employees pay to a percentage of their wage income. For example, health plans are considered “unaffordable” if workers earning less than 400 percent of the federal poverty level (about $46,680 for an individual) must pay a premium that is more than 9.5 percent of their income. Firms that fail to provide health insurance will be subject to a tax penalty of $2,000 for each uninsured employee beyond the first 30.  Firms that offer “unaffordable” coverage will pay a penalty of $3,000 for each worker who cannot afford coverage.

In theory, firms could retain their current health plan by claiming “grandfathered” status. However, according to official documents, two-thirds to as many as 80 percent of employer plans will likely lose their grandfathered status — forfeiting protection from cost-increasing regulations.

Effect of ObamaCare on Premiums. The consequences for employers (and individual workers) who must purchase coverage are already becoming apparent. A 2014 survey of 148 insurance brokers by the investment firm Morgan Stanley found that renewal rates in the small group market have risen substantially. For instance:

  • Premiums for firms renewing in 2014 jumped 11 percent in the small group market.
  • For firms with coverage through BlueCross, the year-over-year renewing contract premium hike is nearly 16 percent.
  • For individuals, the increase was similar — about 12 percent.

The survey found that since December 2012, rates for small employers grew 66 percent in Pennsylvania, 37 percent in California, 34 percent in Indiana, 30 percent in Kentucky and 29 percent in Colorado.

How Employers Are Responding. Some employers are reducing their costs by passing on more of the cost to workers, raising copayments for workers, boosting costs for dependent coverage or eliminating all coverage for a spouse. However, these responses are relatively benign compared to the hard choices some firms face.

A survey of more than 600 small business owners by the Society for Human Resource Management found that more than 40 percent of small business owners have delayed hiring due to uncertainty about the effects of the ACA. About one-in-five reported they have cut the number of workers they employ because firms employing fewer than 50 full-time workers are exempt from the penalties. Employers are also not required to offer coverage for employees who work less than 30 hours per week. The benefits consultancy Mercer reports that 12 percent of employers nationwide plan to reduce workers’ hours as a result of ObamaCare.

The ACA will induce many firms that have the potential to grow to stay small rather than face the costs of providing health coverage. Unfortunately, many workers will also find their hours cut to part time to avoid the cost of providing health benefits to workers unable to bear the cost. These responses are perfectly rational given the burdensome regulations in the ACA. However, these perverse incentives are not in the best interest of employers, workers — or society as whole.

More on this topic: The Effects of the Affordable Care Act on Small Business

Comments (19)

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  1. Devon Herrick says:

    Since Day 1 we’ve argued the Affordable Care Act creates perverse incentives that will cause small employers to response in ways that is not in the best interest of society (or moderate-income workers).

    We’re already seeing this: 1) Firms limiting more workers hours to part-time. 2) Firms slowing hiring additional workers.

    I believe it’s too early for there to be evidence, but in years to come I suspect fewer firms will grown beyond 50 workers. The cost of doing so will make hiring the 50th worker exorbitantly high. There may be other perverse trends that we haven’t seen yet but are likely to segment the labor market into high-wage and low-wage firms. For instance, some firms will probably price coverage in such a way that only certain workers will accept it.

    • Thomas says:

      I agree, firms will have no incentive to hire that 50th worker because they will likely start losing money. This will inhibit growth in a lot of firms simply because of the employer mandate.

      • Mitch says:

        creating more very small firms and giving more market share to the big ones, widening the gap between those that have a lot and those with a little, and pushing the middle down

  2. Jack Towarnicky says:

    You state: “… In theory, firms could retain their current health plan by claiming “grandfathered” status. …” Not true. Yes, any grandfathered health plan would meet the requirements as Minimum Essential Coverage (MEC), avoiding the $2,000 “pay or play” employer shared responsibility penalty tax under IRC 4980H(a); but just because your plan is MEC doesn’t also mean your plan is “Minimum Value” – a 60% plan – sufficient value to avoid the $3,000 “pay or play” employer shared responsibility penalty tax under IRC 4980H(b).

    All that said, sooner or later the most savvy of the “applicable large employers” subject to the PPACA employer shared responsibility rules will stop making iterative, compliance-oriented, tactical changes designed to comply with the next item on the PPACA hit list. Instead, they will identify the end state, and to the extent that they want to maintain coverage, make the jump to offer an option that is “bare Minimum Value” (bMV). Such a plan would be insured or self-insured, with a $6,000+ deductible (twice that for non-single), be offered only to “full time” common law employees and their children up to age 26 (excluding spouses, step children and foster children), where the employee contribution would be 9.5% of pay for the single tier of coverage (no maximum), or, where the individual elected non-single coverage, 100% of the cost of coverage (the employer will want to consider their fiduciary duties concerning plan assets should employee contributions exceed the actual cost of coverage).

    They know that no worker will enroll in any option with a $6,000 deductible that reduces take home pay by more than 10%. Nothing precludes offering other coverage options alongside bMV – the employer need only meet the minimum requirements in a single option to avoid the employer shared responsibility penalty taxes.

    It is only when bMV cost exceeds the dollar thresholds for the High Cost Health Plan tax (Cadillac Tax) that you will see widespread exits to the public exchange – such as those suggested in the offing by Dr. Emmanuel.

    In the interim, certainly, employers will be much more circumspect about their hiring practices where the cost of health coverage born by the employer is a significant financial consideration.

    And, it is only a question of time before employers shift from tactical compliance to strategic responses.

    • John R. Graham says:

      And the employees in such a situation, if they cannot afford the employer-based coverage will not be eligible for subsidies in the exchanges!

  3. Big truck joe says:

    20 years ago big business offshored manufacturing despite workers thinking it couldn’t be done while at the same time saving the company money. 10 years ago big business offshored customer service jobs despite workers thinking that couldn’t be done while at the same time saving the company money. 10 years from now big business will have “offshored” their employees healthcare to big government while employees will note it obviously will save the company money. Face it folks- if your jobs can be offshore to 3rd world countries to save the company money, your healthcare certainly can be offloaded to the govt. it’s just like Obama has wanted, the more people dependent in the govt handouts, the better.

  4. Brad says:

    http://www.forbes.com/sites/hollymagister/2014/04/30/5-6m-small-businesses-blindsided-by-obamacare/

    This article really supplements at lot of Devon’s arguments. The Affordable Care Act/Obamacare is really harming small businesses in a variety of ways. They are essentially getting “blind-sided,” according to this Forbes article.

  5. Mitch says:

    A friend of mine who works in retail (no names) has said that management has made a point to spread hours around so employees that once consistently had 40 hours (and thus qualified for coverage) now only have 30 (and thus no longer qualify)
    sad but you could kind of see that coming

  6. bob hertz says:

    The rate increases for group coverage have absolutely nothing to do with mandates. To my knowledge not a single mandate has been imposed on any company, and small businesses with under 50 employees may never face any mandates.

    The rate increases come from another part of the ACA that is little appreciated by the public. However insurance brokers like me are well aware of it.

    Rate differences have been suppressed or eliminated.
    Firms with younger or healthier employees now pay about the same as other firms. This has meant a premium increase for over 50% of group policies.

    • John R. Graham says:

      Which states to you sell in? In California, if I recall, the small-group market allowed ten percent plus or minus for experience in a rating region.

      It made the whole notion of health privacy absurd. We had one employee who worked in our little shop for two or three years, and that person was the only one who drove our premiums up to the top of the band.

    • Devon Herrick says:

      Bob, I believe CMS estimated that two-thirds of small groups would see a premium increase due to this:

      Section 2701 of PHS Act is titled “Fair Health Insurance Premiums” and requires adjusted community rating for plan years beginning on or after January 1, 2014. Specifically, premium rates in the individual and small group market charged for non-grandfathered health insurance coverage may only be varied on the basis of the following four characteristics:
      • Individual or family enrollment.
      • Geographic area – premium rates can vary by
      the area of the country.
      • Age – premium rates can be higher for an older
      applicant than that for a younger applicant,
      but the ratio of premiums cannot exceed 3:1
      for adults.
      • Tobacco use – premium rates can be higher for
      smokers, but the ratio cannot exceed 1.5:1.

  7. DoctorSH says:

    Why can’t really small businesses just not offer insurance?

  8. Phill S says:

    Good point Bob! Up until now, the employer mandates have yet to kick in, due to the lawless manner in which this president and administration have changed the rules mid-game. And why did the president unlawfully delay the employer mandate? To avoid retribution this November at the ballot box.

    It’s time to throw the bums out, that being anyone who supported this job-killing, wage-reducing law.

  9. Al Baun says:

    Devon — “The ACA will induce many firms that have the potential to grow to stay small rather than face the costs of providing health coverage. Unfortunately, many workers will also find their hours cut to part time to avoid the cost of providing health benefits to workers unable to bear the cost.”

    Mitch — “A friend of mine who works in retail (no names) has said that management has made a point to spread hours around so employees that once consistently had 40 hours (and thus qualified for coverage) now only have 30 (and thus no longer qualify) sad but you could kind of see that coming”

    Just an observation … but in our current growth environment, wouldn’t a company reducing individual employee hours be required to hire more employees just to handle a static workload … let alone any growth?

    Could I therefore deduce that any small employer who chooses to stunt his own growth–for whatever reason–is, by default, contributing to employment (of more 29hr employees who would then receive a larger ACA subsidy) and/or encouraging competition for their neglected market share?

  10. Bob Hertz says:

    Al raises a good point, which is that cutting hours below 30 a week might conceivably create more jobs. Not very good jobs, but jobs nonetheless.

    I do not know if anyone has studied this, but I doubt it is happening. Back about ten years ago, France shortened the legal work week in the hopes of increasing the labor force. I do not think it worked out. Many businesses have slack times, and the new health care laws may have enabled them to just send employees home sooner when business was slow. (Think about restaurants between 2 and 4 pm.)

    I find very little writing anywhere on why the ACA employer mandate has been such a failure so far. But there are some important lessons. A law that was supposed to help workers by getting more of them into health insurance has wound up hurting many of them. A worker who had 40 hours of pay and no insurance now has 29 hours of pay and still no insurance.

    Part of the reason is that either the taxes or health premiums are large dollar amounts. There is a lot of incentive to avoid either the tax or the insurance by staying under 50 employees.

    Social Security and Medicare taxes have very high compliance rates, but remember they started at about 1-2 of payroll and have climbed gradually over the years. Remember the old analogy about two ways to boil a frog. Either you put the frog in lukewarm water and slowly increase the heat to boiling, or you just boil the water and drop him in. Guess which works better.

  11. Jack Towarnicky says:

    Part time employment is almostatall time highs. Coincidence or intended/unintended outcome.

  12. Bob Hertz says:

    The original House version of the ACA would have had the firms which do not provide health insurance be subject to an additional payroll tax.

    If the firm’s payroll was $750,000 and the tax was 5%, the firm would pay in an additional $37,500. (assumedly to fund the subsidies in the exchanges).

    The $37,500 would be due whether you had 49 or 51 employees, and whether they were full timers or part timers.

    The non-providing-insurance businesses in food service, retail, et al were of course wildly against this proposed tax.

    So this foolish full time – part time rule was the replacement in the final bill.

    Some of the liberal drafters of the bill thought that firms would not cut hours below 30, because it was inefficient and might also provoke employee resentment. This was very naive, in that part timers have zero bargaining power, and employers all the way from Walmart to Microsoft to big universities have never cared a whit about whether their part timers are resentful.

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