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