For Small Business, Nowhere to Hide


By Dennis Boone



Large companies won a one-year reprieve from the employer mandate under health-care reforms. Smaller companies face different issues, but those aren’t waiting until 2015 to make their mark.

Here’s what Melissa Dziurawiec gets when she does the math: The chief financial officer for Lynxspring tracks revenue growth that has made the Lee’s Summit company one of the fastest-growing firms in the region, soaring from $1.5 million in 2006 revenues to nearly $11 million in 2012. Along the way, the company has made roughly 5–8 annual hires in recent years to accommodate growth in selling, installing and servicing building automation control systems. The employee head count now stands around 30.

At the high end of that hiring rate, Lynxspring would move from exempted small employer directly into the path of a federal mandate: It would be required to provide health insurance for employees well before full implementation of the Patient Protection and Affordable Care Act in 2018.

And when that happens, something will have to give for a company that has prided itself in paying 100 percent of employees’ health-insurance premiums.

“When we talk to our employees about what this means and the company’s perspective on health-care costs, in a year or two that may change drastically, because we’re not able to swallow those big increases,” Dziurawiec says. “It’s frustrating for employees; they hear things in the marketplace and think maybe they can get cheaper stuff going outside the company, but if we offer insurance, they can’t get those incentives.”

The frustration doesn’t stop with employees—management feels the pain, too. Just differently.

“It definitely changes how you look at things—you don’t want to run your business by what the health-care laws are,” Dziurawiec says. “But when you’re creating long-term budgets, you now have to put into consideration what these costs mean for the company and for current employees if you hit certain benchmarks. You have to consider what it will do to the bottom line, the efficiency of the current staff. And what the impact is if you do add employees, and what impact there is if you don’t.”

For the most part, in the 3.5 years since the ACA became law of the land, “what we’ve had to deal with has not been extreme,” she says.

That, however, is changing. Rapidly.

 

Hitting Home

For all the disruptions it has caused with business planning, for all the overheated rhetoric in Washington, for all the tsk-tsking over stories about millions of individual buyers receiving cancellation notices from health insurers, one glaring truth of health-care insurance reform is this: Tens of millions of small businesses that weren’t the primary targets of the ACA have just gone through a tough process to keep coverage in place, and that process will be far more challenging next year.

“I think that’s exactly right: It’s very unpleasant now, but it’s going to get worse,” says Matt Krull, a broker-consultant for Leawood-based CBIZ. “The overall reaction from employers is that most now have a solution in place for the next 12 months, but they have had a glimpse of the 2014 (renewal) rates will look like, and they’re shocked.”

As a result, say brokers and insurers, conversations with small-business clients this year have been their most challenging ever.

In some ways, what’s happening with small businesses borders on the ironic. When the law passed in 2010, it marked the first time that a fringe benefit for employees had become a compulsory function for all businesses with at least 50 employees, under federal penalty of a $2,000 fine for every eligible employee not covered. History will decide whether that was governmental overreach, but critics weren’t about to wait for history to make its call: They staged a long campaign to press for modifications to ACA, and last July, Barack Obama caved. By presidential fiat, he declared that the employer mandate would be delayed one year, to 2015.

Businesses with fewer than 50 employees weren’t supposed to feel the heavy hand of government on their operations quite the same way as their larger brethren. As it turns out, the hand of the marketplace weighs just as much. For them, however, there’s no sign of a presidential reprieve coming.

They’d best not expect one, brokers say.

“I think the thing I hear most frequently that gives me heartburn is from employers in that under-50 space, ‘Well, we’re not subject to the employer-shared responsibility,’ or ‘they delayed the ACA for a year,” says Karen Vines, VP for employee benefits, governance and compliance with insurance brokerage IMA. “It’s not that broad. There’s definitely work we have to do helping clients understand that even if you avoid the penalty landscape, the majority of the other mandates do affect you.”

 

Cost Factors

At its core, insurance is a balancing act, a game of managing risks: Insurers have traditionally sold policies to various pools of customers, taking into consideration factors like health of the population covered, their ages, behavioral risks like smoking, and many other variables. With ACA, notes Mary Amundsen, managing director for Bukaty Companies, the all-important health factor has been … well, factored out.

“In the 2–50 (employee) group, we’re no longer underwriting come January 2014 for health factors,” Amundsen says. “Not even for pre-existing conditions. Right now, a group with a lot of health conditions and medications gets a higher rate than a group with a lot of young people and no heath conditions. That was the essence of underwriting.”

But now, policies are being written that take into account age, family status, geographic status and tobacco use “but not for health at all,” she notes. The impact? Older, sicker people are getting better deals
on rates, or seeing smaller increases, and the young and healthy will have to pay
for it—if, that is, they choose to make a decision not in their best financial interests by signing up for coverage.

That dynamic may have been lost in the congressional effort to cobble together 2,000 pages of legislative guidance, but the effects of that change were predictable for those who live in the underwriting world. “In our market of small group employers, we’re seeing a few—it’s definitely a minority—who will see rate relief in January 2014 because of the new underwriting requirements,” Amundsen said. “But we’re seeing many, many more adversely affected, some as high as 35 percent higher in their rates.”

The loss of those health factors as an underwriting criterion was a consequence of ACA’s Modified Community Rating, a standard that forces insurers to limit variations in prices of coverage for those at the high end of the price scale to no more than three times the rates charged to those at the low end. Previously, insurers had been able to assess people with greater health risks rates of up to five times the lowest.

By compressing that table, higher-risk customers won’t suffer the same kinds of shocks that young, healthier people entering the system will. But even though the costs borne by those younger clients will subsidize health care for the uninsured and for older, riskier customers, that doesn’t mean those on the high end will see their rates come down. They’ll still feel a hit, just not as hard a hit as the previous actuarial standards might have required, brokers say.

 

 

Dodging Bullets

To help them manage that spike, many carriers gave companies the option of renewing with a policy date effective Dec. 1, which gets them to the brink of 2015 before they have to deal with far higher costs. And those policies are being underwritten with existing standards, which also helps contain costs. For the fortunate few who would have seen declines come Jan. 1, Amundsen said, they had the option to renew then and capture those savings.

Like other carriers, Blue Cross Blue Shield of KC looked at what was coming down the road as far back as 2010 and anticipated the impact on business clients One response to that, says Ron Rowe, VP for small group plans at BlueKC, was to offer that December 2013 renewal and cap on premium increases of 10 percent or less.

Most of their existing corporate clients jumped at the chance to do that. “They’re making that move to delay the bigger increases for another year,” Rowe said. At the same time, BlueKC is seeing more new activity in its small business unit than ever before, as overwhelmed owners and their exasperated HR executives seek guidance on how to manage costs, he said.

Lynxspring, one of those clients, was looking at a 48 percent increase for 2014, but the December renewal pushed that off for at least a year and kept the increase manageable. Still, it meant going back to employees who had seen rate increases in April for family coverage and telling them they had to absorb yet another increase in the same calendar year, Dziurawiec said.

Employers, said Krull, are in a tough spot for other reasons, too. “If the exchanges had been up and running smoothly this summer, and people had been able to get good information about their options, some employers might have said, you’ve got that option and the guaranteed access, go for it.” But with the difficulties the feds have had getting the Healthcare.gov Web site functional, “not one client thinks that it’s going to be a solution,” he said. “The pricing is no better on those; we priced out our own plan, and it looks no different” than small-group rates offered directly through carriers.

 

Other Options

While juggling the numbers, business owners and HR executives have to determine whether to retain coverage and tighten things up elsewhere, share more of the costs with employees, or withdraw altogether. They could tell employees to find coverage through the exchanges and offer a company subsidy. Most, say brokers, aren’t going to risk the human capital losses likely if they simply canceled coverage and paid the per-employee fines.

But there will be other alternatives out there, eventually.

One is the SHOP exchange through the Small Business Help Options Program. So far, it hasn’t attracted much attention from companies in this region because of the same factors that have confounded buyers in the individual market—it’s a part of the same Web portal at Healthcare.gov, which didn’t go live until Oct. 1, and even then, didn’t work for most users. But the lack of interest overall is grounded in the products offered there, said Vines.

In any case, even the SHOP exchanges won’t be in place; the Obama administration in November ordered a one-year delay in their implementation, as well.

“Everyone is still looking for a solution, that magic bullet to make this manageable,” Vines said. “They want to look at every available angle, but the reality is if you’re looking at the same policy inside or outside of SHOP, you’re comparing an apple to an apple.”

BlueKC’s Rowe said more employers may be interested in pursuing what the SHOP exchanges offer when confronted with much higher rate increases late next year. But more intriguing for some busines-ses, particularly those with younger work forces, is the idea of self-insuring to cover employees’ basic health-care needs, and reinsuring to cover higher costs of catastrophic care.

“That limits your exposure on claims,” Rowe said, “and you don’t have to comply with the modified community rating, you don’t have to comply with qualified health plans, the benefits you have to offer are not dictated by the federal government, and you get around some of the taxes. Some of our competitors have stuff on the marketplace for that already, a couple that would make me nervous, but a couple that make sense, too. So we’re looking at that.”

But with most companies taking advantage of late 2013 renewal options, “they’re taking 2014 as a time to do good, in-depth analysis of the options and costs and see what emerges,” he said.

 

Looking Ahead

Compounding the business decision-making process are political considerations. We have a president who has already delayed the employer mandate for a year, SHOP exchanges for a year, and, most recently, deferred the sign-up period for 2015 until after the mid-term elections in 2014. What’s to prevent an additional deferment of other ACA aspects into 2015 if the administration senses voter outrage building when renewal statements come due next Oct. 1—
five weeks before elections that could tip control of the Senate to Republicans?

At that point, there could be enormous pressure on Democrats to make drastic alterations to the law, join GOP efforts to repeal it outright, or press for additional delays to get past the elections. But every one of those potential outcomes builds even more uncertainty into a business climate fraught with it for years—with predictable effects on economic growth.

As a practical matter, said Lynxspring’s Dziurawiec, “the longer they push it off, the better it is for us. Our goal is to sell systems, make money and grow, and we want to con-tinue to be a company that is successful.”

Once the rules are in place, though, leadership will deal with them, she said. “The nice thing about being a small company is we can move quickly, so changes in market, changes in the law, we can absorb pretty quickly. We don’t put a lot of time into thinking ‘If X happens, then we do Y.’ We say this is how we want to run things, this is the impact, and are we going to change because of it, no or yes,” Dziurawiec said.

“But we’re not going to let it run us.”