CBT Q&A: The Pulse of Local Business

Calculating health care reform’s impact on insurance cost

The CBT asked Philip Naught with the Naught-Naught Agency in Columbia and Debra K. Mathes, a CPA and partner at Williams-Keepers LLC, about trends in the health insurance market and the impact of the new health care law.
The cost of employee health insurance for small businesses in Columbia has been steadily rising for years now. How does the cost this year, and the estimate for next year, compare with past years in your experience with clients?
NAUGHT: This has been a fairly typical year for rate increases. We’ve seen groups that have double-digit increases as well as low single-digit increases. This is likely to continue into the future as premiums are closely tied to health care costs, which continue to rise.
MATHES: Our clients continue to see increases in their overall health plan costs. We typically have seen increases of 6 percent and more, depending on the size of the plan. I estimate that the general trend for 2011 will continue upward, but more factors enter into the overall equation, including whether an employer is going to try, if allowed by their insurance carrier, to “grandfather” their plan from certain provisions of the Patient Protection and Affordable Care Act.
Do you predict that that costs will increase under the new health care law because it will require them to provide more benefits, such as coverage for preventive care?
NAUGHT: The new health care reform law requires a high level of services for preventive care. In the past, many health insurance plans included preventive care subject to a deductible, co-insurance or a co-pay. Under the new law these services are required to be covered at no additional cost to the insured. Improved benefits for employees and higher expenses for the insurance company will likely push premiums higher.
MATHES: I believe that overall costs will increase as a result of the new health care bill, but it might be for reasons other than enhancement of coverage changes. The Centers for Medicare and Medicaid Services actuaries performed an analysis of the overall impact of health reform on national health spending, and it showed a relative small increase in overall health expenditures as a share of gross domestic product by 2019.
I anticipate an increase in premium costs to small businesses that historically have had relatively healthy employees and favorable claims experience, while others who have had unfavorable claims experience or difficulty finding coverage for employees might find their insurance premiums more affordable. I also believe the compliance cost for small employers will increase significantly.
A number of new reporting requirements that are a part of the PPACA could become a considerable burden on small employers. For example, the new law requires employers to report the “aggregate cost” of employer-sponsored group health insurance coverage, excluding any salary reductions deferred to a flexible spending account on the employees’ 2011 Form W-2s. We are expecting further guidance from the Internal Revenue Service on the factors to be used to determine this aggregate cost. This is just one example of numerous new reporting mandates that are a part of the new health care bill.
A study sponsored by Families USA and Small Business Majority, nonprofit organizations that describe themselves as nonpartisan, found that about 92 percent of Missouri’s small businesses (less than 25 employees) are eligible to receive a federal tax credit this year if they purchase health care for their workers. Are small businesses in Columbia applying for the federal tax credit?
NAUGHT: We believe that qualified businesses will apply for the tax credit. Many health insurance company websites and the IRS website are offering detailed information and calculators to help businesses estimate their potential credit. Due to some restrictions, businesses should work with their tax preparer to make sure they are calculating the credit properly.
MATHES: Although we have had a number of inquiries regarding the credit, it’s impossible at this time to determine the credit for anyone whose taxable year has not ended because it is dependent on average annual wages. There are numerous eligibility provisions that must be met to qualify for the credit, and the premiums paid on behalf of the business owners are not counted in determining the amount of the credit. Additionally, businesses with the same owners are treated as a single employer for purposes of the credit, which sometimes causes them to lose eligibility, either because they end up with more than 25 employees or the average salary exceeds the dollar threshold when you combine the businesses.
The Small Business Health Care Tax Credit will be claimed on a Form 8941, which was just released in draft form last week, when filing your income tax returns next year. In other words, the credit will be claimed at the same time that you do your income tax filing or your annual informational filing if you are a tax-exempt employer. It is not a refundable credit, meaning the credit for a year offsets only an employer’s actual income tax liability (or alternative minimum tax liability). However, if there is not a current year income tax liability, it can generally be carried back one year and carried forward 20 years.
Have you seen any indications that the tax credit will help small businesses in Columbia afford to pay at least half of the cost of employee health insurance?
NAUGHT: It is unclear if the tax credit is promoting businesses to begin offering employer sponsored health insurance. The small-business tax credit continues from 2010 through 2014 with the possibility of two additional years. The tax credit is temporary, and qualified businesses will likely experience another increase in cost once the tax credit expires.
MATHES: We have seen a great deal of motivation from tax-exempt organizations that appear likely to qualify for the credit, including those that anticipate the credit might make them more competitive in attracting and retaining employees. Some are seriously exploring ways to cover at least 50 percent of the employees’ premiums if they are not already doing so.
Are you seeing more companies passing on higher premium costs to workers because they can’t afford to absorb them?
NAUGHT: Yes, but we don’t believe this is a function of health care reform. Increased premiums, cost shares, co-pays, deductible, co-insurance and prescription cost is a strategy employers have used for many years to mitigate renewal increases. More employers are now communicating the true cost of benefits to their employees. Education about the cost of health care is beneficial for both employers and employees.
MATHES: I can’t say that we’ve  seen an upward trend yet in the percentage of the total premium cost of the health care coverage being passed on to employees, but I believe it’s on the horizon. It’s an anticipatory result of the cost containment practices that a majority of employers in our marketplace have already gone through during the past few years. Many employers have already considered or added a high-deductible plan option, many times with a Health Savings Account companion employer contribution, so the upward trends in the premium costs have not always been directly associated with the employers’ share of the premiums. In some cases, we have seen employers paying the same uniform percentage of the premiums but slightly reducing their employer contributions to companion HSA accounts.
Is there an anecdote you could share about challenges local businesses have faced providing health insurance for employees, without specifically identifying companies?
MATHES: I would take this opportunity to caution people that there is a great deal of misinformation regarding these changes being spread virally across the country, including through e-mail and other methods.
One recent example indicates that the health insurance Form W-2 reporting requirement, which begins in 2011, means employers will lose any tax deductions with respect to employer-provided health care benefits. Fortunately, there is no truth to that, but that’s just an example of the public’s lack of knowledge about the new health care program. We encourage business owners and employees to learn as much as they can about PPACA prior to making substantive changes to their health care plans.