Health Care Reform: Small Business Impact

Thursday, December 31, 2009

Although we are still awaiting the final reconciliation of the House and Senate versions of health care reform, small businesses will likely be impacted greater than any other business entity. The House’s version of health care defines “small” by sub-dividing this group designation into three categories: Smallest, 25 or less employees, Smaller, 26 to 50 employees, and Small, 51 to 100 employees. The Senate’s version defines “small” as from 1 to 100 employees. Currently, the Health Insurance Portability and Accountability Act (HIPAA) defines small group size as those businesses with 2-50 employees. The National Association of Insurance Commissioners (NAIC) defines small group size as those businesses with 50 or fewer employees with mid-sized being defined as 51 to 100 employees. America's Health Insurance Plans (AHIP, http://www.ahip.org) defines a small group size for health insurance to be 50 of fewer employees. AHIP is the member association of some 1,300 member companies that provide health insurance to over 200 million Americans.

How are small businesses important to the US economy? Small firms:
• Represent 99% of employers.
• Employ over 50% of private sector employees.
• Pay 44% of US private payrolls.
• Generated 64% of new jobs in past 15 years.
• Create more than half of nonfarm GDP.
• Hire 40% of high tech workers.
• Are 97% percent of exporters.
• Produced 30% of export value in FY 2007.
• Produce 13 times more patents than large firms
U.S. Dept. of Commerce, Bureau of the Census and International Trade Admin
http://web.sba.gov/faqs/faqindex.cfm?areaID=24

It is apparent that “small” businesses play a sigfincat role in the US and global economies and whatever impacts those businesses ripples throughout the entrie business economic system. One of those “impactors” is healthcare. Health care for new small businesses is expensive and difficult to obtain even though HIPAA guarantees issue and renewal of groups under 50 employees. However, HIPAA does not control the cost of coverage.

Typically, groups that lack creditable claims experience are rated (quoted/priced) for premiums using the carrier’s “standard” or “book” rates for fully insured groups based on the group’s demographic and occupational characteristics. Typically, standard rates are those rates approved by the carrier’s respective “commissioner of insurance” for similar unrated groups. The issue for small business is that these rates are often high due to the unknown and unpredictable nature of the small group’s future claims experience.

Since there is a high degree of unpredictability relative to the cost of small group coverage, small businesses may be reluctant to offer health care to their employees. While renewal for groups under 50 is mandated by HIPAA and the renewal rates are NOT; small businesses may be reluctant to offer coverage that they may discontinue in the future. Carriers generally require both a minimum enrollment by eligible employees and financial contributions by the employer; however, small businesses may have difficulty meeting both requirements. Small groups are highly sensitive to a small number of high dollar claims; even 1 or 2 large claims can result in significant premium increases at the next renewal time. Finally, many carriers simply decline to quote new small groups due to the instability of the business entity and the volatility of claims.

The House and Senate versions of health care reform attempt to bring stability to small group rates by placing limits on rates, rate increases, and the methodology of how rates are calculated. In addition, by offering coverage through “Exchanges” small business will have an alternative to traditional carrier coverage.