Small Firms Hit by Big Changes in Health Coverage

The Wall Street Journal reports:

“Businesses with fewer than 50 workers are exempt from the most stringent requirements for larger employers under the federal health-care law. But that doesn’t mean they’re off the hook entirely.

Smaller employers aren’t required under the Affordable Care Act to offer coverage for their full-time workers—as larger firms must by 2016 or face penalties, for instance. But many owners of small ventures and startup entrepreneurs are nonetheless facing big changes to how they obtain their own health coverage, as well as to the benefits they’re able to offer employees.

“It’s a myth that smaller firms aren’t being hit” by the health law, albeit in less obvious ways, says James Schutzer, president of the New York State Association of Health Underwriters, referring to employers with fewer than 50 workers.

Several thousand of the nation’s smallest business owners—sole proprietors and the self-employed—were kicked off their small-business plans by carriers earlier this year. That is because new guidelines define “employers” as having at least two full-time employees, not including a spouse, in order to be eligible for group plans.

In all, more than 78% of the estimated 28 million small businesses in the U.S. have no employees, according to the Small Business Administration. These business owners must now seek coverage as individuals, or face fines.

Many consumers and small-business owners are finding affordable plans on the individual market, according to government health officials and insurance brokers. But at least some of the business owners who were excluded from group plans as a result of the health law are struggling with higher premiums, less robust benefits or uncertainty within a new, unfamiliar network, says Scott Lyon, vice president of the Small Business Association of Michigan.

In December, the association’s own group plan, which currently has 4,000 small-business members and covers about 40,000 workers and their families, was forced to kick out 700 sole proprietors, he says.

Here’s a closer look at recent changes for three different businesses with fewer than 50 employees:

An Engineer’s Higher-Cost ‘Group’ Plan

Raymond Pezonella currently receives health coverage for himself and roughly 30 workers at his Reno, Nevada, engineering firm through a local builders’ association. He pays about $9,000 a month into the plan, known as an Association Health Plan, or AHP.

The plan includes 220 other local businesses, from carpenters to painters and plumbers, covering more than 5,000 workers and their families. His employees pay around $1,800 each in monthly premiums.

By pooling together with other employers, Mr. Pezonella says he was able to save nearly 14% on annual insurance costs for his company, which designs foundations for homes, schools and other buildings. “You want to do right by your team, not just to keep them around, but to keep them healthy, too,” he says, adding that his firm has been on the group plan for more than two decades.

But earlier this year, his policy, administered by the Builders’ Association of Northern Nevada, was defined as a “small group” plan under federal guidelines, because none of its members have more than 50 employees and each pay separate rates, says Mike Dillon, the builders’ group executive director.

As a result, the plan faces a number of new requirements, such as a ban on charging higher premiums to riskier members. Most large group plans are exempt from that requirement.

Mr. Dillon estimates the change will boost the cost of members’ monthly premiums by 40% on average next year. “Most members with low rates now are going to see them go up, and a few with higher rates may see them go down,” he says.

Tony Novak, an independent small-business benefits consultant in Newport, N.J., says many small-group plans, like Mr. Pezonella’s, are becoming less attractive under the health law. “Most small firms would be better off financially by canceling group coverage and giving taxable bonuses to let employees purchase coverage on the individual market,” he says.

Mr. Pezonella might now opt out of the plan. He’s worried the company’s workers won’t be able to find comparable plans on their own. He’s also worried about losing access to his longtime network of doctors and physicians by switching plans.

Not Defined As ‘Employers’

Sandy and Larry Eiler, owners of an Ann Arbor, Mich., marketing firm, were bumped off their group plan late last year. The plan, offered by the Small Business Association of Michigan and underwritten by Blue Cross Blue Shield, covered the bulk of their health-care costs, including a regimen of blood-pressure, heart- and other medications worth more than $3,000 a month.

But according to the small-business group, the couple’s firm, Eiler Marketing—with 17 independent contractors and just under $1 million in annual revenue—is no longer considered an “employer” under the health law. In a letter late last year, the carrier said the plan would be terminated for 2014.

The Eilers, who are in their 60s, obtained coverage under Medicare in January. But while their premiums dropped to just $272 apiece monthly, they face certain periods when they will temporarily bear up to 72% of the cost for their monthly medications, as a result of an annual funding gap in Medicare Part D drug plans, known as the “doughnut hole.” That is causing a strain in the firm’s monthly cash flow, says Ms. Eiler, even if the total annual costs are lower.

Adam Okun, senior vice president of Frenkel Benefits LLC in New York, says many private plans have richer drug plans than Medicare, in part due to a government subsidy for employers who offer comparable coverage. He says the health law is taking steps to close the funding gap in Medicare drug plans by 2020.

Until then, Ms. Eiler says the couple is looking into buying cheaper medications from Canadian online pharmacies: “If we were given the choice, we would absolutely have stayed on our group plan,” Ms. Eiler says.

Owner Ditches Employer Plan, Offers Raises

Randy Butler says the health law allows him to disband a small-group health plan offered to employees at his Carson City, Nev., real-estate firm since 2002.

The 64-year-old says he initially created the plan because of a past illness, hepatitis C, which prevented him from getting insurance on his own. He currently pays about $4,500 a month into the plan, which covers himself and four office workers ranging in age from 20 to 51, he says.

Mr. Butler says he insists that all employees at his firm be covered: “If you work for me, you have to have medical insurance,” he says, citing an employee who recently had emergency eye surgery: “It can be a lifesaver.”

Yet by October, Mr. Butler says he plans to close the group plan, give his workers an extra couple of hundred dollars a month, and let them shop for their own health plans on the open market. Under the health law, individuals cannot be denied coverage as a result of an existing condition, or be charged higher rates. After consulting with his carrier, Mr. Butler says he expects to pay no more than $1,200 for his own individual plan.

Such a move may come with hidden costs. By shifting monthly expenses from health coverage to payroll, “employers face payroll taxes on that amount and employees may be paying higher income taxes, too,” says Mr. Schutzer, the New York benefits consultant.

Depending on the size of the raise, some workers may even lose their eligibility for tax subsidies for the costs of individual insurance, Mr. Schutzer adds: “It sounds great—give your employees money to take care of themselves—but it’s not really so easy.”