With 2014 and health care reform right around the corner, small businesses are strategizing about the best health insurance solution. And with the exchanges opening this month, it appears that many small businesses are passing up the small business SHOP exchanges, and opting to send employees to the individual exchanges.
Although the small business SHOP exchange may seem attractive on the surface, it is still a group health insurance plan and it doesn't address the core problem that group health insurance is broken.
Small businesses hoped the SHOP exchanges would help them offer affordable health benefits that employees value. But instead:
Competition is low in the SHOP exchanges (i.e. in most states there is still little choice for employees, and little competition to drive costs down).
Premiums cost more in the SHOP exchange policies (i.e. the premiums are still cost prohibitive for most small businesses).
- Premium subsidies are only available in the individual exchanges (i.e. providing further cost incentive to send employees to the individual market).
Here's a closer look at each of these.
Competition in SHOP Exchanges is Low
Some states, such as Texas, only have one insurance company offering policies through the SHOP exchange. Because of this, many employers and health insurance agents are hesitant to send their clients’ and/or employees there to shop for group insurance. Additionally, the provision that the SHOP exchange was to provide an "employee choice" option to small businesses, where employees are given a menu of plans to choose from, was delayed until 2015.
Sending employees to the individual health insurance exchanges, or to the private individual market, provides employees more choice.
Premiums Cost More in SHOP Exchanges
Sending employees to the individual health insurance exchanges also provides better value to the small business and to the employees.
For example, in Michigan, an example SHOP Silver plan for a 50-year old costs $481.35 whereas a similar Silver plan on the individual health insurance exchange costs $451.23. And, if the employee is eligible for tax subsidies his or her cost may be reduced even more. For example, if the same 50-year old employee is single and earns $32,000 in 2014 he will pay $235.75/month out-of-pocket each month.
And, if a small business is contributing to employee's individual health insurance with a pure defined contribution plan, the employer will see their healthcare dollars go farther.
Tax Subsidies Only Available on Individual Exchange
By allowing employees to buy health insurance through the individual exchanges, employers are opening them up to be eligible for premium federal premium tax subsidies. When offered an “affordable” group health insurance plan, employees become ineligible for the federal tax subsidies offered through the individual exchanges.
Eligibility for the subsidies is based on a standard called the "federal poverty level" (FPL). The employee's subsidy will cap the cost of their health insurance between 2% and 9.5% of his or her annual income, depending on how much money they make. Employees who earn up to 400 percent of FPL may be eligible. This translates to an individual earning up to $45,960 in 2013 and a family of four earning up to $94,200 in 2013.
While the small business tax credits are available on the SHOP for eligible employers, the incentive is low compared to the individual premium subsidies and cost savings on the individual exchanges.
The Solution - Pure Defined Contribution Health Plans
Because of the core issues with group health insurance, and the opportunities on the individual health insurance market, many small businesses are passing up the SHOP exchange in favor of a pure defined contribution health plan. With a defined contribution health plan, employees receive a set monthly healthcare allowance to spend on their choice of qualified health insurance.
Offering a defined contribution health plan does not disqualify employees from the health insurance subsidies, as a pure defined contribution health plan is not considered a qualified health plan under the ACA. Small businesses are especially attracted to this solution because it provides a formal benefit to employees, while also giving the employer more fiscal control and predictability over the cost of health benefits.
Even if employees are not eligible for the subsidies because of household income, access to employer coverage under a spouse's health insurance plan, or coverage under a government program, they can still use the defined contribution allowance for their health insurance premium expenses purchased through the exchange, or through the private market.
To offer a pure defined contribution plan, an employer would follow these four steps:
Not offer a traditional group health insurance plan.
Give employees a defined contribution healthcare allowance to use on qualified individual health insurance.
Assign a health insurance broker to help employees enroll in individual health insurance through the exchanges, and receive a discount via a health insurance subsidy (if eligible). Employees can also enroll in health insurance "off" the exchange through a broker or private exchange.
Reimburse employees on payroll, after employees submit proof of their health insurance expense to their defined contribution software provider.
How does defined contribution compare to the SHOP? See this article.
Are you seeing small businesses skip over the SHOP exchange in favor of sending employees to the individual exchange and/or in favor of defined contribution? Leave a comment below.