Industry Market Trends

Obamacare's Full Impact on Small Businesses Remains Unclear

November 13, 2013

The Affordable Care Act (ACA) fails to address the insurance concerns of small business owners, most of whom are paying higher premiums this year than in 2012, a business advocacy association maintains. But what's unclear is just how much those price increases are due to the ACA. 

In a survey of 921 small businesses, 64 percent reported paying higher insurance premiums for employees this year, according to the National Federation of Independent Business (NFIB) in its recently released "Introduction to the Affordable Care Act."

The rising cost of health insurance is the top concern of small business owners and the ACA will do nothing to ease those concerns, the NFIB argues.

"The law's authors were primarily focused on increasing insurance coverage and expanding benefits," said William Dennis, author of the NFIB survey. "They gave little or no consideration to concerns about cost or who would foot the bill."

NFIB, the lead plaintiff that opposed the ACA before the Supreme Court, told IMT that the survey, part of a three-part report, is a baseline to see what happens when new enrollments this fall occur and how the new cost factors are incorporated into health care premiums.

"We don't know how much is due to the ACA," said Holly Wade, a policy analyst at NFIB. "It continues to climb and there seems to be no reprieve in the cost of health insurance for small business owners, which is their critical problem as we see in our surveys every four years."

Insurance companies are increasing premiums in anticipation of the law and incorporating the different taxes that they have to absorb, Wade said. She expects that the ACA will be an on-going challenge for insurers and force small business owners to purchase more expensive products.

"I think what we might be seeing is the effect of the first Obama legislation that has been imposed on the small employer market, which is the Medical Loss Ratio," said Dr. David Hogberg, senior fellow at the National Center for Public Policy Research.

Hogberg told IMT that small group plans under Obamacare face a Medical Loss Ratio of 80 percent. This means that for insurance premiums that people pay, the insurer has to spend 80 percent of that on medical costs. If insurance payments fall short of that, the difference is given back to the policy holder, the employee, as a rebate.

That will prompt insurers to boost premiums because in most states insurers must keep a reserve to help pay off medical claims when costs exceed the premiums they are taking in, according to Hogberg. They rely on the reserve fund to make up the difference.

"The only way to guard against depleting your reserve fund while at the same time paying out rebates is to increase your premiums. That way you can pay out the rebate and have extra money for the reserve fund," Hogberg said.

The NFIB has no data on the impact of the Medical Loss Ratio on insurance premiums, Wade said.

Hogberg admits it's hard to know whether part of the increase in premiums for 2012 to 2013 can be attributed to insurers anticipating the ACA regulations.

"The only thing I can say with any degree of confidence was the Medical Loss Ratio was in effect starting 2013 and that gave insurers an incentive to raise prices, because they have to maintain their reserves," he said.

Wade believes two aspects that are going to be very interesting to track are the confusion about aggregation rules and self-insurers.

The aggregation rules have yet to be finalized and will be more complicated. One owner may have stakes in many businesses or one business may have many owners. How an owner is to comply with the employer mandate has not yet been clarified.

Wade said those business owners would benefit from the advice of a legal expert in the ERISA (Employee Retirement Income Security Act) law to determine ownership responsibilities.

Also of interest is what happens with self-insurance -- businesses that take on the risk of paying medical bills for employees and thus are exempt from many of the ACA requirements.

The NFIB survey shows only 4 percent of the businesses that insure its workers are self-insured. Another 4 percent said it is "highly" likely that they will switch from a fully-insured market to self-insurance within the next year.

NFIB is tracking whether self-insurance eventually becomes a viable option for small business owners should the fully insured market become unaffordable.

Some small businesses have taken advantage of a loophole in the law by renewing their 2014 policies earlier this year, which insulates them against a lot of the regulations taking effect next year, Hogberg said. But they won't be able to do that again in 2015. So increases in premiums from 2014 to 2015 will better reflect the impact Obamacare on small businesses, he said.

NFIB learned there is a net positive in the number of businesses that plan to offer insurance coverage next year.

"Who knows how many of those who say they are going to offer and those who say they are going to drop will actually follow through with those responses, but that's the whole purpose of this year," said Wade.