December 21, 2009

To say that there is uncertainty in the health insurance market today is a major understatement. Chances are pretty decent that a health-care reform bill will pass next year, with implications for individuals, small businesses and large companies. Unfortunately, news reports and experts don't expect the legislation to result in lower costs for small businesses.

As reported in The New York Times on November 30, 2009: "In groups with 50 or fewer employees, [the Congressional Budget Office] said, unsubsidized premiums in 2016 would average $7,800 a year for individuals and $19,200 for families — scarcely any different from the amounts expected under current law. Of the 25 million people receiving coverage from small businesses, it said, 3 million would qualify for subsidies, which would reduce their premiums by an average of 8 percent to 11 percent."

With health care reform and its unknown outcomes on the horizon, how can small businesses be proactive when it comes to negotiating plans or purchasing new benefits? Despite any promises from Capitol Hill, one thing's still likely, health care costs will continue to rise for most individuals and small businesses. As always, employers will need to focus on cost management and tax savings. With expected cuts in Medicare and Medicaid programs, rising health-care costs will have to be transferred somewhere: most likely, to private insurance customers.

Here are a few tips from Kevin Prather, a financial planner with Skylight Financial Group / Dorman Farrell, LLC, based in Cleveland, Ohio,  on how to approach healthcare in your small business, based on today’s laws:

1. Don't make employees crazy with constant change. It might be tempting to change your plan every year to save money but if employees have to also frequently change doctors, they won't be happy. "Set a core level of benefits that you will provide to your employees and then revisit it on a 1 to 3 years cycle."

2. Offer healthcare savings accounts (HSAs). The beauty of the HSA (sometimes called medical savings account) is that it allows employees to contribute pre-tax dollars in a personal account to be used toward medical costs, and can be rolled over from year to year. A sound strategy is to use HSAs as a mechanism to have a higher deductible plan: savings from premiums on such plans allow employees to put more money toward the HSA. Employers may also choose to contribute to the HSAs on behalf of their employees. Consider doing this instead of a bonus, Prather suggests.

3. Add a health reimbursement arrangement (HRA) plan. HRAs allow employers to purchase an even higher deductible plan, by setting accounts for employee medical costs. Typically, the employee pays for most of their portion of the deductible (through an HSA for instance) and the employer pays for the remainder through the HRA. "You can pay employee medical expenses on a claims-made basis or you can fund the account for your workers and make payments from it,” Prather notes. For both employers and employees, contributions to HRAs and HSAs are tax deductible, which means more money in the bank for everyone. It's wise to consult with your CPA for specific tax advice with this strategy and use a third-party administrator for the HRA for best results. 

4. Partial self-funding offers flexibility and savings. For businesses with decent cash flow, Prather suggests looking into a partial self-funded plan in which your company has the basis for full insurance but isn't paying for it all up front. Employers pay lower premiums for basic coverage, and then establish an expected liability such as $5000 per employee to cover the rest. By hedging your bets this way, your healthcare costs could be much lower in the end. (The goal, after all, says Prather, is to limit the amount of money that you pay the insurance company).

No matter your size, it makes sense to hire an outside advisor to help keep you apprised of the evolving legislation and manage the highly-complicated process of evaluating insurance plans and tax laws for your company. Next year, it's bound to get more muddled: the more research you can do now, the better prepared you'll be to react to the forthcoming changes.

Sites for further research:

The National Underwriter

UnitedHealth Center for Health Reform and Modernization

US Chamber of Commerce Healthcare Issue Page

Health Insurance Resource Center

Medical News Today

Join the conversation ( 1 )

• MICHAEL GOODHEIM 2 years 1 months and 22 days ago

  

  Health insurance is such an important area for small businesses so kudos for addressing it, but you have some advice here that is not (in my opinion) well considered. Small groups (<50 employees) should not self-insure at all - the few companies that offer the type of "partial" self-insurance you mention do not structure their products favorably - they aren't worth buying. Stop loss insurance is not generally available for very small groups, because the variation in claims can be so wide. Community rated pools really are the best option for small groups, and potentially associations can offer value.
  
  The HSA recommendation would be good if it weren't for the maintenance and set-up fees that are charged on the HSA accounts. In very large groups, this cost is often invisible to the employee because the employer pays for it. In small groups, the employee is most likely on the hook and the fees more often than not wipe out any tax benefit of the account. HRAs are best suited to small businesses and may be easily combined with high deductible health plans. The employer will incur some cost of administering these plans but ultimately the health care costs are better controlled and plan designs can be more stable.