October 27, 2014 by Tony Novak
Editorial note: Later, after this post was published, the Department of Labor and IRS further clarified that an HRA can only be used when integrated with an Obamacare policy. In other words, an HRA is a supplement to and not a substitute for a legally required health plan.
Rising health care costs have been a major concern of small business owners for decades. The Affordable Care Act (ACA) is not to blame for the underlying trend of spiraling prices but the new law does limit the responses available to us. At this stage in the management process, it makes sense to distinguish the factors that are outside our control and then take a second look at the few remaining tools that we have available to combat these spiraling costs.
Factors outside of our control
We can not control the fact that health care costs total a whopping 17% of every dollar in the U.S.economy. We cannot control that these costs are rising at a faster pace than our overall revenues. We cannot change the fact that the ACA requires most individuals to share in these costs or pay a tax penalty. We have no control over the reduction in health insurance products and choices available to us now that plans are standardized benefits. Finally, we cannot change the fact that changes to the tax law eliminated the ability of employers to make partial tax-free payments to employees outside the health insurance system.
Factors remaining within our control
Small businesses have three primary tools for dealing with heath care costs: 1) make better use of alternate insurance, 2) take advantage of tax-free reimbursements, 3) provide access to employee education to make better health spending decisions. Each of these is described below.
Cost control tool #1: Make better use of alternate insurance
ACA does not require that small business employers provide insurance. Analysis usually suggests that employers are better not providing this coverage. The most efficient models allow employees to obtain insurance through the
The four types of alternate insurance are: 1) short-term medical insurance, 2) mini-med insurance, 3) supplemental insurance, and 4) immigrant or international insurance. The cost-effective use of each is described below.
Short term medical insurance is a type of primary coverage exempt from most of the provisions of ACA. It is priced at about half the cost of ACA-compliant plans. Health reform law allows individuals to be covered by this type of insurance for up to 3 months per year without incurring a tax penalty. An employee who uses short term medical for three months has likely reduced overall health insurance costs by more than 10% for the year.
Mini-med and supplemental insurance are technically the same thing. They provide fixed dollar payments – substantially less than Obamacare coverage – for the most frequent types of medical expenses. The distinction is that the term mini-med implies that this insurance is being used in place of qualifying insurance and the term supplemental insurance implies that there is another primary qualifying coverage. They typically have no deductible so are called “first dollar” coverage. These plans are available to everyone and can be purchased directly by an individual wither within or outside of an employer-sponsored or salary-deducted arrangement.
Immigrant and international insurance is meant for this niche where ACA requirements are more liberal or do not apply. As a direct result, coverage is less expensive. A new employee arriving from overseas can find coverage more easily at at a lower price than regular long term U.S. residents. It is up to the individual or the employer to seek out and exploit that provision of the law.
Cautions: Short term insurance is not available to everyone and is not suitable for those with prior ongoing medical conditions. All of these insurance options provide significantly less protection against catastrophic long-term claims. It is usually advisable to move back to an Obamacare plan in the event of a decline in health condition.
Cost control tool #2: Tax-free reimbursements
It is widely recognized that routine health care costs are best provided outside of insurance. This is the reason that health insurance policy deductibles and co-payments are significantly higher under ACA compliant health plans. Retained health care risks not covered by insurance typically averages about $5,000 per year for an individual, $11,000 for a family. From the employee’s perspective, these are more important than the benefits provided by insurance because they represent the “first dollar” of the most frequent and recurring health care expenses. If these payments can be made on a tax-free basis the cost is lower for both the employer and the employee. The simple economic principle at work here is that 100% of the payments made through a Health Reimbursement Arrangement (HRA), Health Savings Account (HSA), Flexible Spending Account (FSA), Section 125 Cafeteria Plan, etc. go directly for the benefit of the employee. The same can not be said of any insurance plan. The key to success of any of these plans in a post-ACA world is that they must be linked to and integrated with qualifying health insurance. The underlying health insurance does not need to be employer-provided group insurance (and often should not be).
These new type of tax-qualified benefit plans are available at little cost to small business employers
Cautions: Be wary of any benefits adviser who says that have found some secret path that bypasses the intent of the 2014 ACA tax law changes. Plans established before 2014 must be updated to comply with the new tax rules. Finally, be aware that the track record for small employers who chose to self-administer these plans is poor; we discourage the practice of self-administering small business health plans.
Cost control tool #3: Provide access to employee education
Employees of smaller firms do not have access to independent advice to help with better health care decisions. In fact, most contact advice comes directly from the firms that provide the health insurance. The cost of employee education runs about 1% of total health care expenses and the dollar return in terms of health care savings is far greater.
Cautions: Few employee assistance plan providers serve the small business market. It is usually best to combine this service with another function like payroll processing or a small business retirement savings plan.
Taken in combination, it seems likely that a typical small business firm not currently employing these strategies could expect to achieve a minimum immediate 10-20% reduction in net heath care costs after netting out cost of any additional administrative and consulting costs. More information on the insurance options is available through Freedom Benefits.net and its web affiliate FreedomBenefits.org has more information on the small business benefit plan designs. I am available for brief consultation online without charge, subject to the site’s fair use rules, through any Web sites supported by OnlineNavigator service.