Small companies must decide to pay or play under new health-care rules

The US Supreme Court's decision to uphold a keystone of the Patient Protection and Affordable Care Act (PPACA), the centrepiece legislation of US health-care reform, is expected to reshape employer-sponsored health insurance. But small companies and companies that employ low-wage workers may feel the most acute effects.

The 5–4 ruling, which determined that Congress has the constitutional right to require US citizens and legal residents to have health insurance, leaves existing provisions of the 2010 health-care reform law in place. Among them is the requirement that every company with a workforce of 50 or more full-time equivalent employees offer affordable health insurance to its employees.

Many businesses are facing a choice: offer insurance to employees or pay penalties. It's a calculation companies – particularly small ones that may not reap the cost savings of a big group policy – will sketch out in coming months. And the calculation is not just financial. Talent retention, worker morale, productivity and public perception are also factors.

"In the short run, it puts a lot of pressure on business owners," said Nicole Hendren, CPA, who is the CFO at Capital Associated Industries, a nonprofit consulting group in Raleigh, N.C., which advises employers on human-relations matters.

Weighing the costs

Enforced by fines, subsidies and tax credits, the law's multiple requirements are expected to add about 30 million Americans to insurance rolls by 2016, the US Congressional Budget Office projects.

The influx could lead to larger insurance pools with the help of state-run health-care exchanges born from the law. The thinking is that larger groups allow insurers to spread risk.

Small businesses in general pay higher insurance rates than large ones because of the size of their risk pools. For this reason, the health-care law gives them an incentive to provide insurance. It makes a tax credit available to small businesses with fewer than 25 full-time equivalent employees and average annual wages of less than $50,000 if they contribute to their employees' health insurance premiums. It also makes it easier for small businesses to offer health-care coverage as a tax-free benefit through a cafeteria plan. And with the exchanges, clusters of small-company employees and low-wage earners could be lumped together to buy in bulk, thus receiving better benefits for the same cost or less.

Some smaller companies may be inclined to drop insurance, provided the math works.

The average cost for health insurance benefits was $2.21 per hour worked in US private industry in March 2012, according to the US Bureau of Labor Statistics. Based on a 40-hour work week, that's about $4,600 annually per employee.

Companies, especially those with just over 50 employees, will have to determine whether dropping health insurance and paying an annual fine of at least $2,000 for each employee is the best way to go, according to the Kaiser Family Foundation.

"Today it can be very difficult and very expensive for a small business to try and cover their workers," said Ceci Connolly, the managing director of PwC's Health Research Institute. "The reason for that is insurance is all about risk. If you only have, say, five or ten employees, the chance that one of them may have a very serious, very expensive illness would jack up the rates for everyone in that small business because you can't spread the cost or the risk around. If you're at a company with 10,000 or 50,000 employees, and there are some very sick individuals, the cost gets spread around."

Indeed, Mercer, a human-resources consulting firm, found that larger employers are more likely to continue to offer health insurance coverage to their employees under the PPACA. Six per cent of companies with 500 or more employees planned to drop their health plans once state-run health insurance exchanges come online in 2014. But about 20% of smaller companies said they would drop their health plans. A study by business consultant McKinsey & Co., which didn't differentiate by size of workforce, projected a much higher overall dropout rate of 30%.

With the presidential election looming and continuing opposition to the act from many Republicans, companies with just over 50 full-time employees are likely to consider reducing or restructuring their workforce to avoid having to offer health insurance, Hendren said. Some companies may postpone hiring.

"There's a natural inclination to pull back on cost, benefits, positions," she said. "Until we get a lot of these things worked out, it's going to be costly for businesses."

Small businesses get a more level playing field

The calculation—to insure or pay penalties—is more than just simple math. Several other quality-of-work issues might outweigh the quantitative advantages. "There are going to be all of the issues around recruiting, retention, competition in the marketplace," Connolly said. "Things even like worker productivity, absenteeism, morale – things that are harder to quantify but that smart employers know they at least need to think about."

The benefits of deciding to offer coverage include the ability to attract high-quality employees, positive public perception, a potentially healthier workforce and a potential long-term decrease in health expenses, said Nancy Sayre, assistant chair of the Department of Health Professions at Metropolitan State College in Denver.

Workers tend to gravitate toward businesses that offer health coverage, and the law should enable small businesses to be more competitive in recruiting talent because they can explore their insurance options in the exchanges and offer a variety of coverage options, said Thomas Buchmueller, a professor at the University of Michigan who recently completed a 10-month stint in Washington as a senior economist on the Council of Economic Advisers.

"That's a secondary effect, but I think it's a real one," Buchmueller said. "We have lots of evidence that the link between health insurance and the workplace does inhibit labour mobility and does cause people who value health insurance to gravitate to larger firms. It's going to loosen up that constraint."

Projected cost of PPACA

Projections of how much implementing the PPACA will cost businesses have varied widely.

The Urban Institute, a Washington research group, used a simulation model and figured that total employer spending on premium contributions, assessments, and vouchers would be 0.6% lower than without the law.

Small employers would particularly benefit from the health insurance exchanges, according to the Urban Institute. Their total spending was projected to decrease by 8.7%. Medium-size firms (those with 101 to 1,000 employees) would see an increase of 11.8%. Spending by large firms was not expected to change much.

In the absence of the PPACA, the Urban Institute forecast that more employers, especially small ones, would have continued to drop health insurance coverage for their employees. Mercer projected that the PPACA in most cases would push up costs 2% or less.

About one-third of employers polled by Mercer last year estimated that PPACA compliance would affect cost by less than 1%. Sixteen per cent expected costs to rise 5% or more.

Sabine Vollmer ( and Neil Amato ( are CGMA Magazine senior editors.