As designated by the Patient Protection and Affordable Care Act (PPACA), seven major changes in the small group market that take effect in January 2014 (or at the time of a non-grandfathered company’s first renewal in 2014) will have a disproportionately negative impact on subcontractors.
Some of the changes will be expensive for all companies equally and others will have a disparate impact on firms with fewer than 50 full-time employees. Each change interacts with the others. Self-performing general contractors and subcontractors should be extra cautious when bidding work to be completed after their 2014 insurance renewal and make sure to model out the financial impact of these changes.
Thirty-five states and the District of Columbia currently allow insurance companies to underwrite for gender when establishing the premiums for a group health plan. Beginning in January, insurance companies may not take the gender of a company’s employees into consideration when determining pricing. Females are significantly more expensive to insure than males. From age 21 to 45, the average cost of insuring a female is double the cost of insuring a male of the same age. For a contractor that has been paying the rate based on a largely male workforce, having the rates move to the average of the two will mean a very substantial rate increase.
Thirty-seven states and the District of Columbia allow insurers to include SIC codes when figuring out premiums in the small group market. Traditionally, white-collar companies have had higher health costs due to higher utilization of expensive treatments and specialists. Law firms and accounting firms have been priced 15 to 30 percent higher than blue-collar trades such as electricians, drywall installers and carpenters. The new law for 2014 does not allow insurers to take SIC codes into account when developing rates. This shift to parity will cause an additional rate increase for many subcontractors.
Currently, only New York and Vermont prohibit insurers from taking the age demographics of a company into account when developing their rates. In the other 48 states, the spread of costs to insure the youngest employees to the oldest span from a 5-1 ratio to a 12-1 ratio depending on the state and the insurance company.
In a 10-1 ratio, if it costs $100 to insure a 22-year-old male, it would cost $1,000 to insure a 65-year-old male with the same coverage. The new regulation requires that the highest amount charged to insure the oldest employees not be any higher than 300 percent of the cost for the youngest employee. Using the same example, the insurer might charge the youngest employee $275 and the oldest employee $825 to bring in the same total amount of premium. This will significantly increase the rates for a subcontractor with a workforce that has a younger average age.
Thirty-eight states and the District of Columbia currently allow insurers to look at a group’s health status when coming up with its premium. The range of increases based on health status can be from 10 to 500 percent depending on the state. In a state with a 100 percent swing, the healthiest groups pay half of what the unhealthiest groups pay for the same coverage.
The rule in 2014 does not allow any more underwriting for medical status in the small group arena. Companies that happen to have a healthier than average workforce will pay more—and in some cases substantially more—while companies that are unhealthier than average will benefit from this change.
Deductible and Out-of-Pocket Limits
Another change affecting only companies with fewer than 50 employees is the limit on deductibles and out-of-pocket maximums. (Out-of-pocket maximums do apply to larger firms.) According to Associated Builders and Contractors’ (ABC) 2013 employee benefits survey, 35 percent of ABC contractors with fewer than 50 employees have deductibles that exceed $2,000 for an individual employee. The new rule states that the maximum deductible allowed is $2,000 for an individual and $4,000 for a family. There is one exception to this: when a plan is forced to have a higher deductible to meet the actuarial value of one of the PPACA’s “metal tiers” (bronze, silver, gold and platinum).
This change can have a double impact. A company with a higher deductible may be forced to terminate its plan and move to a higher cost plan with a lower deductible. In addition, this removes one of the few cost reduction options available to companies that try to mitigate premium increases.
Several new taxes, some direct and some indirect, will affect small group plans. These include the medical device tax, health insurance provider fee and Patient Centered Outcomes Research Institute fee. These taxes are showing up in 2014 renewals as an additional four to six percent premium increase.
Small companies are accustomed to receiving their health insurance rates in four tiers: employee, employee and spouse, employee and child, and family. These rates customarily have been fixed for 12 months. Most insurance companies will be moving to a new rating system in which they provide rates based on each employee’s age, their spouse’s age and the number of children they have. A company with 40 employees might wind up with 40 different health insurance rates. Additionally, these rates will change during the year when each employee and spouse has a birthday.
Coupling this change with the fact that an older employee will cost more to insure makes it very clear just how much more money it will cost to hire an older employee than a younger one.
This change will be particularly devastating for contractors that perform prevailing wage work and take credit off of the fringe for their health insurance premiums. It will be an administrative nightmare to have a different rate for each employee and have the rates change during the year. Even worse, the Department of Labor (DOL) does not allow contractors to average their costs across all employees; they may only take credit for the dollars specifically paid for each employee’s insurance. This will significantly reduce the paychecks of older employees doing prevailing wage work while increasing those of younger employees. (The ABC Insurance Trust is working with the DOL on a way to provide composite rates to affected companies.)
What Can Be Done?
Some subcontractors already have begun to receive their 2014 renewals and will be able to bid their jobs with the correct health insurance burden next year. For contractors that have not yet received their numbers, it is very important to analyze the company based on which of these seven factors impacts their state and model out the impact.
Additionally, consider the option of a partially self-funded insurance plan, which can be structurally similar to conventional fully insured small group policies while avoiding some of the most onerous issues. These plans have saved contractors from significant rate increases when the demographics and health of a firm fit the plan’s niche. These plans are under attack from the Obama administration’s regulators because they remove healthy companies from the general pool. But for now, they are still available in most states and can help a contractor keep offering strong benefits to their employees without breaking the bank.