On Thursday, President Trump signed an executive order intended to allow small businesses and potentially individuals to buy health insurance that bypasses state regulations and Affordable Care Act (ACA) protections. This comes after efforts to repeal and replace ACA failed to pass in Congress earlier this year. We previously wrote a deep dive covering what a complete repeal of ACA would mean for small business owners.
The most extensive part of the president’s order is a move that would allow more small businesses to band together in “association health plans.” It also attempts to make it easier for employers to use pretax dollars in “health reimbursement arrangements.” These arrangements can be used to help workers pay for any medical expenses, not just health policies that ACA requires.
It’s important to note these changes won’t take place immediately and will likely get bogged down in the courts. That being said, here’s a closer look at the major impacts the executive order would have for small business owners:
Association Health Plans
These new plans, which could be created by business and professional groups, allow small businesses to band together to buy insurance. A White House official said these health plans “could potentially allow American employers to form groups across state lines.”
In theory, banding together would save small businesses money and the larger group market would give workers access to a broader range of insurance options. The plan has garnered support from some business groups, including the National Federation of Independent Business and the National Restaurant Association. These business groups hope the change will give small businesses more leverage in the insurance market.
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Although these plans have the potential to drive down costs, some officials have pointed out that they can set different rates for each employer within the plan. “Two employers in an association can be charged very different rates, based on the medical claims filed by their employees,” said Mike Kreidler, the state insurance commissioner in Washington.
So a company with older workers or workers who suffer from chronic diseases, like diabetes, may have to pay much more than a business with a younger, healthier pool of employees.
Another drawback to the change is…change. A recent survey by The Workforce Institute at Kronos found that over half of business owners spend between $40,000 to $100,000 to prepare for new business regulations. These expenses include such activities as hiring legal consultation, the creation of new HR and workplace policy, training, and education. For small businesses running on a thin margin, paying to prepare for the change could come with serious pain.
Switching to the new association plans would come with initial costs that could potentially be offset in lower healthcare costs in the future. According to a 2016 study by the Kaiser Family Foundation, employers take on the majority of premium costs for employees. On average, employees with single coverage paid 18% of their premiums, while employees with family coverage paid 30%. For small businesses, employees often paid larger shares of their premiums, however, topping 50% at times for family coverage from small businesses.
The Small Business Majority also warns that these plans may result in higher costs for small businesses that choose to remain in the small-group market, saying in a statement that “The tradeoff is that this would result in the emergence of parallel insurance markets for small businesses.”
Health Reimbursement Arrangements
Under Trump’s order, the use of Health Reimbursement Arrangements (HRAs), which allow employees to pay for certain healthcare-related expenses with pre-tax dollars, will be expanded.
The order doesn’t spell out exactly how this will happen, but instructs the Secretaries of the Treasury, Labor, and Health and Human Services to propose regulations or revise guidance within 120 days. It does indicate that those regulations should allow HRA’s to be used in conjunction with nongroup coverage, which could allow employers to offer HRAs that employees would then use to purchase their own coverage in the individual health insurance market.
In addition, Trump’s action is intended to widen employers’ ability to use pretax dollars in “health reimbursement arrangements” to help workers pay for any medical expenses, not just for health policies that meet ACA rules — another reversal of Obama policy.
“The requirements to adopt an HRA today are complicated and involved,” said David Kautter, an assistant Treasury secretary. Simplifying those regulations turn HRAs into a “useful tool in expanding the range of health care options available.”
For most small businesses, costs will be the main decision driver when it comes to choosing insurance plans. It looks like some Trump’s changes could help save business owners money, but adjusting to the changes will put pressure on cash flow. And we’ll have to wait to see how the insurance markets ultimately react to the changes.
Either way, business owners should prepare for a cash flow crunch now by taking care of their personal and business credit scores, so they can qualify for affordable financing to get through a potential rough patch. Expect to see an uptick in applications for small business loans and credit lines in the near future.
Image: Gage Skidmore via Wikimedia Commons