What Affects Your Employee Insurance Costs?
While the cost of healthcare insurance has many small business owners fearing that it will hurt their profit margins, providing it to your employees will likely help you reduce the cost of turnover and absenteeism while increasing morale and productivity.
The Affordable Care Act (ACA) introduced changes designed to make healthcare affordable for all Americans, but as with most laws and processes, the system is not perfect for everyone. In particular, some businesses will be affected more than others when it comes to the overall cost to insure employees. According to HealthCare.gov, under the ACA, insurance companies can adjust insurance rates up or down based on the following criteria:
- Size of your company. If you have more than 50 employees on your staff, you are legally required to provide your employees with group insurance. If you have fewer than 50 employees, you aren't required to purchase insurance.
- Geographic location. Because of the modified community rating, where your business is located (and employees live) will affect your premiums. Rates are set based on risk factors from an entire geographic market area. Rates vary from state to state—and from location to location within a state—due in large part to the competitive nature of the hospitals and insurance providers within a particular location. Additional factors, such as the overall health of a population and safety risks within a community, play a role in how insurance companies calculate premiums. The rules do stipulate, however, that insurers must charge all people within a designated area the same rate.
- Age. Under the Americans with Disabilities Act (ADA), insurance companies can charge up to three times more for older employees to obtain insurance than for younger employees (ages 18 to 49) to obtain the same policies. The reason being that older employees tend to need more healthcare and therefore cost more than their juniors. Additionally, since the ADA caps how much an insurance provider can charge an employee aged 49 and older, if providers want to generate the same level of revenue within a designated geographical location—and of course, they do—they must find the money elsewhere; as such, oftentimes, younger employees’ rates go up.
- Tobacco use. While the ADA put an end to denying coverage for applicants with pre-existing conditions, it does allow insurers to increase the rates for smokers up to 50% more than non-smokers. Some states, however, have voted against charging smokers more, so be sure to research the rules in your state.
- Family enrollment. If you purchase employee plans that cover spouses and dependents, they typically cost more than individual enrollment.
- Choice of coverage. For example, you will pay more if you choose low-deductible policies that limit the amount of out-of-pocket expenses employees accrue. You can reduce your costs by choosing plans with higher copayments and deductibles. In addition, your expenses will vary depending on whether you choose preferred provider (PPO), health maintenance organization (HMO) or point of service (POS).
- Penalties versus credits. If an employee’s insurance rates cost more than 9.5% of their household income, their insurance is considered unaffordable. If the insurance you provide employees is deemed unaffordable, you could face large annual fines. Small businesses can take advantage of the Small Business Healthcare Tax Credit if you offer insurance to employees to help offset the cost—even if you have fewer than 25 employees.