SHOP versus individual marketplace? That is the question. Whether ’tis nobler (and more cost-effective) to offer coverage to your employees or simply direct them to HealthCare.gov?
Thanks to the Affordable Care Act, if you’re a small-business owner with 50 or fewer full-time equivalent (FTE) employees, you have new options to help your employees obtain health insurance, although you are not required to do so if you have fewer than 50 FTE employees.
A major ACA innovation for small employers is the Small-Business Health Options Program (“SHOP” for short). This federal insurance marketplace is already available nationally to all small-business owners if their state does not have its own specific small-business marketplace.
(These states are called “FFM states” for “federally facilitated marketplace.”) To determine if your state has its own SHOP, visit HealthCare.gov and you will be directed to the appropriate site after selecting the state where you live.
Three ways to keep employees covered
What if you live in a state with an FFM (or a state-federal partnership marketplace)? Here are your options:
- Purchase health plans in the SHOP Marketplace and possibly take advantage of the Small-Business Health Care Tax Credit for Small Employers. There is no deadline to apply for health plans through SHOP. Enrollment is open all year. (People buying individual coverage through the exchanges must enroll during the Open Enrollment Period unless they have a qualifying event.) For 2014 coverage, small employers must use a broker to purchase SHOP plans. To determine whether you qualify for the small-business tax credit – and how much you might save with it – see Small Business Majority’s tax credit calculator.
- Send your employees to the individual marketplace, where they may possibly obtain premium tax credits and other cost-sharing reductions. But again, if you choose this option, send them soon: March 31 is the deadline for individuals and self-employed.
- Or, you can contact a specific insurance company and sign up for a SHOP plan without the assistance of a broker. This is called the “direct to carrier” or “direct enrollment” approach. To qualify, the carrier must offer a certified SHOP plan and conduct enrollment according to HHS standards. If you choose this route, however, the best way to know which carrier to approach is to start comparing plans on HealthCare.gov. Once you decide which plan you want, you can then contact the carrier directly.
With the March 31 deadline for 2014 individual health coverage fast approaching, it’s important to make this choice soon. And while each small business will have to make its own determination, here are some important considerations to ponder.
Pros of offering coverage through SHOP
Attracting and retaining employees and being competitive in the local labor market are critical to business success. When a business loses an employee, it costs money. Such costs include hiring and training new employees and productivity losses resulting from open positions and the time it takes new employees to get up to speed.
A 2012 Center for American Progress report combined data from 30 case studies dealing with the costs of employee turnover. According to the report,
“Implementing workplace policies that benefit workers and help boost employee retention is not simply a ‘nice’ thing for businesses to do for their employees. Maintaining a stable workforce by reducing employee turnover through better benefits and flexible workplace policies also makes good business sense, as it can result in significant cost savings to employers.”
The report calculates that excluding executives and physicians, the median cost of employee turnover is 21 percent of an employee’s annual salary.
Let’s say your long-time prized manager making $40,000 a year leaves because her new position offers health insurance (and you don’t). Replacing her will cost you approximately $4,800 through lost productivity, training, and hiring costs. What if her replacement doesn’t work out and you have to hire someone else? That’s $9,600 for one employee.
What if you lose two more employees the same year? The costs add up. Include this consideration when deciding whether to offer your employees health insurance.
Large-group buying power
According to Grant Lahmann of Small Business Majority, “High employee turnover directly impacts a small employer’s bottom line. There’s a reason larger employers offer insurance, and it’s not out of a sense of moral obligation. Small employers have typically paid for many an unaffordable 18 percent more on average for the same insurance product available to their larger competitors.”
According to Lahmann, small businesses have historically been treated as an individual small group, thus minimizing their buying power and the size of their risk pool, compared to large businesses. As a result, they haven’t been able to afford insurance.
Two different studies – one by the RAND Corporation, the other by the Urban Institute – suggest that ACA market reforms and the new ACA marketplaces will reduce small employers’ premium contributions and increase insurance-offer rates among small firms. With the “risk pooling effect” of the SHOP Marketplace, smaller employers now have an unprecedented benefit, driving insurer competition and pooling together with other small businesses to spread the risk like a larger company.
Here’s another positive contribution SHOP makes to small businesses: Small-group plans outside SHOP now also compete with plans inside SHOP. So, whether a small employer purchases inside or outside the marketplace, the entire marketplace in each state has more options for small employers. This increases competition everywhere and helps stabilize costs. Therefore, the more small businesses participate in SHOP, the more affordable coverage will be for small businesses in general.
Furthermore, the Affordable Care Act requires insurers to maintain a unified risk pool in each state for individual and small group markets. This means that claims are spread across the state’s whole small group market, regardless of whether the plan is a SHOP plan or not. In addition, states have the option to merge their individual and small group markets.
Another very specific advantage of purchasing coverage inside SHOP is the small-business tax credit. You now must get a SHOP plan to qualify for the tax credit starting in 2014. Such tax credits are not available outside SHOP.
Two other considerations that may make SHOP a good choice for small employers are employee choice and premium aggregation.
The “Employee Choice” component – which starts in 2015 – is one of the big changes in SHOP in FFM states. (This is already a major incentive in state-run marketplaces for 2014.) With employee choice, an employer can set a contribution level (based off a plan available in SHOP) and then offer employees the option to pick the insurer of their choosing within a single metal level across different insurers or across different metal levels from a single insurer.
This type of choice has never before existed in the small-group market, and is extremely rare in the large-group market. It is a major bonus on top of the basic benefit of offering insurance and a competitive advantage small employers will have over even their larger competitors in the labor market.
(State-run SHOPs display multiple types of employee choice, depending on the state. To learn how different states stack up with regard to employee choice, see this Commonwealth Fund report.)
Premium aggregation is a feature that will allow small employers to offer all these choices while still paying just one bill to the SHOP. The SHOP Marketplace manages payments to each insurer, taking any additional paperwork or time costs out of the equation.
Therefore, starting in 2015, SHOP in FFM states will become quite robust, and is already the case in state-run SHOPs.
Attractive to employers ‘on the cusp’
If you’re an employer on the cusp of having 50 full-time employees (FTEs) you have a solid incentive to purchase from SHOP in 2014. That’s because once you participate in SHOP the first time, you don’t have to re-qualify in subsequent years. This is a significant advantage for small businesses. Why?
Here’s an example: Let’s say your business is at 45 FTE for 2014. You can get a SHOP plan this year and still be able to provide those SHOP plans in 2015 even if your business grows and surpasses 50 FTEs (and at that point will also be subject to the employer shared responsibility requirement). This will allow your employees access to the employee choice component in 2015 as well, which is seldom an option in the large-group market once they’re thrust there after surpassing 50 FTE.
These unprecedented advantages truly make the Affordable Care Act a game changer when it comes to making small businesses more competitive with their large-business counterparts. It’s therefore important for small-business owners to familiarize themselves with their new options and make the best choices based on their individual circumstances.