Five Must-Fix Items in the Affordable Care Act – The Small Business Deductible

Editor’s Note:  We initially expressed concern about the impact of the small business deductible cap in September 2012.  Since that time, the Department of Health and Human Services issued a final rule on the application of the small business deductible.  Under that ruling, the Affordable Care Act provision allowing small businesses to use medical expense reimbursement plans to increase plan deductibles is no longer available.

Blue text identifies updates from the original post.

Tom, Robin and Susan are neighbors.  Tom is a self-employed consultant.  Robin works as a senior manager at a large company.  Susan is an executive at a small, growing firm with 30 employees.  In 2014, can they select the same health insurance plan options under the Affordable Care Act?  Simple, right? 

Beginning in 2014, the Affordable Care Act created two cost-sharing limits for health insurance plans that do not exist today. The first applies to all health plans and caps out-of-pocket expenses at the maximum permitted for Health Savings Accounts ($6,350 for individuals and $12,700 for families in 2014).  The second limits deductibles to $2,000 for an individual or $4,000 for families on health insurance plans offered by small businesses.

Required Fix #2 – Eliminate the $2,000/$4,000 cap on small group health insurance deductibles.

Four intersecting facts highlight the problem with the small business deductible rule.

1.  The limit applies only to small businesses.  It does not apply to personal health insurance or large company health plans.

2.  The Affordable Care Act contains a provision that allows, but does not require, small businesses to increase the deductible by offering an HRA or contributing to an HSA.  Using this principle, if a small business contributes $1,000 to an employee’s HSA or offers a $1,000 HRA, the deductible can rise by that same $1,000.  This effect negates some of the intended benefit in reducing the employee’s out-of-pocket cost.  (Note: An employee’s HSA salary deferral is not included in this calculation.)

However, in 2013, the Department of Health and Human Services published a regulation that included the following ruling:

“Section 1302(c)(2)(A) of the Affordable Care Act permits but does not require, contributions to flexible spending arrangements (FSAs) to be taken into account when determining the deductible maximum. We proposed to standardize the maximum deductible for all health plans in the small group market at $2,000 for self-only coverage and $4,000 for [family] coverage…and not increase the deductible levels by the amount available under the FSA.” (Emphasis added)

3.  The maximum out-of-pocket cost rule still applies.

4.  The Department of Health and Human Services also ruled that health insurance exchanges and insurance companies can increase the deductible for plans they offer if needed to maintain the integrity of the new metal levels required by the Affordable Care Act.  This perverse ruling allows insurers to do what a small business otherwise could not.

Impact on Small Business Health Plans

Over time, business owners have turned to high deductible health plans to relieve financial pain for themselves and their employees.  In many cases, they added HSA or HRA benefits, and their employees have come to appreciate the tax savings and ability to carry unspent money into future years. 

The table below illustrates four typical plan options.  What’s important to note is that small businesses may not purchase two of the four plan designs.  Looking across each row, the maximum out-of-pocket is exactly the same for each insurance policyholder.  The only difference is the deductible.

The Affordable Care Act Small Business Deductible Impact on Premiums

For families who previously enjoyed the savings from a higher deductible health plan, this change will  increase their monthly premium.  Using a standard High Deductible Health Plan offered in Minnesota as an example, reducing the family deductible from $9,000 to $4,000 increases the premium for a family of four by more than $6,800 a year. 

The deductible goes down but the maximum out-of-pocket remains the same, and the family will pay more than $500 per month more in premium. HHowever, if the family buys its own insurance, if the policyholder is covered by a plan offered by a large company, or if they work for a small employer with a self-funded health plan, they don’t have to deal with this restriction. 

The government will tell you that’s ok, because you can get a premium subsidy.  However, that only works for people earning less than 400% of the federal poverty level and buying their own insurance, and that comes with its own set of problems.

And So We Wonder

Why shouldn’t small business owners and employees have the same freedom to select health insurance deductibles as people at large companies or individuals?  The answer makes no sense to us, and that’s why the small business deductible makes our list of must-fix items in the Affordable Care Act.

What will this change do to your health insurance?

Next: The Affordable Care Act’s Disappearing Premium Subsidy