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Tony Novak, CPA, MBA, MT
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Health care options for small businesses
by Tony Novak, CPA, MBA, MT
, revised 11/21/2011
Small business owners consistently place concerns about affordable health care at the top of their list of management concerns. In fact, the fear of giving up employer paid health benefits is the This concern about health care inflation has been troublesome for more than four decades, and shows no signs of letting up in the near future.
This article is designed to business owners a fast overview of the issues in the current health care climate that will most directly affect their decisions, help clarify their objectives, dispels the myths that lead to mistakes, and consider some of the strategies that have been most effective with other small businesses. Some of the topics may spark anger or political disagreement; we should recognize that health care is an emotionally-charged topic for many people.
First, this article must make a few general assumptions from which to base the discussion. While this article s not meant to spark political debate, it is necessary to predict some mid-field political position that will prevail in the near future in order to make planning decisions:
1) The U.S. health care delivery system is not likely to change dramatically in the near future. We are unlikely to adapt a national universal health care program in our lifetime and strict managed care systems will continue to be primarily be used by those who can not afford other treatment options. Out ability to provide ever-improving medical treatment will continue to outpace our ability to pay for such treatment.
2) Small business owners, on average, incur lower health care expenses that the population overall. Small businesses and self-employed people will continue to spend far less, on average, for health care than the rest of the adult population. Starting and running a business is just too hard to allow much “sick time” and few small businesses have the cash flow to afford to fund health benefits comparable to large employers. This is only a temporary distinction and eventually this population will conform to health care patterns of the population. This distinction is important only for the consideration of short term/long term strategies.
3) State-specific differences will diminish over time. U.S. Citizens are becoming intolerant of the fact that more attractive health care plans available in a neighboring state are not available in their home state due to political differences between unelected government bureaucrats. Over time, the differences will disappear. It is impossible to conduct an in-depth discussion of health care strategies now that applies to residents of all 50 states. For that reason, this article assumes the most common legal treatment and procedures adapted by a majority of states.
“I need health coverage”. Virtually everyone in the U.S. has access to the health care system regardless of the ability to pay. People simply do not go without basic health care in the United States. The level of basic care provided in a U.S. emergency room is significantly higher quality than is available under similar conditions throughout most of the world. Certainly there are many exceptions that prove this rule, but the importance of dispelling this myth is to understand that health care decisions are a matter of choice, not of necessity. The decisions facing a business owner primarily affect the quality, not theexistence of future medical care. When asked to estimate the cost of health insurance, many uninsured people overestimate the cost of coverage. While not endorsing this strategy, it is important to recognize that a significant number of people choose to be without health care coverage without regard to affordability.
“I can’t get health insurance”. 99.99% of the legal residents and most of the illegal residents of the United States are eligible for health insurance since the implementation of federal legislation known as HIPAA. This law is interpreted and implemented on a state-by-state basis. Significant differences exist, making it almost impossible to discuss the issue on a national basis. A small group of people estimated at less than 50,000 people are excluded from eligibility from health insurance on a temporary basis, mostly as a misinterpretation of HIPAA law in the administration of specific state programs.
“I can’t afford health coverage”. Millions of self-employed people choose to forgo health insurance as an economic decision, not because they are unable to find coverage or the means to pay for it. The common statement “I can’t afford health insurance” in most cases really means “I am unwilling to rearrange my finances in such a manner that places health care as my highest financial priority”. This is a risk/benefit choice that sometimes works out well and sometimes ends in disaster. Those whose income combined with financial assets is less than the cost of health insurance plus “poverty level” cost of living are usually eligible for state-assisted health care though Medicaid and other programs. Most middle income individuals scoff at the underlying premise that health care is affordable only by impoverishing themselves. Fortunately, the fact is that the majority of people without health coverage in the U.S. are middle-class and most are uninsured for only a short time. Chronic inability to afford health care is a real concern but not nearly as big a problem as we are led to believe. It is equally important to recognize that affordability
The previous provocative section might make it might be possible to consider the objectives of a health care plan with a different perspective. Objectives vary from person to person and from business to business. No one can dictate your own objectives. We suggest that a few of those objectives might include:
- diminish the role of the insurance company in dictating coverage
- insure only the catastrophic risks
- maximize tax-deductible expenses
- cover 100% of all health care expenses
- offer more choices for employees
- simplify administration for the employer
- build a cash reserve for future expenses
- share expenses with employees
- reward healthy employees
- expand geographical range of coverage
- expand eligibility to include part-timers and contractors
- restrict eligibility to only seasoned full-time employees
- provide benefits for owner or management only
- allow employee to qualify for state-assisted health plan
- benchmark employee benefits to performance
- provide an incentive for employee retention
- insulate the employer from the rising costs of health care
Regardless of the specific goals you adapt for your business health plan, it is critical to clarify these objectives before deciding which strategies will work best.
Health Reimbursement Arrangements (HRA) – HRAs are the most cost efficient way for an employer to deliver health care benefits to employees. These plans are for employer-paid health benefit only. Virtually all large employers use this health plan design and small company have quickly adapted this approach only after they took the time to fully understand all of the issues. An HRA is a tax-qualified health plan that makes all benefits deductible by the employer and tax-free to the employee. But unlike other types of health plans that push a “one size fits all” approach to benefits, an HRA allows employees more flexibility to customize their own benefits. The article “25 Reasons that Small Business Owners Choose HRAs” goes into additional detail on the potential advantages.
Health Savings Accounts (HSA) – Almost all large employers have adapted a health savings account option in their employee health plan and small employers are slowly catching on. Unlike the other types of health plans, HSAs can be used by individuals whose health benefits are not provided through an employer. See healthsavingsaccount-hsa.com for more information on HSAs.
Flexible Spending Accounts (FSA) and Section 125 cafeteria benefit plans – These offer the same benefits as HRAs but are based on elective employee contributions. The motivation is to pay expenses on a pre-tax basis. See Freedombenefits.org for more information on FSAs and HRAs.
Core Health Insurance – Limited benefit health insurance can be used as a starter plan when regular major medical insurance is too expensive. This approach is popular in some industries like retail and restaurants that usually have no health benefits for employees. Wal-Mart, one of the nation’s largest employers, has not provided health benefits to all workers (especially part-time workers) in the past has now announced a strategy of providing this type of limited benefit health plan in the near future. The logic is that some health benefits are better than no health benefits and the features of the limited benefit health plans may actually be more attractive and more useful to the average lower/middle income employee. See Corehealthinsurance.net for more information.
Discount Pricing – The proliferation of Preferred Provider Organizations (PPO) make paying “cash prices” obsolete. Discounts are common for prescriptions, dental care, eye care, etc. The basic approach is 1) do not overlap coverage, 2) pay as little as possible for the PPO network access, 3) choose a reputable provider with a good network in your area. See Ehealthdiscountplan.com for the popular options from Careington, the nation’s largest provider of discount PPO plans.
Transition Strategies – When changing from one health plan to another, small businesses often take advantage short term policies to save money. Short term medical insurance is available at about 1/2 the cost of small group coverage. These policies provide a “Certificate of Creditable Coverage” that guarantee takeover benefits will be available for pre-existing medical conditions coverage under the next group insurance plan. Short term medical insurance does not pay for the cost of pre-existing medical conditions, but can be a great time saver when the employees are healthy. Short term medical insurance policies are available from one month to 36 months. See Freedom Benefits for more information.
A business owner who adapts a deliberate strategy toward dealing with health care costs will fare better than a person who is subjected to the ever-changing health care industry forces. The objective for establishing and maintaining a health plan may vary sharply from one small business to the next but the results are more likely to be achieved though active management and planning.
For More Information
Dozens of short articles about various health care issues can be found on OnlineAdviser Web sites including FreedomBenefits.net andAskTony.tonynovak.com. Additionally, OnlineAdviser service offers up to one hour of free professional consultation to small business owners; see detailsFreedomBenefits.org.
Benefit news tips and commentary are posted on Twitter twitter.com/freedombenefits
Political news and local events particularly geared toward providing health care to lower/middle income people are listed at www.Covertheuninsured.org .
IRS Publication 969 titled “Health Savings Accounts and Other Tax-Favored Health Plans” is available athttp://www.irs.gov/publications/p969/ix01.html
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