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Small business, the ACA and a second potential debacle

Small_Businesses_and_Obamacare___National_Review_OnlineThe following are excerpts of an article written by me and published in the National Review Online.  It’s available here. I recommend starting here, seeing if you are interested, and then clicking over to the National Review to read the entire article.

We could be about to see the same clumsy reconciliations of egalitarianism and freedom [that we see in the individual market provisions of the Affordable Care Act] ensnare the nation’s 6 million or so small businesses, the 40 million–plus people they employ, and the millions more spouses and children who depend on those employees. If only because the number of people involved is so much larger, the consequences and the stresses created could be even more serious than those we have seen playing out over the past few months in the individual market. The major points of tension here are (1) the prohibitions in section 1201 of the ACA on experience rating and medical underwriting in policies sold to small employers; (2) the requirement, also in section 1201, that, if a small business purchases group health insurance from a state-regulated insurer, it must provide the same sort of generous protections (including “essential health benefits”) as do individual policies; and (3) the effective tax that section 1421 of the ACA (section 45R of the Internal Revenue Code) places on wage increases and hiring by some small businesses that choose to offer health insurance.

What [various provisions of the ACA mean] is that there are an awful lot of employers who, if they want to provide health insurance to their employees and dependents, will now be able to purchase those policies at prices that do not take into account their abnormally high projected medical expenses.

A large number of these employers are likely to do so; even now 35 percent of employers with 50 or fewer employees provide some form of health insurance. Many small employers with lower-than-average projected health costs will strive to avoid being lumped in with their colleagues or competitors with higher costs. Instead, they will, if financially possible, “self-insure”: The section 1201 requirement of uniform premiums does not apply to arrangements whereby the employer (or union) itself nominally provides the medical benefits but throws off much of the financial risk onto reinsurers and many of the headaches of running a health plan onto “third-party administrators.” This option becomes even more attractive if employers can get away with the now-bandied-about “dumping strategy” of offering to pay their sickest employees enough so that they can purchase platinum health insurance in the individual exchanges and have money left over. Still other small employers may simply decide not to insure at all — reserving perhaps the delicious option of entering the exchange if some crucial employee or his dependents develop expensive medical conditions.

This self-segregation of small employers based on the projected health-care expenses of their employees will pressure small-group health insurers to raise prices. …

Of course, the curious thing about the looming debacle in the small-group market is that its possible contraction might be the one thing that could rescue the individual market from the probable death spiral. Right now, the individual markets are in danger as a result of lower-than-predicted enrollment and disproportionate enrollment of those over age 50. If small employers actually stop offering coverage — either because the costs of ACA-compliant policies prove too high or because of a death spiral in the SHOP exchanges (or both), they may end up just sending people to the individual exchanges. That won’t do much for President Obama’s promise that people could keep their health plans, and it won’t constitute a “silver lining” for people who want to reduce government’s role in health insurance, but it will do what many conservatives have wanted to do for years: undo the ideology that has previously tied the labor and health-insurance markets together.

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