Group health insurance costs for a practice’s employees represent a major expense, and cost has been rising rapidly in the wake of passage of the Patient Protection and Affordable Care Act.
Employer-based health insurance premiums for a family policy rose 9 percent in 2011 to an average cost of $15,073, according to the Galen Institute, a nonprofit health and tax policy research organization.
Practices need to shop around for the best rates, employ strategies to reduce costs and take advantage of available tax credits.
The Texas Medical Association Insurance Trust recommends physicians consult with an insurance adviser who specializes in medical practices. And a variety of organizations, such as the American Medical Association’s AMA Insurance Agency, offer members discounted benefits. Check with your local state medical society as well.
The type of plan and the richness of benefits a practice can offer to its employees depend on the practice’s unique demographics and financial circumstances. An insurance adviser can design a program that fits your practice’s needs and negotiate with multiple insurers to get group healthcare coverage at the best price.
One caution if your current offering was in effect on March 23, 2010, when the Affordable Care Act was signed: So-called grandfathered plans are exempt from some of the law’s mandated benefits, such as full coverage for certain preventive services. Whether it is cost-effective to maintain grandfather status remains to be seen, so compare plans carefully.
The Affordable Care Act exemption applies only if at least one employee covered on that date continues to be enrolled and you have made no changes to the plan. Specifically, you have not done any of the following:
- Reduced benefits
- Raised copayments by more than $5 or the rate of medical inflation
- Raised coinsurance by any percentage
- Raised deductibles by more than the rate of medical inflation
- Lowered the employer contribution toward the total cost of premiums by more than 5 percent
- Changed the annual limits on what the insurer pays
Grandfather status can remain even if you change insurance carriers – as long as the benefits and costs to employees stay largely the same as noted above. Practices with grandfathered plans should discuss with their brokers the pros and cons of maintaining the status quo or seeking a lower-cost plan from the same or a different carrier.
Raise out-of-pocket costs
The two most common ways to reduce employer costs without cutting benefits are to:
- Increase employees’ share of the premium
- Raise copayments and deductibles
Determining the employees’ contribution toward the premium will depend on what a practice can reasonably afford. A Kaiser/Health Research and Educational Trust survey found that, on average, employers in 2011 contributed about 72 percent of the total cost of a worker’s health insurance premiums for family coverage.
One strategy is to modify the contribution structure. For example, if you currently have a three-tier employee contribution structure, consider increasing it to four – employee only, employee + spouse, employee + child(ren), employee + spouse + child(ren). The higher cost for the fourth tier also can discourage inclusion of dependents that may already be covered under another plan.
Raising copayments and deductibles can have a dual effect. Besides lowering premiums, higher out-of-pocket costs may reduce claims. Insureds with more skin in the game are less likely to seek unnecessary higher-cost medical treatment, such as a hospital emergency department vs. an urgent care center.
Premiums can also be lowered by providing a high-deductible health plan accompanied by a health savings account (HSA) or health reimbursement account (HRA). These so-called consumer-driven plans may be more palatable to employees than simply cutting benefits, which, of course, is another way to cut plan premiums.
Check available tax credit
Practices that provide health insurance coverage may be able to qualify for the Small Employer Health Insurance Tax Credit. It provides a tax credit of up to 35 percent of an employer’s share of the premiums. In 2014, the rate will increase to 50 percent for two consecutive years, but only for coverage purchased through a state health exchange.
To claim the tax credit, your practice must:
- Employ 24 or fewer full-time equivalent (FTE) workers;
- Pay average annual employee wages of less than $50,000, excluding wages of the practice owner(s); and
- Pay at least half of employees’ premiums, excluding employer contributions to HRAs, HSAs and flexible spending accounts.
The credit works on a sliding scale – generally, the smaller the practice, the bigger the credit. Even if your practice did not owe tax during the year, the IRS allows you to carry the credit back or forward to other tax years. In addition, you can still claim a business expense deduction for the premiums in excess of the credit so that you get both a credit and a deduction for employee premium payments.
Critics of the tax credit point to a General Accounting Office study released earlier this year showing that only 170,300 small employers out of a possible 4 million claimed the credit. Complaints range from the complexity of calculating the credit to factors that limit participation. For example, an employer’s premium payment may not be more than the average premium for the small group market in the state where the employer offers coverage.
To determine whether your practice qualifies for the credit, talk to your tax adviser.