Small Business Health Care Bill Raises Questions

A bipartisan bill that the House Ways and Means Committee will consider today would let small employers use a health reimbursement arrangement (HRA) — a tax-favored, employer-funded account that people can use to pay out-of-pocket health costs — to help their workers buy individual-market coverage, rather than offer health insurance directly.  The bill raises some serious questions that could affect both health insurance consumers and markets.

Employers provide HRAs today, but they must also offer a health insurance plan that meets health reform standards.  Since 2014, they’ve been barred from offering a “standalone” HRA without a health insurance plan because it can’t meet health reform’s market reforms.  For example, because HRAs don’t cover any specific benefits, they don’t meet health reform’s requirement that group health plans provide preventive services without cost-sharing. And because they limit employer contributions, they don’t satisfy health reform’s prohibition against an annual benefit limit.

Supporters of lifting the ban on standalone HRAs for small employers argue that small businesses should be able to use pre-tax dollars to give their workers a defined contribution toward the cost of individual market coverage.  But this HRA proposal, in particular, could affect people’s coverage as well as the overall stability of the individual and small-group health insurance markets.  Among the unanswered questions:

1. How will small employers respond?

Some small employers that now offer health insurance plans through the small-group market— about 54 percent of employers with three to 49 workers offered health benefits in 2015 — likely would drop them and provide standalone HRAs instead.  We don’t know how many small firms would shift people to the individual market, but the option of standalone HRAs would certainly reduce somewhat the number of people covered in a state’s small-group market. 

 

2. What will happen to health insurance market risk pools?

If a large number of employers shifted out of the small-group market in a given state, it would substantially affect that market.  Whether the effect is good or bad depends on the characteristics of the small employers that shift.  If more small firms with healthier-than-average workers, on balance, take the HRA option, it could worsen the small-group risk pool, potentially resulting in higher premiums.  That, however, could improve the individual-market risk pool if healthier, lower-cost employees of small businesses enroll.  Conversely, if small firms opting to use HRAs have disproportionately older and sicker workforces, no longer participating in the small group market would improve that market’s risk pool, while making the individual market less healthy and more unstable.

 

3. How will small business HRAs affect workers’ coverage?

The legislation requires no minimum employer contribution to workers’ HRAs, but it limits a small employer’s contributions to $5,130 per year for an individual and $10,260 for a family (indexed to general inflation).  Some employers that now offer health benefits might scale back their related spending considerably due to the new HRAs.  Employees may then have to pay higher premiums for coverage that may be less generous than what they had received through their job-based coverage. 

At the same time, some low-wage workers could benefit, if their employer’s decision to drop health benefits makes them newly eligible for federal subsidies and more expansive coverage through their state’s marketplace.  (Under the bill, that’s permitted when the employer’s contribution to the HRA requires workers to spend more than 9.5 percent of their income to buy the second-lowest-cost silver plan in the individual market where they live.) 

Ways and Means is considering this bill as health insurers, state regulators, and others are seeking stability in the individual and small-group health insurance markets.  Policymakers should set aside this proposal until its risks and potentially adverse effects can be better understood.