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ACA Reforms Take Small Businesses, Owner-Only Firms into Unfamiliar Territory

Changes require switch from small-group market to individual -- and more costly – health insurance plans

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Linda Schwimmer, vice president of the New Jersey Health Care Quality Institute.

Healthcare reform is bringing an unpleasant surprise for thousands of mom-and-pop shops, small law firms, technology startups and other owner-operated firms in New Jersey.

For years, owners of companies with no other employees could buy insurance in the small-group market and benefit from a wide selection of plans, less-expensive drug coverage, and other advantages compared to the individual health insurance market.

But in December, the state changed its small-group insurance regulations to match the Affordable Care Act, which defines businesses as having at least one employee who is not an owner or the spouse of an owner. That excludes both husband-and-wife teams and partnerships with multiple members but no other staff.

As those firms’ health-insurance policies expire this year, instead of being allowed to renew their plans or buy another small-group plan, they are being directed to research their options on the individual marketplace at Healthcare.gov.

And they are barred from purchasing small-group insurance through their brokers or the new federal Small Business Health Options Program. “There are a lot of small employers who are in for a very rude awakening,” said Linda Schwimmer, vice president of the New Jersey Health Care Quality Institute. “As soon as their policies expire, they’re not going to be able to renew them on the marketplace or even the SHOP. They’ll experience rate shock, and many won’t qualify for a subsidy.”

“We view it as one of those unintended consequences that bubble up in a place like New Jersey that has so many self-employed and freelancers and small law firms and places like that — father-son plumbing firms, electrical engineers and so on. It’s going to have an impact,” she said.

The change resulted from the Affordable Care Act’s use of a definition of “employer” taken from the federal Employee Retirement Income Security Act, which excludes sole proprietors, partners and their spouses. New Jersey is among several states affected by the law’s language.

Greg Colen, an independent insurance broker at Ultimate Benefits LLC in Morganville, said he had a difficult conversation this week with a longtime client who got angry when he confirmed that he could no longer renew his small-group policy.

The client, who has a successful business with his wife importing perfumes and selling them wholesale, has his three children on his insurance policy, and he also has medical conditions that factor into his healthcare decisions, Colen said. The client’s current policy expires July 1.

“He wanted to know, is it true? Is it really the case? Or is it another thing that was said that's going to get delayed?” Colen said. “Then of course his reaction is, he didn't ask for this change, why is it happening? Of course, he thinks his rates are going to double or triple, and so he starts to get mad, which is a natural reaction.”

Colen, who services 18 groups that will be affected by the rule change, said the perfume importer asked him questions about subjects outside an insurance broker’s area of expertise, such as whether he should hire an employee so he can keep his current insurance. Colen noted that such a hire would be costly and would require the company to take on other administrative burdens like payroll taxes.

The man ended up visiting Healthcare.gov and finding that his insurance rates would go up 30 percent, smaller than the doubling or tripling of premiums that he had heard was happening in other states, Colen said. He did not qualify for subsidies, but he was able to remain with his insurer, Horizon Blue Cross Blue Shield.

“Small employers are finding their way through the rule change, but they are not happy about it,” said Christine Stearns, vice president of health and legal affairs for the New Jersey Business and Industry Association. “It has caused significant disruption for many small companies.”

Thousands of people will undergo similar adjustments this year. In 2011 New Jersey had 119,872 small businesses with zero to four workers, employing a total of more than 200,000 people, according to federal Small Business Administration data.

Even as the total number of people with insurance rises under the ACA, a Rutgers Center for State Health Policy study projects a 10 percent drop in the number of people insured through the small-group market for companies with up to 50 employees.

Of the new enrollees in individual health plans, 29,000 to 45,000 will be sole proprietors, the study says. Some may have been uninsured in the past, while others have been insured through the individual and small-group markets.

The open enrollment period for individual plans under the ACA closed March 31, but people with expiring policies can still buy new insurance. Those moving from the small-group to the individual market just as ACA reforms take hold will find significant differences in the way insurance offerings are structured.

For example, in New Jersey only three insurers sell policies on the individual insurance exchange where subsidies are available, with one other selling off-exchange directly to customers. They also sell only a limited number of plans. Meanwhile, five insurers active in the small-group market offer dozens of different plans.

Those affected by the changes “have to turn to the individual market, and choice is significantly reduced,” said Dave Mordo, vice president of education and compliance at Walsh Benefits in Fair Haven.

The pharmacy plans for small businesses generally offer multiple levels of coverage, requiring copays of perhaps $10 or $15 for generics, $35 to $40 for brand-name drugs, and more for nonpreferred drugs in some plans, Mordo said. By contrast, many plans in the individual market, especially the less expensive ones, offer 50 percent co-insurance, meaning the policyholder has to cover half the cost.

“The biggest disruption is the change in their prescription drug plan,” Stearns said. “If you are taking a drug that costs $100, in the end you may see no difference. But if you're taking a drug that's significantly more expensive, say $10,000 a month, when you're presented with a $5,000 coinsurance at the pharmacy, that's significantly different.” Health insurance plans of all kinds are changing because of the requirements of the ACA. Costs are going up as more services are covered, while cost burdens are shifting as gender discrimination is banned, and insurers are narrowing their hospital networks to keep premiums from rising too quickly.

But sole proprietorships and partnerships without employees are in the rare position of seeing changes not only their plans, but also in their markets.

Colen said his clients are shocked by the price increases they are facing in part because they are comparing the cost to their old premiums, not realizing they would have had to switch to more expensive plans even if they could remain in the small-employer market.

The effect of the ACA on small-group premiums has varied widely, but many groups have seen big increases.

Colen himself must make the switch, since he owns his brokerage with his wife. He will see a 50 percent premium increase when he moves to individual insurance, but even if he could have stayed in the small-group market he still would have paid 30 percent more, he said.

As with other aspects of the ACA, change itself and a lack of knowledge are making the transition more distressing.

Colen's clients ask why they appear to be targeted for a change they didn’t ask for, and are reluctant to delve into the details of insurance programs they had depended on their broker to handle, he said. Stearns said some affected NJBIA members see the individual market as the “great unknown,” and others don’t want the bother applying for subsidies.

“I have heard from some members who are reluctant to go through the paperwork required to obtain a subsidy, even if they are qualified,” she said. “Generally, small businesspeople don’t look to the government to solve their problems. They generally view the government as a source of their problems.”

Colen and Mordo said good insurance brokers will help their sole proprietor and small partnership clients try to figure out their options, even though the brokers receive much smaller commissions for selling individual policies. But they will have to restructure their own finances and look for new clients as they work to stay in business.

“This is an immense problem for the broker out there who dabbles in the two-to-five, two-to-nine (employee) or husband-wife market,” Mordo said. “This is a segment of the marketplace that is now going away. Husband-wife groups are being disassembled because of these new regulations.”

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