How small firms are gearing up for health reform

January 14, 2013: 10:54 AM ET

Legions of small and midsize businesses that don't offer health insurance have to quickly come up with a game plan. Here's what some are thinking.121203040638-healthcare-spending-gallery-horizontal

By Elaine Pofeldt

FORTUNE -- Lenny Verkhoglaz wishes he could provide health insurance to the nearly 300 home care aides he employs at Executive Care, based in Hackensack, N.J. No such luck.

Verkhoglaz hasn't been able to muster enough participation among his employees to qualify for the group plans he's considered so far. These plans require 75% of employees to participate. Many of his workers, who mainly assist clients with nonmedical tasks, earn a modest income ($10-14/hour) and aren't interested in contributing part of the premiums, he says.

"A lot of folks are immigrants," says Verkhoglaz, who came from the Soviet Union in 1978. "They send money overseas."

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Now that the presidential election has come and gone and it is clear that health care reform will proceed, businesses like Executive Care need to prepare for change. Legions of small and midsize businesses that don't offer health insurance but have 50 or more "full-time equivalent" employees will have to provide health insurance by 2014 under the reform or pay financial penalties if their workers obtain insurance through one of the state exchanges currently being set up. To be considered a "full-time equivalent," someone must work an average of 30 hours a week or more.

Verkhoglaz says that he'll likely have at least 50 employees who count as full timers at his firm in 2014. He has been speaking to a lot of insurance carriers about his options. "It looks like we might be providing health care," he says. "It's going to cost us some money."

Owners like Verkhoglaz will have to make some tough decisions over the coming year. Can they offer health insurance and still stay profitable -- or would it be better to pay the penalties and let workers, who will be required to obtain health insurance, buy it through the exchanges?

If a company doesn't provide health coverage and someone on their team buys subsidized insurance through an exchange, the firms will have to pay a penalty of $2,000 per employee, although the first 30 employees are excluded. A company with 60 employees, for instance, would have to pay $60,000 in fines.

"If they can afford it, they will more than likely want to give it to their employees as an option," says Xavier Epps, owner of XNE Financial Advising, a firm in Woodbridge, Va. that advises individuals and small businesses on managing cash flow and related matters. However, owners also have to be mindful of the bottom line. "It's about them continuing to make money quarter after quarter."

While Verkhoglaz has no plans to slow hiring, some business owners are already scaling down their headcount or hiring plans to avoid the 50-employee threshold, so they can skirt the issue altogether.

"I see them taking some temporary steps," says Shawn Jenkins, president and CEO at Benefitfocus, a benefits software company based in Charleston, S.C.  In some cases, he says, this means "not hiring one or two people -- or if people leave, not replacing them."

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Current health insurance rates are a big obstacle to many small firms. The Kaiser Family Foundation recently found that, for small businesses, the average annual premium for an employer-sponsored plan for a family in 2012 was $15,253, with workers paying 35% of the total premium, on average.

Nonetheless, an August 2012 survey of employers of all sizes by the Midwest Business Group on Health, a nonprofit business coalition based in Chicago, found little indication that employers plan to drop their health coverage in the immediate future and give employees money to cover the cost of buying their own insurance, a trend some observers predicted.

Many employers seem to be taking a wait and see attitude toward the exchanges. Just 9% of employers planned to buy insurance through state-run health insurance exchanges from 2014 to 2016, and only 4% expected to purchase it through privately run exchanges in that same period, the Midwest Business Group's survey found.

In the meantime, however, many firms are shifting to lower cost, high-deductible plans. Among respondents, 57% said that they offered high-deductible plans along with health savings accounts or health reimbursement arrangements to cover expenses employees incurred before meeting their deductibles. By 2013, 62% expected to opt for high-deductible plans and 71% expected to use such plans in 2018, based on the survey's findings.

In the years to come, those firms that offer more robust health plans may find that they are a strong selling point to attract talent, says Jenkins. "Their strategy may be to offer a rich benefits package to compete with everyone else who is cutting their benefits," he says.

PAN Communications, a 45-person publicity firm in Boston, Mass. founded in 1995, voluntarily provided health insurance long before the state of Massachusetts enacted its law mandating universal healthcare in 2006. The state's health reform requires that employers with 10 workers or more provide coverage or pay penalties. PAN Communications views health insurance as an investment in its talent pool. "We want employees to be confident and comfortable when they come to work and able to focus on our clients' needs," says Elizabeth Famiglietti, senior vice president of human resources.

But PAN has had to do some fancy footwork to stay ahead of rate hikes -- like switching carriers recently to stave off a hefty increase. It has, like many firms, opted for a high-deductible plan to keep costs down, educating workers on how best to use it.

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Some companies anticipate that health care reform may help them save on health care in the long run. Derrick Parks, president and CEO of Metropolitan Protective Services, a security company based in Lanham, Md. with about 250 employees, provides health insurance to his employees or an hourly stipend to cover their insurance costs, a requirement under federal contracts. He also offers health insurance to workers on his commercial accounts, sharing the costs of premiums with them.

Parks anticipates that the health insurance rates he pays will eventually get better as carriers compete for the millions of new customers who will flood the marketplace. "Because health care will be a necessity that every company will have to provide, it should bring the cost of health care down tremendously," he says.

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