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Small Business Employee Benefits and HR Blog

Why Premium Reimbursement for Individual Health Insurance Is About to Explode

explodingHealth insurance costs are rising, and employers are facing enormous cost challenges. In fact, less than half of all small employers are currently offering health insurance because it is too expensive. With open enrollment coming up fast, many employers are searching for an alternative to the high costs of group health insurance. For these employers, the emerging solution is premium reimbursement for individual health insurance. While this solution is not new, the Affordable Care Act’s (ACA’s) changes have created advantages to individual health insurance that will make this a pivotal time for healthcare benefits.

Here’s a look at the new advantages of individual health insurance, premium reimbursement, and why the two are about to explode.

What Is Premium Reimbursement?

Employers can reimburse employees for their individual health insurance premiums by implementing a premium reimbursement program.

First, the employer decides how much they will contribute towards employees’ health insurance expenses. This allowance, or “defined contribution,” can be the same for all employees, or it can differ depending upon employee class and/or family status.

With a premium reimbursement plan, employees purchase individual health insurance policies from the carrier of their choice. The policy choice is 100 percent up to the employees, who may purchase any eligible policy from an insurance broker, online, through the health insurance Marketplace, etc.

Advantages of Individual Health Insurance

One of the main reasons employers are canceling group health insurance is that individual health insurance costs up to 60% less. Employees may qualify for premium tax credits, depending upon their income level, household size, and eligibility for other government subsidized programs. Other factors that may influence the cost of individual health insurance include:

  • Location (state/county)

  • Age

  • Type of health plan selected (coverage level, carrier, etc.)

  • Tobacco use

In addition to being less costly, individual health insurance is now guaranteed issue. The ACA’s Pre-existing Condition Exclusion (“Guaranteed-Issue”) provision prohibits health insurers from denying coverage to individuals due to a pre-existing condition.

Individual health insurance offers employees more choice and control by allowing them to select a plan that fits their needs, including coverage level and network. Since individual health insurance is selected and purchased by the employee, just like car insurance, employees get keep their health insurance when they leave an employer.

Premium Reimbursement of Individual Health Insurance Is About to Explode

There are numerous signs that point to the shift away from group health insurance towards the individual market.

New research from the Employee Benefit Research Institute (EBRI) raises the question “Are employment-based benefits facing a ‘crisis,’ or merely an uncertain future?” Paul Fronstin, head of the Health Research and Education program at EBRI, argues that the ACA, “levels the playing field like it’s never been before,” now that health insurance coverage is no longer dependent on employment.

Fronstin also points out that “One could argue workers won’t need their employers any more for health benefits once the law is fully implemented and health exchanges become a viable option to employer-sponsored health benefits. That raises real issues about the future of employment-based health coverage.”

EBRI’s research parallels what other industry experts are saying about the dilemma, and demise, of employer-sponsored health insurance.

For example, Dr. Ezekiel J. Emanuel, in his recently published book, “Reinventing American Health Care,” predicts that by 2025, “fewer than 20% of workers in the private sector will receive traditional employer-sponsored health insurance."

S&P Capital IQ, a division of McGraw Hill Financial, came to a similar conclusion. S&P Capital IQ predicts that by 2020, 90% of American employees who currently receive health insurance through their employers could be shifted to individual health insurance and government Exchanges.

In a recent Whitepaper we discuss how the shift will first start with small businesses, predicting that 60% of small businesses will eliminate traditional employer-sponsored health insurance in favor of an employer contribution to individual health plans by 2017.

Conclusion

Small businesses are a driving force behind the switch from group health insurance to premium reimbursement for employees’ individual health insurance policies, because they are not subject to the employer shared responsibility provision. Due to the changes implemented by the ACA that favor the individual health insurance market, and the astronomical costs of group health insurance, more businesses will be exploring the option of premium reimbursement. Additionally, more brokers are adding premium reimbursement plans to their offerings.

What do you think about the shift to reimbursing employees for individual health insurance?

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