June 13, 2012

Unintended Consequences of the HIT: Eliminating Health Coverage in Small Businesses

The new healthcare reform legislation contains a tax that could spell the end of employer-sponsored health coverage for many small business employees. In just over one year, insurance companies will become subject to a tax called the Health Insurance Tax (HIT).

Small businesses already suffering under the weight of ever-rising premium costs will be disproportionately affected by this tax, which will be passed on to the carriers’ customers in the form of increased premiums. It is time for your small-business clients to begin preparing for the very real possibility that employer-sponsored health care coverage will be prohibitively expensive after the HIT becomes effective.

How Does the HIT Work?

The HIT is a tax on insurance carriers imposed in proportion to the carrier’s outstanding net premiums, meaning that insurance carriers with a higher market share will pay a higher rate. Though the HIT is technically a tax on insurance carriers that provide health insurance, the additional cost to insurers will be passed on to consumers in the form of higher premium payments. 

The tax is set to increase each year according to an index based on net premium growth. In the first ten years that the HIT is effective, it is estimated that it will generate approximately $87 billion in revenue—increasing to about $208 billion in its second decade. 

The proceeds from the HIT will be used to fund health insurance exchanges and finance subsidies for those without health coverage. However, by imposing a tax on health insurance carriers that will be passed on to small-business owners, the HIT essentially increases the number of employees that will need to rely on these subsidies.

Unintended Consequences

The HIT will have a disproportionate effect on small-business owners because it specifically excludes companies who self-insure; the vast majority of small businesses do not have the resources to self-insure. Further, small business owners have significantly less leverage to negotiate lower premiums with insurance carriers.

Your small-business clients are likely already having difficulty with the high costs of providing health coverage for their employees. The average small business saw a 9.9% increase in the cost of providing health benefits in 2011. If the new health care reform legislation is held to be constitutional, providing health coverage will become even more expensive for small businesses.

The result could be harsh—many of your small business clients could be forced to eliminate health coverage as an employee benefit.  It is also possible that they may reduce the cost of the insurance that they do provide by eliminating dependent coverage or increasing the proportion of the cost paid by the employee.

At minimum, the HIT will increase the costs of health coverage for small businesses, thereby limiting growth and reducing hiring among companies struggling to cover the high costs of health insurance.

Conclusion

The likely results of a healthcare reform package that includes the HIT could substantially hinder the ability of small businesses and the self-employed to purchase comprehensive health coverage. Your self-employed and small business clients need to prepare for the possibility that their health premiums will increase even further in 2014 and beyond.

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You may also be interested in signing up for a free trial with another Summit Business Media partner, Tax Facts Online.

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