Affordable Care Act; Bad for Small Business, Bad for Young People

Last week the Wall Street Journal asked the question, “Will Employers Drop Health Insurance Because of the Affordable Care Act?” It is an interesting assertion that we don’t believe many legislators took in to consideration before signing the bill into law. This week we wanted to examine health insurance from the perspective of businesses.

Since this bill was first introduced on the floor, we warned that it would do 2 things; first, it would make health insurance less affordable and, second, the business community would not respond favorably to it. It is important to note that if you are a business owner and have less than 50 employees, you are exempt from any mandates to provide insurance for your employees.

Let’s use Darden Restaurants as a case study. Darden owns Red Lobster, Olive Garden, and a few other name brand restaurant chains. After hearing of the bill’s passing, Darden has considered cutting employees down to part time status. Under the Act, if an employee does not work 30 or more hours/week, the employer is not required to provide the employee with health insurance. There will always be loopholes that businesses will find to avoid regulations, and typically those loopholes are at the expense of economic growth and employment; the Law of Unintended Consequences.

Let’s revisit that 50 employee benchmark we mentioned earlier. One concern that we have is that this could stifle small business development. If a company does not currently provide health insurance to its 40 employees, they will likely be reluctant to expand to the 50 benchmark as there will be more costs associated with growth.

Unfortunately, the segment of the population that will suffer the most by the Affordable Care Act is young people. Typically when young people purchase an individual health insurance plan, it is to cover catastrophic medical conditions or emergency care. Meanwhile, the 70+ age demographic is typically spending more money on healthcare than they have at any other point in their life (one of the perks of getting old I suppose). One of the core ideas behind the Affordable Care Act was to bring down the cost of premiums to those who are spending a lot on healthcare. The only way to do that is to force those who are paying relatively less to pay more.

When you pay a premium for a health insurance plan, there exists what is called a “float.” Insurance companies will take your premiums and put that money to work by investing it in an effort to earn more on the money than they plan to spend on the insured individual, similar to the way that your auto insurance company operates. By reducing the amount charged to those who are spending big bucks on healthcare, the insurance companies need to earn more on those with a longer actuarial life expectancy (young people), thus they charge higher premiums.

This is why over the last several months we have heard that average health insurance costs in Ohio are expected to increase nearly 88% and as much as 146% in California according to Forbes. It is no shock that we are beginning to hear news like that of AETNA opting to exit the California personal health insurance market. 

While this would not have been a recommended course of action, the federal government could have subsidized 100% of the cost of catastrophic health insurance for those who are currently uninsured by expanding Medicare/Medicaid and it still would have cost less than the Affordable Care Act.

Our healthcare system is far from perfect; however this piece of legislation was not the answer to our healthcare problems. When a key designer of the bill says he foresees a “train wreck” coming as implementation nears, you know you have a problem.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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