How health care reform affects the self-employed

Kathryn Hawkins

Self-employed American often have few options or protections when it comes to health insurance. Insurers often are able to reject applicants on the basis of existing medical conditions and can raise premium costs astronomically from year to year.

Sally Jamara, a self-employed business consultant from Atlanta, knows this firsthand. Since a knee injury a few years ago, she’s been unable to switch to a different insurance carrier because of her pre-existing condition. The cost of her current plan has been “dramatically rising,” forcing her into a high-deductible plan with high out-of-pocket costs.

“I now spend over $12,000 a year to cover my medical expenses,” Jamara says.

More than 10.5 million Americans are self-employed, but the difficulties of buying health insurance on the individual market can make entrepreneurship less attractive. The federal health care reform law, known as the Patient Protection and Affordable Care Act, has some provisions designed to protect entrepreneurs and others buying health insurance on the individual market. Here’s a look at how the federal law could affect the self-employed in the years to come.

Under the federal health care reform law, self-employed Americans will be able to buy health insurance even if they’ve got pre-existing conditions.

Changes already in effect

A number of protections already have been put into place. In 2010, the federal government launched a national high-risk insurance pool for uninsured individuals with pre-existing health conditions who’ve been uninsured for at least six months. For uninsured self-employed workers who’ve been struggling to find coverage on the individual market because of health problems, this insurance pool could be an option.

Another insurance issue that hits the self-employed hard is a practice known as “rescission.” In the past, an insurer could retroactively cancel an approved policy when the policyholder got sick and began racking up bills. Often, the withdrawal of coverage would be based on relatively insignificant conditions that a policyholder mistakenly didn’t disclose during the application process.

A survey by the National Association of Insurance Commissioners found that health insurers had dropped about four of every 1,000 policies between 2004 and 2008. But the health care reform law has put an end to this practice for most policies. As of August 2010, it is illegal for insurance companies to retroactively cancel coverage for plans that began after Sept. 23, 2010. For self-employed workers, who must fend for themselves without the protection of an employer’s group coverage, this provision might provide some peace of mind.

One of the biggest money-saving provisions for the self-employed, however, comes in the form of tax credits for small business owners. Businesses with fewer than 25 employees that provide insurance may be eligible for tax credits worth 35 percent of the cost of coverage.

“Many of the self-employed fall just short of qualifying standards for subsidies and tax credits in the health reform law,” says Mike Beene, senior health policy adviser at the National Association for the Self-Employed. “They make too much to qualify for premium assistance but too little to afford the comprehensive coverage they will be required by law to buy.”

For example, the federal law’s small business health tax credit excludes the self-employed (defined as a one-person business), according to the National Association for the Self-Employed. The self-employed can qualify for premium subsidies for individuals and families when take effect in 2014. To qualify, someone must make below $43,340 and a family of four must have a household income below $88,200. The average household income is $62,500 for a self-employed member and his or her spouse, which makes them ineligible for premium assistance.

What’s in store

The health care reform law’s most controversial provision is the individual mandate, which requires all U.S. citizens and legal residents to be insured by 2014. This means all self-employed individuals will have to buy insurance or be fined. But it also means that insurers won’t be allowed to deny coverage, even for applicants with pre-existing conditions.

When the mandate goes into effect, self-employed workers, as well as owners of small businesses with up to 100 employees, will be able to shop for coverage through their states’ insurance exchanges. The exchanges are marketplaces that will let people compare health insurance costs and benefits. Several levels of coverage will be available.

To help individuals afford the mandatory coverage, premium subsidies will be available for those under certain income thresholds. Meanwhile, Medicaid will be extended to support low-income adults making up to $14,404 individually ($29,326 for a family of four).

The mandate is in danger, as 26 states have questioned its constitutionality. However, Joe Torella, president of employee benefits at insurer HUB International Northeast, says there’s good reason to mandate health insurance.

“The danger is that people will only buy health insurance when they’re sick and won’t buy when they’re healthy,” Torella says. “If I want to buy homeowner’s insurance, I can’t wait until my house is on fire. The only way health insurance will be affordable is if everyone has to play.”

No matter what becomes of the individual mandate, many experts don’t think the federal law will make health coverage cheaper for the average American. Because insurers will be required to include certain essential benefits in their plans, many low-cost plans no longer will be available.

“The new law isn’t going to fundamentally bring down health care costs,” says Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, a trade group. “With the new benefit requirements, many people will need to buy more than they currently have.”