Will New Health Insurance Be Too Expensive for America's Lowest-Paid?

June 6, 2013, 8:14 p.m. ET - Wall Street Journal

Will New Health Insurance Be Too Expensive for America's Lowest-Paid?

Bosses, Workers Struggle to Gauge Hit to Paychecks

For people like Salvador Martínez, a 50-year-old grounds crewman, the health-care law seems to be a potential game changer. Because of the law, his employer, a landscaping service in Santa Clarita, Calif., will begin offering coverage to him, and to its 230 other low-wage workers, next year.

But Chris Angelo, a second-generation owner of the landscaping firm, Stay Green Inc., doesn't expect a groundswell of enrollments next year from lower-wage workers such as Mr. Martínez.

While the employees might say they're interested in employer coverage, "we believe they will opt out," says Mr. Angelo. His reasoning? "They'd rather have the cash than pay the employee portion of the premium."

He says: "On the surface, it sounds appealing to them. There might be optimism without having all the facts."

Indeed, Mr. Martínez, who earns $10.50 an hour, says he'd love to have insurance, but he can't afford the estimated $140 monthly cost for his share of the premium next year. "I make too little to spend on insurance. How am I going to pay for food?" he says, speaking in Spanish. He says he won't immediately sign on to the plan.

Stay Green's experience suggests that employers may struggle to figure out how many of their low-wage workers will opt in for employer coverage in 2014. By the same token, it suggests that many low-wage workers could remain uninsured next year, despite the law's subsidies and penalties.

"Of course I prefer to have health insurance because I need it for my children, for my family," says Romérico Herrera, a 48-year-old crewman who earns $11.50 an hour. Mr. Herrera, also speaking in Spanish, says he's had health insurance through previous employers but hasn't been insured since he started working at Stay Green two years ago.

But Mr. Herrera would like to find out what kind of coverage he would get before signing up for health insurance. He says that he wouldn't be able to contribute more than $100 a month. "I make so little that [contributing] more would mean working just to pay for insurance," he said.

Mr. Angelo says he is working with a broker to find a plan that will be as affordable as possible for his workers. As he evaluates different plans, he must also consider his company's bottom line.

For instance, in one scenario, where all 270 employees participate and pay no more than 9.5% of their income to the premiums, it would cost the company $1 million a year—essentially wiping out the company's profits.

One in three low-wage workers are employed by firms with fewer than 100 employees, according to the National Employment Law Project, an organized-labor-backed advocacy group for low-wage workers. "Employers are in limbo," says Paul Fronstin, director of Health Research and Education Programs at the Employee Benefit Research Institute in Washington, D.C. "You never know what the low-wage worker's position is—whether they have other family members who are working, or whether there is another member of the family who has benefits."

For an employee earning $30,000 at Stay Green, for instance, a 9.5% salary contribution to the premiums is $2,850 a year. But under the law, the 1% penalty for that same employee who forgoes health insurance is only $300 a year.

Mr. Angelo says he believes the majority of his low-wage workers will opt out, based on past experience. For instance, the company offers a 401(k) program that most of the workers skip—even though Mr. Angelo offers to match their contributions, up to 4% of their salaries. "It's been a struggle to get them to participate," he says.

Starting next year, firms with 50 or more full-time equivalent employees will need to offer health insurance to all their workers who average 30 or more hours a week.

In addition, employers must not ask employees to contribute more than 9.5% of their income to health-insurance premiums. Otherwise, the employer could face penalties. Employers don't face any penalties if they offer affordable health-insurance benefits and their employees don't sign up.

Also come January, under the law's individual-mandate provisions, most U.S. residents will be required to have health insurance or pay a penalty. Low-wage earners who can't afford their employers' plans may seek coverage through Medicaid, if they are eligible, or through an individual plan available through a government-run exchange.

Alternatively, the workers may forgo insurance altogether and pay the small penalty, which could be their most affordable option. Low-wage workers who forgo employer-sponsored insurance may be able to claim a hardship exemption from the penalty.

Bill Reeder, owner of Campus Cooks in Glenview, Ill., says the insurance plan he intends to offer next year could cost the company $200,000 or $500,000, depending on the number of employees who sign on.

Today, Campus Cooks, a food-service firm that operates in sorority and fraternity houses on 20 university campuses in the Midwest and Southeast, doesn't offer insurance. Mr. Reeder polled his staff recently and found that about half of the staff is interested in an employer-sponsored health plan.

Mr. Reeder is hoping at least 75% will sign on. But he says it could be a challenge to get the chefs, who tend to be younger, healthier and lower-paid, earning between $10 and $20 an hour, to find value in a health-insurance plan when, for most of them, paying the penalty is so much cheaper.

"We want the plan to be simple, be compliant and to get people on board," Mr. Reeder says. "We are grappling with how much we can contribute and make it so everyone can be on the plan."

—Andrea López Cruzado contributed to this article.

Write to Emily Maltby at emily.maltby@wsj.com

A version of this article appeared June 7, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: The New Math for Health Insurance Costs.