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In 1986, in a garage behind his house, John Lockwood built the first computer-designed kit for assembling a kayak at home. Today, he runs Port Townsend’s Pygmy Boats, a leader in the construction of kits for wooden kayaks, canoes and rowboats.

Before most people had email, Lockwood figured out how to create a boat with a computer. But what he can’t sort out now is why insurance companies have scuttled the state’s health-insurance exchange for small businesses like his.

Next year Washington — with the exception of two counties bordering Oregon — will be the only state without a Small Business Health Options Program, or SHOP. That means the vast majority of the state’s small employers won’t have a shot at federal tax credits that, under the Affordable Care Act, reduce the cost of health insurance for their employees.

At the same time, eight insurance companies in the Washington Healthplanfinder exchange are selling dozens of plans in the individual insurance market. Only one, Kaiser Permanente, stepped up to sell health insurance on the small-business exchange, and only in Clark and Cowlitz counties.

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“It’s absurd,” Lockwood said. “What is it about Washington state that separates us from the rest of the United States? We’re no less healthy; there’s nothing saying we’re a greater risk.”

Other states have hit some snags with SHOP. Maryland and Mississippi are delaying the launch of their business exchanges until spring 2014, and Wisconsin has less than complete statewide coverage. Most states use the federally run SHOP, which is working, but the online enrollment won’t be available next year.

The lack of the SHOP exchange across most of Washington is only one challenge facing small employers as health-reform rules continue rolling out. Another is that many associations and trusts that sell health insurance to smaller businesses at lower prices are disappearing. Businesses moving from these trusts to the small-group insurance market could see a jump in their premiums while those staying in the group market aren’t expected to see big spikes.

“There is a lot of dust in the air right now,” said Sean Corry, president of Sprague Israel Giles, a Seattle-based insurance brokerage. “Some people are going to be better off, some will be worse off.”

Opting out

So why are Washington’s small employers — those with 1 to 50 employees — being battered by changes while others are not?

First, when states wrote the rules creating the health-insurance exchanges, some required insurers doing lots of in-state business or participating in the individual market exchange to also sell plans on SHOP. Many states, including Washington, skipped that requirement, allowing insurers to opt out.

Second, and more important, associations and trusts are more common here than perhaps any other state. Some 490,000 small-business employees and their families are insured through one of these groups, often organized around a certain profession.

Only 140,000 small-business employees are insured through plans available on the small-group insurance market.

The associations and trade groups have been popular because they were able to play by a different set of rules, making their products cheaper.

Under those rules, insurance companies could use screenings to determine the health of a company’s workers and set rates accordingly. If an employer’s claims started rising — say an employee got a serious illness — the insurer could boost that employer’s rates.

“They’ve been able to screen out the sick people,” said Stephanie Marquis, a spokeswoman with the Office of the Insurance Commissioner. “They’ve been cherry picking.”

While the practices were legal, businesses with potentially less healthy employees were forced to buy coverage outside of the association and trade groups and on the “community rated” group market. There, the insurers could not charge more for sick people, but in general they set premiums higher because the pool was riskier.

Trade groups

The Affordable Care Act helps level the playing field. The law makes it illegal to deny coverage to people for pre-existing conditions, and insurers can no longer use screenings to set premiums. The plans all must limit deductibles and provide more comprehensive benefits.

Those aren’t the only changes. Unrelated businesses have been able to join the associations and trade groups. Now, the groups’ members must truly represent the same sorts of businesses, and the groups must offer benefits beyond selling health insurance.

The state predicts many associations will change dramatically, breaking into multiple groups or dropping some members. Potentially half of the 490,000 people covered by these organizations could wind up seeking insurance elsewhere, officials say.

A group that has weathered the changes is the Master Builders Association Health Insurance Trust, which covers approximately 1,400 companies and 40,000 workers and their families in King and Snohomish counties. The trust cut up to 12 percent of the member companies because of the new definitions, said Jerry Belur, president of EPK & Associates in Bellevue, which administers the trust.

The trust didn’t use health screenings to set its premiums, Belur said, so that aspect of its operations was OK. It also provided more comprehensive coverage, including preventive care and prescription drugs.

“There was a very active and vibrant association market in the state of Washington,” Belur said. “There were lots of options in the state, and those have been narrowed, but there are still options available.”

The Affordable Care Act contains no legal requirement that small employers provide health-care coverage for their employees. Instead, the law dangles a carrot in the form of a tax break.

Since 2010, businesses and nonprofits with fewer than 25 full-time employees making $50,000 a year or less and which pay at least half the cost of their employees’ insurance premiums have been eligible for tax benefits. Small businesses were eligible for up to 35 percent of the insurance costs, while nonprofits could recoup up to 25 percent.

That tax benefit will increase next year to 50 percent for businesses and 35 percent for nonprofits, but only if they buy their insurance through a SHOP exchange.

Earlier this year, seven insurance companies in Washington expressed interest in participating in SHOP. Six withdrew, leaving only Kaiser, which also will offer SHOP insurance in Oregon. There is significant crossover between that state and the two Washington counties where Kaiser is participating in SHOP.

Employer frustrated

At his kayak business on the Olympic Peninsula, SHOP doesn’t do Lockwood any good.

For decades, the kayak designer has paid the cost of health insurance for his employees. Then in 2011 and 2012, Lockwood qualified for a tax credit covering 21 percent of the costs for the six employees he insures.

He’s frustrated with the insurance companies.

“If they are willing to go in and risk individual coverage, it doesn’t make any sense that they aren’t willing to risk the small-business market,” Lockwood said. “I haven’t heard any rational reason why Washington state isn’t in [SHOP].”

Insurers claim they have good cause for taking a pass. They say that it was a huge amount of work to create Obamacare-compliant plans; adding SHOP to the mix was too much, too fast. They’re also still waiting to see how the association and trade groups sort out.

No one knows for sure who will enroll in the individual exchange, seek small-group coverage or go without and pay the penalty. In an industry that loathes uncertainty, no one wanted to be the first to take the plunge into SHOP in a big way.

“Because in Washington [SHOP] was optional, many of us chose not to participate,” said Melinda Hews, Group Health Cooperative’s executive director of Health Insurance Exchanges. “Part of that was because of sheer resources.”

Insurance companies also say they’re not convinced the tax credits will create enough demand for the SHOP market. Between 1.4 million and 4 million employers are eligible for the tax benefit instituted in 2010, according to a federal report released last year, but only 170,300 employers filed for the benefit in the first year.

The question now is whether more insurance companies will join the SHOP exchange for 2015.

Premera Blue Cross spokesman Eric Earling wouldn’t say if the company would submit plans for SHOP, but he seemed skeptical about future participation.

“While the individual exchange offers a very clear incentive to purchase insurance if you have a subsidy, the small-group exchange does not have that same incentive,” he said.

Officials with Group Health and Regence BlueShield also were mum on their plans.

There is a slim chance that employers like Lockwood will be able to take advantage of a tax credit even without SHOP. This summer, state officials asked the Internal Revenue Service if the existing tax-credit program can be extended here.

A spokeswoman for the U.S. Treasury Department recently said they “are examining the issue.” But Catherine Bailey, SHOP manager for the state, said “as we understand it, the IRS is not likely to make a change.”

Those in the insurance industry are encouraging employers to hold on.

“I think there will be a lot more stability in the market after this first hurdle,” said Beth Berendt, formerly of the Office of Insurance Commissioner and now with Olympia-based Berendt and Associates, which provides insurance advice.

Lockwood hasn’t decided what to do. One option is boosting his employees’ salaries and sending them to the exchange for individual insurance. Whatever the case, he’s committed to providing coverage for his workers.

“We have no choice,” Lockwood said, “Our health-care costs are going to increase.”

Lisa Stiffler, a freelance writer in Seattle, can be reached at story was produced through a partnership with Kaiser Health News, an editorially independent part of the Kaiser Family Foundation, a health-policy research and communication organization that is not affiliated with Kaiser Permanente.

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