Why Small Businesses Aren’t Embracing Reform

Why Small Businesses Aren’t Embracing Reform

The health reform law was supposed to help small businesses. So why have some turned against it?

As the health reform debate grew increasingly rancorous last year, both political parties sought support from the nation’s millions of small businesses, an influential sector that represents 99.7% of U.S. employers and, in California, provides more than half of the state’s jobs.

Republicans stressed that the reform would force small businesses to grapple with new uncertainty and “job-killing employer mandates.” Meanwhile, Democrats and the Obama administration touted their legislation as a salve for employers’ rising health costs, with small businesses often spending more on plan administration and their employees paying health plan premiums up to 18% higher than their counterparts working for larger businesses. Since the law’s passage, the White House has organized several high-profile events focusing on immediate benefits for small businesses.

Yet, rather than champion reform, many small businesses have expressed skepticism or outright oppose the new law, contending that its provisions are insufficient in the face of sudden rate hikes and have created additional challenges.

The Law’s Intended Benefits

Beyond general measures intended to benefit all employers — such as provisions designed to reduce health costs and expand health coverage for low-income workers — the reform law targets small businesses with new tax credits and special protections.

Beginning this year, small businesses that employ fewer than 25 full-time workers and meet certain criteria will be eligible for a 35% federal credit on premiums. According to the Council of Economic Advisors, about four million small businesses nationwide could qualify for the tax credit, which would be phased out by 2016.

Meanwhile, small businesses with fewer than 50 full-time employees would be exempt from new coverage mandates after new health exchanges come online in 2014, in hopes of reducing their health spending and improving competitiveness.

Practical Dilemmas

As conceived, the reform law could have a considerably positive impact on California employers. About 43% of the state’s uninsured residents work for businesses with fewer than 10 employees, and more than 4.5 million Californians in 2007 worked for companies with fewer than 50 employees. The tax credits could be worth more than $4.4 billion to California employers over 10 years, according to a report from UC-Berkeley’s Center for Labor Research and Education.

In practice, the credits are presenting unanticipated challenges. For instance, small businesses are not permitted to count any family members they employ toward the credits. Also, the National Center for Policy Analysis suggests that the credit could have an adverse effect on hiring practices, as the credit’s value diminishes as small employers grow from 13 to 25 employees.

Meanwhile, many small-business owners say any relief from the credits pales in light of rising health costs, as payers across the nation push for premium hikes. Most major insurers that serve California’s small businesses already announced significant rate increases. For example, Blue Shield of California will increase average rates by 18%, although some small businesses could experience rate hikes of up to 76%.

The insurers argue the hikes are necessary given rising spending in the wake of the recession, while small-business owners contend that their new tax credits essentially are going to pay down higher premiums. Despite complaints, regulators in many states lack the power to curb the rate hikes, although AB 2578which passed the California Assembly last week and would require insurers to receive approval for increases in charges — would bring that authority to the Golden State.

Debate Over Potential Consequences

Meanwhile, trade associations and policy analysts are split on reform’s effect on small businesses. Dan Danner, president and CEO of conservative-leaning National Federation of Independent Business — which has joined a multistate lawsuit against the reform — warns that the “law is death by a thousand cuts” for small-business owners. Danner says that small businesses also now must deal with additional paperwork and taxes.

John Goodman of NCPA cautions that a new tax on health insurers under the law will be passed onto small businesses and their employees in the form of higher rates.

However, the liberal-leaning Small Business Majority continues to back reform, and CEO John Arensmeyer says the credits are a “big piece of an overall solution.” Jonathan Gruber, an MIT economics professor who has consulted for HHS, also is optimistic on the effect of credits on lowering costs and ensuring that small businesses offer coverage. According to Gruber, he doesn’t know what else the government could do “besides provide coverage for free.”

Here’s a look at what else is making reform-related news around the nation.

Selling the Law

Industry Impact

White House Efforts

In the States

Unexpected Fallout

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