At an economic roundtable last week, President Obama called small businesses the “backbone of our economy and cornerstones of our communities.” It’s true: small business accounts for about half of America’s GDP and more than half of all employment. They create two out of every three new jobs- especially important these days, while unemployment is still high.
Yet for decades our health care system has placed small business at a competitive disadvantage. Not only are the administrative costs of setting up and maintaining a health plan much higher for small businesses, they also have to pay higher premiums than large corporations– 18% higher on average.
Rising health care costs in recent years have been particularly hard on small businesses too. According to the Chicago Tribune:
“To deal with soaring health costs, many small businesses have had to switch insurance carriers, push more of the financial burden on to workers, or reduce, if not eliminate, coverage. About 12 percent of nearly 500 small businesses polled in a dozen states dropped coverage for their workers in 2008 and 2009, according to a report by the Illinois Main Street Alliance. In addition, 35 percent reported switching within the past two years to insurance that covers fewer services.”
Will the new health care law help small business? Right now only 24% of owners think so… but that doesn’t mean they’re right. It’s a complicated law and surprisingly little media coverage has been devoted to how it will affect them. And so we’ve put together a brief primer on what the law means for “the backbone of our economy.”
I. Establishes a Small Business Health Care Tax Credit
How Reform Helps: Starting this year, small businesses who have:
- 25 or fewer employees;
- An average wage of less than $50,000; and
- Pay at least 50% of the health care premiums for their employees.
- Will qualify for a tax credit up to 35% of the cost of premiums.
The credit goes up to 50% after 2014 if they purchase insurance through an exchange, and it continues for two years after that. The size of the credit depends on the number of employees and their average wage.
The Down Side: Critics have pointed out that the credit is only available to the smallest businesses and only lasts through 2016.
However, supporters would argue that medium-sized businesses already provide coverage, and it’s the smallest businesses that need the most help. According to a report by Families USA:
- Nationally, more than 95% of businesses with 50 or more employees offer some kind of health coverage;
- 72% of businesses with 10 to 24 employees offered some form of health insurance last year; and
- Only 46% of businesses with three to nine employees offered coverage.
In any event, Kaiser Health News reports:
Some small business owners are already happily planning on taking advantage of the law. Jim Houser, an auto mechanic and owner of a shop in Portland, Ore., said in a telephone interview that the tax credits will save him nearly $15,000 a year in health care coverage costs. He provides coverage to 13 employees at his shop. Houser, who is a member of the Main Street Alliance — a small business group that supports the new law — said he’ll use the extra money he keeps from the tax credits to give raises to his workers that he’s put off for the last couple years. And in 2014, he’ll use health insurance exchanges to seek coverage for employees, he said.
II. Creates Health Insurance Exchanges
As we mentioned earlier, small businesses face higher premiums than large businesses, higher administrative costs to set up and maintain a health plan, and they they lack the bargaining power of larger companies in negotiating with insurance companies.
- How Reform Helps: Starting by 2014, firms with 100 or fewer workers will be able pool their buying power and reduce administrative costs by purchasing insurance through an exchange. According to the nonpartisan Congressional Budget Office (CBO), plans on the exchange:
“Would have lower administrative costs, on average, than the policies those firms would buy under current law, particularly for very small firms.”
III. Subsidies and Medicaid
Starting in 2014, many self-employed will qualify for a federal subsidy to help them afford the cost of purchasing health care. Those earning up to 400% of the poverty level will get assistance, or up to $88,200 for a family of four (at today’s poverty level). Those earning less than 133% of the poverty level will be eligible for Medicaid. This can be a big help, especially for those just starting a business, without much income.
IV. Mandatory Employer-based Coverage
Small businesses – with fewer than 50 employees – are exempt from mandatory requirements. Businesses with more than 50 employees will be required to provide coverage as of 2014 or pay a fine. This could be a new cost for some medium-sized business, but again, nearly all companies this size already provide insurance.
According to one business owner, the mandatory coverage requirement for larger employers, “means those of us who provide health care coverage will no longer, in effect, be subsidizing our competitors (whose employees rely on public health services) who don’t.”
V. Ends Price Discrimination Against Small Businesses with Sick Workers
Large corporations don’t have to worry when one employee gets sick- costs are spread out among so many people that the low costs of covering all the healthy employees will balance out the high costs of a few sick ones. Small businesses aren’t so lucky- if one employee gets sick, the insurance company can jack up your premiums.
- How Reform Helps: Health reform will end this price discrimination. Starting in 2014, “community rating” rules will prohibit insurers from charging more to cover small businesses with sicker workers or raising rates when someone gets sick.
VI. Unlocks Entrepreneurs by Increasing Health Care Security
We’ve all heard stories of people who would like to leave their current job, but can’t because they worry about finding insurance coverage for themselves or their family– especially if they have a pre-existing condition. This “job lock” causes many workers to stay at large firms even if they would be more productive working at a small business or becoming an entrepreneur.
- How Reform Helps: By eliminating exclusions for pre-existing conditions and price discrimination against those who are sick, health reform will make it easier for small businesses to attract the best workers and easier for entrepreneurs to strike out on their own.
VII. Reduces the Hidden Tax on Small Business Employees with Health Insurance
Currently, the cost of treating the uninsured adds a “hidden tax” of over $1,000 to every health care premium.
- How Reform Helps: Health reform should significantly reduce this “hidden tax” by covering an additional 32 million Americans by 2019.
VIII. Reduces Premiums in the Small Group Market
According to the CBO, health reform will reduce the cost of a given plan in the small group market 1-4 percent by 2016. However, this number doesn’t take into account the small business tax credit, which will reduce the cost of premiums for some employers even more.
IX. Coverage for Adult Children
Starting this year, if an insurance plan covers dependent children, it will have to offer that coverage until they turn 26– unless those children can get insurance through their own employer. We have to admit, this is an added cost for some small businesses that they won’t benefit directly from. However, it will be a major help for adult children of their employees. Young adults who are going to school or are just starting out in their careers are much less likely to have a job that provides health insurance.
X. Other New Rules for Plans
- Starting September 2010, there can be no lifetime maximum limits on policies. Also, companies can’t cancel your policy based on pre-existing conditions, unless they can prove that you lied in your application.
- Starting September 2010, coverage must include basic preventive care. Since many small businesses can now only afford catastrophic coverage, this may mean additional benefits.
- Starting 2014 deductibles for health plans in the small group market will be limited to $2,000 for individuals and $4,000 for families, unless your employer chips in to help pay deductible costs over that limit.
XI. Grandfathered Plans
Since a major component of health care reform was the idea that “if you like your current insurance you can keep it” current insurance plans will be grandfathered in. This means that small businesses can keep plans that doesn’t meet some of the coverage requirements of the new law… as long as they don’t make significant changes. Plans can raise premiums to keep up with rising health care costs and make some small changes to benefits or out of pocket costs.
But changes that would cause a plan to lose its grandfathered are things like:
- Significantly cutting or reducing benefits – for example, if your plan covers care for people with diseases such as diabetes, cystic fibrosis or HIV/AIDS, the plan cannot eliminate coverage for those diseases;
- Raising co-insurance charges – for example, increasing your share of a hospital bill from 20% to 25%;
- Significantly raising co-payment charges – for example, raising the copayment from $30 to $50 over the next 2 years;
- Significantly raising deductibles – for example, raising a $1,000 deductible to $1500 over the next 2 years;
- Lowering employer contributions by more than 5 percent – for example, increasing workers’ share of the premium from 15% to 25%;
- Adding or raising an annual limit on what the insurer pays.
All right, so that’s health care reform for small businesses. In a nutshell: small businesses do not have to provide insurance under the new law, but if they do provide it, there is help.