Will federal health care reform help small businesses keep pace with bigger counterparts?

Stephanie Taylor Christensen

Small businesses hold a big disadvantage in health insurance compared with their bigger counterparts. Small businesses pay about 18 percent more for health insurance than larger companies do – and for fewer benefits, according to a new report from The Commonwealth Fund, a nonprofit that promotes improvements in the health care system.

Furthermore, the report says, 49 percent of workers in small businesses with fewer than 50 employees were offered and were eligible for health insurance through their employers in 2010, down from 58 percent in 2003. By contrast, the figure for companies with at least 100 employees was 90 percent in both years, according to the report.

For small business owners, this coverage gap harms productivity, hiring and retention, the report says. The federal health care reform law, known by many as “ObamaCare,” promises to narrow the gap, according to The Commonwealth Fund.

Sara Collins, vice president of The Commonwealth Fund, says the health care reform law should improve “the affordability and comprehensiveness of health insurance both for small business owners who want to offer health benefits and for workers in small businesses who can’t get coverage through their jobs.”

After the U.S. Supreme Court upheld federal health care reform in June 2012, Dan Danner, president and CEO of the National Federation of Independent Business, said that under ObamaCare, small business owners will face “an onslaught of taxes and mandates, resulting in job loss and closed businesses.” Danner’s group lobbies on behalf of small businesses.

Depending on your viewpoint, here are some of the ways that federal health care reform is supposed to help or hurt small businesses.

More coverage

Under the law, businesses with 50 full-time employees that don’t provide health insurance must pay a penalty of $2,000 for each full-time employee (minus the first 30 full-time employees) starting in 2014.

Many workers at small businesses “can’t afford the health care they need or have medical bills they are unable to pay,” Collins says.

The National Federation of Independent Business complains that the insurance mandate discourages business growth and job creation. The group says a small business “can avoid the penalties by firing employees, by not hiring new ones, by replacing full-timers with part-timers, or by outsourcing.”

Tax credits

During 2010, about 170,300 businesses with fewer than 25 employees and average wages of less than $50,000 claimed new tax credits for health insurance premiums, covering 770,000 workers. That number is predicted to more than double in 2011, with 360,000 businesses claiming tax credits for 2 million workers, The Commonwealth Fund says.

The tax credit currently covers up to 35 percent of a small employer’s premium contributions. From 2014 to 2016, small businesses can claim a credit of up to 50 percent of premium contributions.

A 2011 survey of small business owners by Small Business Majority, a lobbying group for small businesses, found one-third of employers that don’t offer health insurance would be more likely to do so thanks to the tax credit.

The nonpartisan Governmental Accountability Office (GAO) says fewer small employers claimed the tax credit in 2010 than the estimated 1.4 million to 4 million that were eligible. In addition, most businesses could claim only partial tax credits because the average pay and the size of the workforce didn’t meet requirements.

Amanda Austin, director of federal public policy at the National Federation of Independent Business, said in May 2012 that ObamaCare supporters highlight the tax credit “as the one shining beacon in a bad law.”

“Unfortunately,” she said, “the truth is that this credit does not incentivize those small employers not already offering coverage to begin doing so. Fuzzy estimates about the number of eligible business owners, the temporary nature of the credit and the increasingly high cost of providing health insurance all make this tax credit a mere talking point, not an incentive for action.”

Subsidized care

The report estimates that starting in 2014, most of the 27.6 million low- to moderate-income uninsured workers at small and large employers will be eligible for subsidized private health insurance through new health insurance exchanges or through Medicaid.

John Arensmeyer, founder and CEO of Small Business Majority, says the federal health care reform law “can play an important role in getting small businesses the relief they need from skyrocketing health care costs. Provisions of reform like the health insurance exchanges opening in 2014 … can help deliver that.”

The Heritage Foundation, a conservative think tank, says these subsidies will cost more than $460 billion by 2019.

“The cost of the subsidies harms the nation’s long-term fiscal health. Furthermore, the subsidies will encourage employers to drop coverage, perpetuate an already inequitable tax code, and discourage work and upward mobility,” the foundation says.

Pre-existing conditions

Effective in 2014, health insurers will be prohibited from limiting or denying coverage based on pre-existing conditions or gender, representing a benefit for small businesses that have a lot of older or female employees.

The federal health care reform law “is building a health insurance market that works for consumers,” U.S. Health and Human Services Secretary Kathleen Sebelius says. “Thanks to the health care law, no one will be discriminated against because of a pre-existing condition.”

The National Federation of Independent Business points out that this provision may trigger a rise in health insurance premiums.

Rate review

Insurers planning to raise premiums by at least 10 percent in the individual or small-employer markets now must justify the rate hikes to state or federal regulators.

“Ultimately, we believe the bright light of sunshine will convince more insurers to think twice and check their math before submitting large rate hikes, which means the benefits of these new rules will be felt by millions of Americans,” Sebelius said in December 2010.

ObamaCare critic Sally Pipes wrote on Forbes.com that the laws “attempt to control insurance prices directly will only diminish the number of options available to consumers — and thereby result in even higher prices.” Pipes is president and CEO of the Pacific Research Institute, a libertarian group.