The recently passed Patient Protection and Affordable Care Act and the Senate’s $18 billion jobs bills will together ensure that small businesses have the help they need to offer heath care benefits while keeping current employees and attracting and taking on new ones. The tax incentives they offer are designed to help business owners provide for their workers while growing number of jobs they can offer. And these are welcome changes; two-thirds of small business owners reported in a Small Business Majority poll that health care reform was needed to get the American economy back on track.
Rising health care costs are a major concern for small business
The cost and availability of health insurance have been top small business concerns for many years, driven by large premium increases and rising administrative costs. Health insurance costs for small businesses increased 113 percent from 1999 to 2007. And these escalating costs don’t mean better or more health care benefits.
In fact, small firms’ health insurance premiums are an average of 18 percent more than those for employees at large firms receiving the same benefits. Some of these higher costs are passed on to small business employees in the form of lower wages, and some eat into business profits that could otherwise go toward research, development, and other much-needed investments, including hiring more staff. This implicit tax disadvantages small businesses when competing on the market for the best workers and for their products.
These higher health insurance costs mean that small businesses are far less likely than larger businesses to provide health insurance for their employees, although small employers state that offering benefits helps with employee recruitment and retention, increases productivity, and is the “right thing to do.” And only 49 percent of firms with 3 to 9 workers and 78 percent of firms with 10 to 24 workers offered any type of health insurance to their employees in 2008. Small business employees also tend to have less generous plans than employees at large businesses.
How health care reforms will help small businesses provide insurance coverage for their employees
Health care reform will enable small businesses that meet certain criteria to purchase health insurance through an “insurance exchange” that will allow them to choose among a variety of plans that provide better coverage at lower costs than those in the current small group market.
Many small businesses that provide health insurance for their employees will receive a small business tax credit, targeted to those firms with employees whose average wages are low, to alleviate their disproportionately higher costs and encourage coverage.
From 2010 to 2013, the bill will provide employers with a tax credit of up to 35 percent of their contribution to health insurance if they have 25 workers or fewer and average annual wages of less than $50,000. This is provided that the employers’ contribution is at least 50 percent of the premium cost.
Once the health insurance exchanges are running starting in 2014, eligible small businesses that purchase coverage through the state-based exchanges will be able to receive a tax credit of up to 50 percent of their contribution to health insurance for two consecutive years, provided this contribution is 50 percent of the premium cost.
The health care reform legislation also includes provisions that create a temporary reinsurance program for employers providing health insurance coverage to retirees over age 55 who are not eligible for Medicare. The program will reimburse employers or insurers for 80 percent of retiree claims between $15,000 and $90,000. Payments from the reinsurance program will be used to lower the costs for enrollees in the employer plan. This provision will be effective 90 days following enactment of the legislation through to January 2014, when the exchanges are established.
How health care reform will boost jobs in the small business sector
The Small Business Majority commissioned a study by Professor Jonathan Gruber that examined how health care reforms would affect businesses with fewer than 100 employees. This study concluded that small businesses will fare far better under the substantially reformed health care system, which includes appropriate levels of assistance to small businesses to help them meet their health care obligations.
The SBM study shows that health care reform will help small business by dramatically reducing the costs small businesses pay to provide health insurance coverage to their employees. If Congress had not passed reform, small businesses would have had to pay nearly $2.4 trillion over the next 10 years in health care costs for their workers. With reform, the study shows that small businesses can save as much as $855 billion, a reduction of 36 percent.
It is estimated that 178,000 small business jobs would have been lost in 2018 as a result of escalating health care costs. Health care reform can save up to 128,000 of these jobs, reducing job losses by as much as 72 percent, and will contribute to increased profits, competitiveness, and higher wages. The SBM study found that health care reform will save workers up to $309 billion in wages over the next 10 years.
But perhaps the biggest benefit for small business employers and employees is that health care reform will eliminate “job lock,” the situation that arises when people, especially those with pre-existing conditions, are fearful of changing jobs and losing their health insurance coverage. Approximately 1.6 million small business workers are in this situation—that’s roughly one in 16 people currently insured by their employers. Health care reform will ban exclusions on the basis of pre-existing conditions and enable individuals and families to purchase health coverage at an affordable rate, likely bringing the new rate of job lock close to zero.
Several recent studies highlight how health care reform will boost jobs growth across all business sectors. David Cutler and Neeraj Sood estimate in a study for the Center for American Progress that health care reform could boost employment by 250,000 to 400,000 a year over the next decade. Their findings are very similar to those of President Obama’s Council of Economic Advisors, which estimated that health care reform will create approximately 500,000 new jobs a year, remove unnecessary barriers to job mobility, and help to “level the playing field” between large and small businesses.
Small businesses are the “engines of the economy.” Firms with fewer than 500 employees accounted for 64 percent, or 14.5 million, of the 22.5 million net new jobs between 1993 and the third quarter of 2008. These small businesses will benefit significantly from these new pieces of legislation and are likely to claim a majority of the new jobs that are generated from it.
The PPACA combined with the jobs bill will help reduce the current cost burdens on small firms and their workers. The proposed reforms will encourage entrepreneurial activity by increasing the incentives for talented Americans to launch or expand their own companies, and will increase the pool of workers willing to work at small firms. And small businesses will benefit in particular from reductions in absenteeism and improvements in worker productivity resulting from better health outcomes because of expanded access to health insurance coverage.