Will the Health‐​Care Law Help Small Businesses?

There’s a long list of groups that will suffer under the new law: taxpayers, health‐​care providers and patients. Near the top are small businesses.[
August 18, 2013 • Commentary
This article appeared on The Wall Street Journal (Online) on August 18, 2013.

No: It Will Make It Harder for Small Firms to Grow

Nearly half of small‐​business owners believe that the Affordable Care Act will hurt their business, according to a recent Gallup poll.

The evidence strongly suggests that they’re correct.

Let’s start with the most obvious and onerous mandate: Companies with 50 or more workers must provide insurance or pay a fine. That has an immediate effect—raising the cost of employing workers without delivering any benefit.

It also has a long‐​term effect on the plans of smaller firms and on the economy. Most small companies aspire to become bigger companies. Now the cost has been increased significantly.

Suppose that a firm with 49 employees does not provide health benefits. Hiring one more worker will trigger a penalty of $2,000 for every worker after the first 30. If you were that small‐​business owner with 49 employees, how fast would you run out to hire that 50th worker?

In fact, according to the Gallup poll, 41% of small businesses said they have already held off on plans to hire new employees, and 38% said they’ve pulled back on plans to expand in other ways. Worse, 11% indicate that they’ve laid off workers or cut back their hours.

Setting the Floor

Even businesses that provide insurance today may find themselves caught up under the mandate because they must offer coverage that meets the “minimum essential benefits” requirements. While current plans are grandfathered, businesses must come into full compliance if they make any change to those plans, such as changing deductibles. Moreover, noncompliant plans are closed from adding new clients. Eventually, most businesses will be forced to change to compliant plans.

Advocates argue that premiums will be more steady and predictable with these plans. But they will also be higher. While estimates vary widely, studies suggest that premiums in the small‐​group market could increase by as much as 50%.

There are several reasons. The number of insured will increase, as well as the number of covered services, but without a corresponding increase in supply. What’s more, the pool of people in the small‐​business exchange will likely be older and sicker. That’s because companies with healthier and younger workforces will likely to try to save money by staying out of the exchanges and self-insuring—paying their workers’ medical costs directly.

Advocates note that companies with fewer than 50 employees will be exempt from the mandate. But the increased premiums will affect them, too, if they choose to offer coverage. And if they don’t, the higher premiums will affect their workers as they shop for individual coverage.

Stalled Growth

While some businesses may be able to offset a portion of the costs through tax credits, perhaps only 12% of small businesses will use them, according to the Congressional Budget Office. Eligibility requirements are designed so that few businesses meet requirements—and, like the rest of the Act, qualifying for these credits involves a big bookkeeping commitment.

Advocates say the system will make it easier for companies to decide whether or not to offer insurance. What it will actually do is make them decide not to grow. It’s worth noting that in France, where numerous regulations kick in at 50 workers, there are 1,500 companies with 48 employees and 1,600 with 49, but just 660 with 50 and only 500 with 51.

Helping Founders?

Then there’s the argument that entrepreneurs are hesitant to launch companies without universal coverage. So, why does U.S. entrepreneurship outpace OECD countries with national health systems?

There’s a long list of groups that will suffer under the new law: taxpayers, health‐​care providers and patients. Near the top are small businesses.

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