Small Businesses: Big Winners Under Health Reform

July 2, 2009By Janet Bauer

What was once said of General Motors rings true for small businesses: what’s good for them is good for America. Nearly a quarter of the nation’s net jobs growth in recent years has flowed from small businesses, many of them start-up companies that fuel innovation and economic growth.

And what would be good — in fact, what’s vital — for small businesses is successful reform of our broken health care system.

The cost of health care burdens the American economy as a whole, but small businesses toil under a particularly heavy weight. They pay up to 18 percent more per worker than large firms for the exact same health care policy.

Why do small businesses pay more? Well, because they are small. In the insurance world, a smaller pool of workers means more risk, because there are fewer healthy workers to subsidize the cost of sick workers. And the higher your group’s risk, the more you pay.

Insurance companies also tack on more administrative costs to the health care policies of small businesses. Administrative costs add up to 10 percent of the cost of insurance premiums for larger firms, compared to 20 to 25 percent for small businesses.

Small businesses also face a less-competitive market for health insurance than bigger companies, with one or two small-group insurers able to dominate the market and keep prices high.

Those higher insurance costs wreak havoc on health coverage. Only about a third of the nation’s small businesses with fewer than 10 employees offer health coverage to their workers.

According to the National Federation of Independent Businesses, 26 million of the 46 million currently uninsured Americans are small business owners, employees or their dependents.

Small businesses that do insure their workers must find a way to pay for the bigger price tag. Providing coverage can mean reduced profits and fewer dollars available for research and innovation. It can also mean lower wages for employees and sparse coverage, with high deductibles and fewer benefits.

These burdens put small businesses at a competitive disadvantage compared to larger companies, both in terms of investing in the future of the company and in attracting needed talent.

So a lot is riding on how the congressional effort to reform the nation’s health care system treats small businesses. Fortunately, legislation emerging from the U.S. House of Representatives addresses the needs of small businesses.

First, the House legislation would prohibit insurers from charging small businesses more based on their workers’ health status. This would prevent premiums from skyrocketing just because one employee in the group suffers a heart attack, develops cancer or experiences some other major medical need.

The bill would also set up a health insurance marketplace, or exchange, where small businesses, including sole proprietors, would be able to shop for less expensive insurance than what’s currently available in the market. Even better, all health care plans competing in the exchange would have to provide a basic, comprehensive benefits package so that workers and their families can get care when they need it.

Finally, the legislation would exempt many small businesses from having to provide coverage but would encourage the smallest firms to do so by offering a tax credit to help defray insurance costs. About 99,000 small businesses in Oregon would qualify for the credit, putting them in a stronger position to provide health coverage for their workers.

Unfortunately, change does not come easily, even when it would bolster small businesses. Critics of health reform legislation have sought to portray up as down, day as night, by claiming that reform would harm small businesses. But that’s not reality.

Small businesses stand to be big winners under successful health care reform. When they win, we all win.

Janet Bauer is a policy analyst with the Oregon Center for Public Policy.