Health Care Reform and Small Businesses
Jumpstarting the Economy
Erin Mariano
Maytak Chin
Dr. Lesley Russell | Center for American Progress
Posted Tuesday, December 28, 2010

Lesley Russel is a visting fellow at the Center For American Progress. She is also a research associate of the U.S. Studies Centre at the University of Sydney and a visiting professor in the Department of Health Policy at George Washington University.

Dr. Russell was previously policy advisor to the Australian Shadow Minister for Health and Manager of Opposition Business in the House, Julia Gillard, MP, now Deputy Prime Minister of Australia. Prior to this, Dr. Russell served as policy advisor to the Leader of the Federal Opposition, the Hon. Simon Crean, MP, now Minister for Trade. She has advised across a considerable portfolio including health and aging, population and immigration, indigenous affairs and reconciliation, and multicultural affairs.


Q: To orient our discussion, who qualifies as a small business with respect to health care reform?

A: In the context of the health care bill, businesses that are composed of twenty-five full-time equivalent employees or less qualify as small businesses and therefore are entitled to certain benefits.

Q:  What are some of the pressing issues small business owners face in providing health care coverage for their workers in today’s economy? 

A: First of all, many businesses currently have to make a choice between hiring new workers or providing health cover for their employees. Many small businesses do not have enough money to do both. Roughly twenty-nine percent of companies who employ twenty-five employees or less actually provide health insurance for their workers. The inability for small businesses to provide health insurance limits their ability to attract the best employees. Employment benefits are an important factor in employment decisions, especially for high talent employees. President Obama’s health care reform will help small businesses keep their current employees while attracting new talent. According to the Small Business Majority poll, two-thirds of small business owners believe that health care reform will be critical in getting the American economy back on track. [1]

Q: How does the availability of health care affect job mobility and other employment considerations on the employee’s side?

A: Many employees are in what is called a “job lock,” meaning that they are not willing to move around from job to job because they risk losing the health care coverage that they have. Before the passage of health care reform, getting new health coverage was increasingly difficult, particularly if you or someone in your family has a pre-existing condition. Many people with pre-existing conditions, for example, were fearful of changing jobs because they would lose their health insurance coverage and risk the potential of being discriminated by health insurance companies.

Q:  Small businesses spend on average about eighteen percent more compared to large businesses in 2009 for similar coverage.[2]  Can you explain what disadvantages contribute to this disparity? 

A: Small businesses are greatly disadvantaged in the marketplace because they do not have the negotiating power that a big business has to negotiate with insurance companies for better rates and terms. For instance, a small business cannot say,  “Well I don’t like your rates, and I’ve got two hundred employees so if you don’t do business my way I’ll take my business somewhere else.”

In fact, the eighteen percent can be characterized as a surcharge for small businesses. These businesses, due simply to the size of their company, are required to pay insurance companies eighteen percent of the business’s revenue--money that is not available to return to employees in the form of increased wages, or to be reinvested in the business itself. According to a commissioned study by the Small Business Majority, small businesses will pay nearly $2.4 trillion over the next ten years if health care reform did not pass. With the reform, it is estimated that small businesses can save as much as $855 billion, a reduction of 36 percent.[3]

Q:  The passage of health care reform created new state-based health care exchanges to regulate the cost and improve competition, giving small business owners more market power and access to health insurance options. Can you explain the exchange plan in more detail, specifically how it will affect small businesses? 

A: The health care exchanges will increase negotiating power and the choices available to small businesses. The exchanges create a market consisting of a large number of health care insurance providers for small businesses to choose from. There are certain requirements a health insurance company has to meet with respect to their plans before they are allowed to offer these in the exchanges. The main point is to make sure that everyone, regardless of how they work and where they work, will have a chance to have health insurance coverage under health care reform.

Q: What requirements must health insurance policies meet to participate in the exchange for health insurance companies? 

A: There is quite a list.  For one, insurance companies participating in the exchange are not allowed to discriminate on the basis of pre-existing condition.  Insurance companies now are not allowed engage in rescission, meaning they are no longer allowed to say, “Mrs. Smith, yes it’s true you’ve got our health coverage but you’ve been costing us a lot of money in dialysis recently so we’re not covering you any longer.” 

Another significant requirement is that participating insurance companies have to cover a defined range of preventative health services, such as immunizations, mammography, and diabetes screening, without any co-payments or deductibles.

There is also a Medical Loss Ratio (“MLR”) provision of the bill, which ensures that a certain percentage of profits paid to insurance companies is spent on health care expenses rather than lobbying and advertising. The MLR basically ensures that a certain percentage of the money that they bring in, return it back to people in the form of benefits.   

The exchange will level the playing field. Information will be readily available through websites, and a health insurance ombudsman will help small businesses and individuals with making comparative evaluations. Companies will be able to compare insurance policy plans and see if they were previously paying far too much money for far too little in benefits or whether it is worth moving to another insurer. Small businesses will now have the ability to exercise choice in selecting providers, which will increase competition among insurance providers that will in turn result in a higher quality of health care. The exchanges will create a market environment that regulates the health care insurance companies by setting the standards for what policies they have to offer and requiring that these companies not discriminate against their clients—they have to accept everyone.  In essence, the exchanges will make a much more manageable marketplace for everyone, but particularly for small businesses.

Q: How will the exchanges be implemented?

A: Small businesses and people purchasing cover on the individual market will be the first to participate in the exchanges. The anticipation is that down the road the exchanges will later expand to allow larger businesses to participate. There were two versions of the exchange plan prior to enactment—the House bill envisioned one national exchange while the Senate bill sought a state-by-state exchange scheme.  Health care reform, enacted on March 23, 2010, adopted the Senate version of the exchange. However, it is possible that down the road people will decide to merge the state-by-state program into a national exchange.

However, the bill recognizes that it will still be expensive for small businesses to provide coverage for their employees, even on the exchange plan. To remedy this, health care reform will provide financial assistance in the form of tax credits, in particular, to small businesses with fewer than twenty-five employees whose average wage for all their employees is under $50,000 a year.

Q: The President’s health care policy plan also provides tax credits to small businesses as a way to offset the costs of providing health care coverage for their employees. What factors will be considered and how will these tax credits be issued? 

A: The health care reform that President Obama signed into law provides a sliding scale of tax credit to small employers with fewer than twenty-five employees and with average annual wages of less than $50,000 that purchase health insurance for their employees. The full tax credit is available to employers with ten or fewer employees and average annual wages of less than $25,000.

To be eligible for a tax credit, the employer must contribute at least fifty percent of the total premium cost or fifty percent of a benchmark premium. In 2010 through 2013, eligible employers can receive a small business tax credit for up to thirty-five percent of their contribution toward the employee’s health insurance premium. Small businesses that have less than 25 employees that make less than $50,000 on average or have 10 that make less than $25,000 average are eligible for tax credits of up to 25 percent of their contribution.

In 2014 and beyond, when the exchanges are up and running, eligible employers who purchase coverage through the State Exchange can receive a tax credit for two years of up to fifty percent of their contribution. Tax-exempt small businesses are eligible for tax credits of up to thirty-five percent of their contribution.

Q: What are the consequences for a small business not to participate in the exchange or to not provide health care coverage for their employees?

A: Well, if an employer decides not to provide coverage for their employees, the employer will have to pay a fee, although there is an exemption for very small businesses. Also on another note, if you were a small business employee, and for whatever reason, your employer decided not to provide you with health care coverage, there is also a provision that will provide assistance to you as an individual to buy your health insurance coverage.

Q: How will health care reform affect small businesses and job growth in our economy?

A: Health care reform is not going on in isolation—there is also a jobs bill, recently passed and signed into law, that will create a lot of new jobs.[4] For instance, President Obama’s proposal to accelerate job growth calls for a one-year elimination of taxes on capital gains from new investments in small business stock. [5] Also, President Obama advocates that a short-term tax credit be issued to small businesses who hire new employees throughout 2010. A combination of these tax credit along with health care reform will work together to encourage small businesses to grow, provide jobs, and jumpstart our economy.

Small businesses are really the engine room of our economy. When the job market expands, which we hope it will start doing soon, small businesses is where that expansion starts. Everyone agrees, including small business owners, that a key issue to helping them move out of the recession is health care reform and lower health care costs. For instance, the health IT sector will benefit in growth at approximate 200,000 jobs for small businesses. There is reason to believe that the combination of these things, with the help of small businesses, will make a difference in turning our economy around.

[4]See more at:

[5] The Recovery Act allowed a 75% exclusion from capital gains taxes on small business investments. See more at: