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Health Insurance Reform Will Help Small Businesses

A new and enlightening analysis from the Council of Economic Advisers.

As President Obama made clear at the bipartisan meeting on health insurance reform, and has emphasized all year, small businesses stand to gain substantially from his proposal for comprehensive health insurance reform.

Small businesses are essential to the nation’s economy and its recovery from the recession. They are responsible for a disproportionate share of economy-wide net employment growth, and account for a large majority of jobs in start-ups, a key source of innovation and economic growth.

Nevertheless, both a CEA report released last year and new analysis by the Council of Economic Advisers shows that the status quo of rising costs and declining coverage is unsustainable for small businesses. Over the past decade, average annual family premiums for workers at small firms increased by 123 percent, from $5,700 in 1999 to $12,700 in 2009, while the percentage of small firms offering coverage fell from 65 percent to 59 percent. As shown in the following figure, this insurance offer rate is especially low at small firms with fewer than 10, 25, or 50 employees.

CEA Chart of Small Business and Health Care Reform 2-25-10

While opponents of reform have raised concerns that some of the provisions in the President’s proposal will harm small businesses and their employees, the facts, figures, and discussion below show that the proposal will mean tax cuts, no new requirements, and numerous other benefits for small firms and their employees:

The President’s proposal makes more than 60 percent of small firms eligible for tax credits to help combat rising costs and declining coverage for their workers.

  • CEA estimates indicate that more than 60 percent of small employers would be eligible for the new $40 billion small business tax credit in the President’s proposal. This represents a total of nearly 4 million small firms eligible for the credit. Moreover, millions of workers at small firms and their families would be eligible for their own tax credits to purchase coverage through the Exchange if their firms did not offer coverage.

The President’s proposal exempts virtually all small businesses from any employer responsibility requirements.

  • The proposal specifically exempts all firms that have fewer than 50 employees – 96 percent of all firms in the United States or 5.78 million out of 6.02 million total firms – from any employer responsibility requirements. These 5.78 million firms employ 33.8 million workers.
  • More than 96 percent of firms with 50 or more employees already offer health insurance to their workers. Thus under the President’s proposal, less than 0.2 percent of all firms in the U.S. (approximately 10,000 out of 6.02 million) would face new employer responsibility requirements. And many of the firms not currently offering coverage are likely to do so because of the lower premiums and greater set of plan choices in the Exchange.   

Pooling together with other small firms and individuals through a competitive Exchange will reduce costs, increase plan choice, and provide pressure on insurers to reduce their markups.

  • Because individuals and small businesses are not currently pooled together into larger health insurance groups, the administrative costs of marketing and operating health plans are up to 26 percent higher as a percentage of claims compared with larger firms, leading to higher premiums.
  • A report by the Congressional Budget Office (pdf) confirms that the Exchange will reduce costs and increase competitive pressure on insurers, driving down premiums for a given amount of coverage for a given group of enrollees by 1 to 4 percent in the small group market.

The President’s proposal will reduce “job lock,” and spur entrepreneurship, job growth, and productivity at small firms.

  • As described in a recent CEA report, health insurance reform will reduce “job lock” – the fear of switching jobs or starting a small business due to concerns over losing health coverage – by guaranteeing access to coverage for all Americans. This will encourage more people to launch their own small businesses.
  • Moreover, reform will make small firms more competitive by allowing them to offer coverage comparable to that of larger firms, letting them recruit and retain talented workers.
  • Finally, improvements in access to coverage will lead to better health status and reduced disability, increasing workplace productivity. 

Health insurance reform will benefit workers, firms, and the government budget in many more ways.  For a discussion of these impacts, please read the CEA’s report on the Economic Case for Health Care Reform.  Chapter 7 of the Economic Report of the President (pdf) also provides a comprehensive discussion of the challenges in the current health care system and the way that reform components work together to address these problems.

Christina Romer is Chair of the Council of Economic Advisers and Mark Duggan is a Senior Economist at the Council of Economic Advisers who focuses on Health