Health Care Reform: Whether it Means a Break For Small Business?

I.          INTRODUCTION         

While larger firms and corporations may handle rising health insurance premiums, small businesses seem to be crushed under the weight of rising health costs for their employees. [1] The inability to obtain affordable, quality health coverage falls more on the shoulders of individuals and small businesses, which may be the primary reason President Obama and Congress have focused their health care reform proposals on benefits for individuals and small businesses. Statistics indicate nearly 46 million Americans have no health insurance coverage at all while nearly 25 million are underinsured. [2] Also, in 2007 total cost for health care reached $2.4 trillion in the U.S. or the equivalent of $7,900 per person, and the U.S. spends 52% more than Norway, which follows the US as the next most costly nation in regard to health care spending per person. [3] This article provides an overview of the main goals of President Obama and Congress’ proposed health care reforms as it relates to small businesses. Small businesses with less than 20 employees made up 18% of private sector jobs in 2006 and accounted for 25% of employment growth for the period of 1992 to 2005. [4] Furthermore, this article provides analysis on the pros and cons of health care reform in relation to small businesses based on three aspects of the reform. The first is the public option government run health care plan, second is the Exchange a government-regulated marketplace of insurance plans, and finally, tax credits for small businesses to offset the cost of buying health insurance for their employees.  


As with other sectors of the economy, small businesses are failing under the pressure of rising operating costs, including health insurance premiums for their employees, while dealing with the stagnation of business revenue.  Small businesses pay 18% more for health insurance premiums per employee versus larger firms “due to high broker fees, fixed administrative costs, and adverse selection.” [5] In addition, the health insurance policies offered by smaller businesses have less generous plans, with higher co-pays and deductibles in comparison to the larger firms, coupled with the fact that small businesses usually offer lower wages to their employees. [6] The rising costs of health insurance premiums have meant that either small business is not able to provide health insurance at all or reduce the premium amounts they cover. [7] Statistics indicate the number of small businesses offering health insurance has been declining in the past few years, and that in 2008 49 percent of small businesses with 3 to 9 workers and 78 percent of them with 10 to 24 workers offered any health insurance. [8]


President Obama’s plan touts certain features, such as for people that currently have health insurance reform will not force them to change coverage or doctors, it will become against the law to penalize individuals with pre-existing conditions, reform means no cap on the amount of coverage insurance companies provide annually, limitations on out-of-pocket expenses, requirements that insurance companies cover basic routine checkups and preventative care, and the plan provides coverage to individuals that lose or change jobs. [9] Furthermore, small businesses’ interest may be peaked by President Obama’s plan because of the Exchange, a new insurance marketplace, in which small businesses and individuals may compare and buy plans at more competitive prices. [10] Additionally, if small businesses are not able to afford insurance plans in the Exchange tax credits will be offered to assist them in buying health insurance for their employees. [11] The most heated and contested area of the plan includes a not for profit public option or government backed health insurance plan available in the Exchange for those that do not have insurance. [12] Another hotly contested issue in President Obama’s plan derives from financing or in other words who will pick up the tab for health care reform?  President Obama has adamantly declared that reform will not add to the U.S. deficit, based on locating waste and abuse within current government health care programs and taking the necessary measures to cut out such waste. [13] 


Currently the Senate and the House of Representatives have proposed legislation for health care reform, for which the leaders of each building are trying to merge into a cohesive plan that meets President Obama’s vision and tag price of $900 billion over ten years. [14] The first of the two plans, Senate Bill 1679, comes from the Health, Education, Labor and Pensions Committee and provides small businesses with a tax credit equal to $1000 for each individual employee whose health insurance is covered by the business, with a $2000 equivalent for family health insurance coverage through the employer. [15] These credits are qualified based on the size of the small business and the months per year for which the employee and their dependents are covered, such that a small business with 10 or fewer employees that paid the health insurance premium for their employees throughout the entire calendar year will receive a 100% of the tax credit. [16] In order to qualify as a small business, the plan has further qualifications regarding the percentage of the employee’s health insurance expenses that the small business pays out as well as caps on wages. [17]


The second plan, Senate Bill 1796, arising from the Finance Committee provides tax credits to small businesses based on 50% of the amount the business pays for health insurance coverage, with various qualifications including reduction of credits based on whether wages paid exceed a certain amount and to qualify the small business must have no more than 25 full-time employees for the taxable year. [18] The Senate Finance Committee plan resembles the House Bill 3962, which has mandates that employers provide their employees health insurance coverage as well as a mandate that individuals buy health insurance, with an exemption for small businesses that have an annual payroll of less than $500,000. [19] The House Bill 3962 projects a cost of $1.5 trillion over 10 years or $150 billion over President Obama’s vision for health care reform, which the House intends to pay with Medicare cuts and imposing a surtax on individuals with adjusted gross income of $500,000 annually and for couples with adjusted gross income of a $1 million annually. [20]


The battle over health care reform continues as a day-to-day struggle for Capitol Hill leaders as well as President Obama.  Recently a blow to the administration occurred when the Senate blocked a vote to increase payments to Medicare doctors at a cost of $247 billion over ten years. [21] Opponents saw the action as an attempt to divide a third of the cost for the entire plan as a separate bill, while attempting to appease doctors and the medical field to garner more support from them for the overall health care legislation. [22] Nonetheless, both chambers of the Senate did agree to remove anti-trust exemptions the health insurance companies have received since 1945. [23] More signs that the strong hold the health insurance industry has enjoyed for years in the U.S. may be reforming as well.


While the debate over health care reform rages on, small businesses are facing large and steep rises in the health insurance premiums they pay to add on to the burden of the recession credit freeze and lower revenue generation with higher operating costs. Based on the rising premiums reported by insurance brokers and benefits consultants indicate their small business customers are enduring premium increases of “about 15 percent for the coming year – double the rate of last year’s increases.” [24] Experts believe these steep increases are due to pressure that Wall Street is placing on insurance companies to retrieve as much as they can in profits prior to the current health care legislation going into place. [25] Additionally, insurance giants such as WellPoint Inc., a major provider of health insurance to individuals and small businesses, provided Congress with a report indicating that the proposed health care legislation will equal higher premiums for these groups on a state-by-state basis. [26] The company reported small businesses would face 70% higher premiums and on an individual basis a 25-year-old man in Virginia could expect a premium rise of $181 from $66, but this cost would be reduced to $18/monthly if the individual qualified for the maximum government subsidy. [27] In contrast both the White House and the Democrats in Congress have criticized this report and others by the insurance industry as “bogus” and “self-serving” claiming the insurance industry is “cherry-picking cases” and “twists the facts” in order to stop reform that will provide consumers more protection and options. [28] The White House touts the benefits to small businesses as the ability to purchase insurance through the Exchange allowing them to compare and purchase plans at more competitive rates. [29] Additionally, small businesses will be exempt from the plan’s provisions that penalize larger firms if they cease their insurance benefits after the government run public option becomes available. [30]


The issue of a public option or a government run insurance plan in which individuals without insurance could acquire coverage has been revived in the debate. [31] The public option may include an opt-out option for states as a compromise to opponents. [32] Opponents argue government run programs are overly costly and inefficient, such as Medicaid that now costs 37 times more than it cost in the beginning (the first year estimated costs for Medicaid were $238 million and rather it hit $1 billion). [33] While proponents, such as the Obama Administration, contend the public option keeps insurers honest and on their toes. [34]


The ramifications of current health care costs for small businesses include losing high skilled employees to the larger firms, entirely closing their doors due to the rising costs of health care, or continuing to endure the higher costs for lower quality plans since they have less clout with the insurance companies. Therefore, pros and cons exist for small businesses in respect to the three major aspects of President Obama’s plan that affect them, the public option, a newly created marketplace Exchange, and tax credits. 


The pros of health care reform are that the Exchange could provide small businesses with more options for affordable health insurance plan and the tax credits will encourage the small businesses to continue providing employee health insurance. Additionally, the proposed benefits and options for small businesses may encourage more ingenuity by entrepreneurs to operate their own business, and free-up capital for more marketing, employees, or equipment. On the other hand the cons of health care reform are the possibilities that small businesses’ may hire less or lay off people to keep themselves within the small business definition of the plan in order to receive tax credits. Also, small businesses may be tempted to cancel their employer sponsored health insurance plan and encourage their employees to purchase insurance under the public option, since small businesses receive an exemption from penalties for dropping health insurance plans. Finally, a concern exists as to whether the individual or small business taxpayer will end up paying for future costs or overages of health care reform through higher taxes.   


In summation, regardless of various pros and cons of the proposed health care reform, at this point small businesses are being crushed by the inability to acquire credit to run their businesses and the large amount of capital they use for rising health insurance premiums. To a certain extent small businesses are shouldering the burden of the large firms ability to acquire millions of dollars in tax benefits and lower insurance premiums due to their clout with insurance companies. The proposed health care reform seems to equal needed relief for small businesses.

End Notes:

[1] Reed Abelson, Small Business Faces Sharp Rise in Costs of Health Care, N.Y. Times, Oct. 25, 2009, at A1, available at 

[2] Elizabeth Cohen, What You Need to Know About Health Care Reform, Cnn, June 18, 2009,


[3] Id.


[4] Exec. Office of the President Council of Econ. Advisers, The Econ. Effects of Health Care Reform on Small Businesses and Their Employees (2009) [hereinafter Council],


[5] Id. 


[6] Id. 


[7] Id.

[8] Id. 

[9] President Barack Obama, Remarks by the President to a Joint Session of Congress on Health Care (Sept. 9, 2009), (transcript available at


[10] Id. 

[11] Id. 

[12] Id. 

[13] Id. 

[14] David Espo, House Health Care Bill Over $1 Trillion For Decade, Associated Press, Oct. 23, 2009,


[15] Affordable Health Choices Act, S. 1679, 111th Cong. § 3112(b)(2)(A)(i)-(ii) (2009).


[16] S. 1679 at 3112(b)(1)(A)-(C).

[17] S. 1679 at 3112(c)(1)(A)(i)-(ii). 

[18] America’s Healthy Future Act of 2009, S. 1796, 111th Cong. § 45R(b),(d)(1)(A)-(B),(d)(3)(B) (2009).


[19] Robert Pear & David M. Herszenhorn, Buoyant Democrats Unveil Health Care Legislation, N.Y. Times, Oct. 30, 2009, at A20, available at

[20] Id. 

[21] Robert Pear & David M. Herszenhorn, Democrats Lose Big Test Vote on Health Legislation, N.Y. Times, Oct. 22, 2009, at A25, available at

[22] Id. 

[23] Id.


[24] Abelson, supra note 1.


[25] Id.


[26] Avery Johnson, WellPoint Attacks Health Legislation, Wall St. J., Oct. 22, 2009,

[27] Id. 

[28] Id. 

[29] Council, supra note 4.

[30] Id. 

[31] Greg Hitt & Janet Adamy, Public Option Gets New Life in Senate, Wall St. J., Oct. 20, 2009, at A4, available at

[32] Id. 

[33] Health Costs and History, Wall St. J., Oct. 20, 2009,


[34] Obama, supra note 7.