Effects of Health Care Reform on Small Businesses and Their Employees

Effects of Health Care Reform on Small Businesses and Their Employees

Introduction

Eibner supports that, ‘small businesses contribute significantly to the development of the economy’ (52). The Small businesses, as a result, act as major drivers of growth in employment and the innovation levels. Small businesses in U.S have greatly impacted by the current health care reform compared to their large firm counterparts. In U.S, small enterprises play a significant role in the creation of employment and hence increasing job growths. In the year 2006, companies that have had employed less than 20 workers accounted for about 18% of the jobs in the private industries. This was almost 25% of the net growth in employment from the year 1993 to the year 2006. Small enterprises have been indicated by the economists to the play a major role in creating jobs in start-up businesses, the main source of innovation and account significantly for the economic growth (Eibner 54). The paper will hence cover the effects that health care reforms have on small enterprises and their employees. The changes in health care reforms have high chances of impacting economic performance since it affects small businesses that contribute significantly to the economy of the nation.

Contribution of Small Enterprises in the U.S Economy

Small businesses in U.S contribute to the economy and hence are among the major pillars of the economy of the United States. The annual payrolls and the number of employees are used in measuring the size of the firm. According to the figure 1 below, approximately 88% of the total firms in the US had less than 20 employees in the year 2006 accounting to approximately 18% of jobs created by the private sectors. Firms with 20-50 employees accounted for about 95% of all companies and 28% of private industries employment. A comparable pattern arose when one defines companies using total payroll rather than the number of employees as shown in Fig 2 below. The figure indicates that approximately 87% of the companies in U.S had produced yearly payroll that had less than $500,000 which accounted for about 20% of the employment in private sectors (Folland, Goodman and Stano, 35).

Small Enterprises besides contributing substantially as the major source of the current jobs they also account though disproportionally a share of employment growth. US Bureau indicated that in the year 2006, firms that had employed less than 20 Workers contributed 25% of net growth in employment from the year 1992 to the end year 2005. Comparing the results with small businesses average share of the employment in the private sector in the similar period that was 19%, the rate at which they created new jobs was approximately 40% which is higher than the corresponding figures in other firms. It is hence evidenced that small businesses account for the high number of the new firms as well as the important source of innovations, creation of majority of employments in start-ups and economic growth (Folland, Goodman and Stano 37).

 Impacts of Current Health Insurance System on Small Enterprises in U.S

Small businesses have greatly suffered great negative impacts as a result of employing the current health care system. Small firms are highly likely to pay a substantially high amount of cash outlay to help them offer insurance covers to their employees. Small business in average contributes approximately 20% higher than their larger counterparts firms for the similar health insurance policy. This is supported by the fact that small businesses contribute high cash outlays to cater for the broker fees of their policies which range from 2 to about 10% of the premiums. On average, the commissions contributed by small firms are higher than the amount paid by the large businesses in the same industry. The second factor is the element of fixed costs (Folland, Goodman and Stano 39). For the large companies, fixed costs that are incurred by the company to pay a private insurer to set-up and administer the business’ health insurance policy for large enterprises can be spread to a large pool of employees. This is contrary to the small number of employees in small enterprises making the cost be high for the employees working in these firms. Adverse selection also contributes as a factor that causes small firms to incur high costs lowering their appetite for the current health reforms. Small businesses are subjected to contributing an extra amount to every covered employee in the firm to cater for the incident of adverse selection (Cooper and Gardner 54).

High costs incurred by the small business when providing health insurance to their employees have lowered the appetite to provide the policy to the workers. This is shown by the data collected indicating the rate that companies provide insurance covers to their employees comparing them with the sizes. This is through the use of the number of employees hired by the companies. According to the data, organizations that had employed 3- 9 employees and the ones that had hired 10 – 24 employees in the year 2008 only 49% and 78% respectively that had provided health insurance to their employees. The figure is minimal comparing it with 99% of the large businesses that had employed 200 and above employees in the same year. The results hence indicate that the high costs of providing insurance policy incurred by the small businesses act as a barrier towards offering policies to their employees (Cooper and Gardner 57).

The large numbers of small firms are highly probable to avoid insuring their employees according to the current health care reforms. The large numbers of elderly employees in the small enterprises is likely to uninsured comparing the same age group in other large companies. It is also notable that the generosity of coverage in small businesses is much lower than it is in the large companies that employ large numbers of employees. This is supported by the fact that small businesses have to pay high prices for any level of coverage. The current healthcare reforms inflict heavy taxes on small enterprises as well as their workers. Small businesses that offer coverage are prone to paying high costs comparing them with other large companies that they compete with in the market. As a result, these small firms end up passing the incurred costs to their workers lowering their take-home wages. Other small enterprises that do not provide the coverage causes their employees to fail to enjoy tax benefits that other workers in large enterprises enjoys. As a result, the employees may opt to buy policies in the individual markets causing them to incur high costs. As a result, small businesses become more competitive disadvantage in the recruitment of competent employees in the market Garthwaite, Gross and Notowidigdo 654).

The small businesses are likely to earn lower profits that are equivalent to the amount that they incur as a result of inability to pass on the health insurance costs to their employees. The data collected indicated that large numbers of small firms are likely to be affected negatively by the increasing health care costs. This is especially as a result of the health care costs that the firms are unable to pass to their employees to ease the burden. The figure below indicates analysis of the data indicating an estimate of profits that small firms lose on annual basis as a result of increasing health care costs without reforms. The results hence increase the support from the small businesses to support health reforms to help them lower the health care costs and help them increase on profitability levels (Cooper and Gardner 63).

Fig 4: Yearly Small Enterprises Profits Lost as a Result of Healthcare Costs

Billions of dollars

 

 

$14

 

$12

 

$10

 

$8

 

$6

 

$4

 

$2

 

$0

2009    2010    2011   2012 2013  2014   2015   2016     2017     2018

 

Source: Small Business Majority.

 

Benefits accruing to Small Businesses and their employees as a result of Healthcare reforms

The healthcare reforms are likely to lower the premiums as well as increasing the quality of the health insurance coverage in return. Lowering the premiums is meant to reduce the burden to both the small enterprises and their employees. The insurance exchange as a result of reforms is likely to offer small businesses an option of choosing among the multiple health insurance plans incurring lesser costs. The competition as a result of exchange plays a significant role in the health care especially in the current increased concentration that is created by the small group health insurance market. The reformed health care is inclusive and insurers are not prohibited from excluding persons with the initially existing conditions and are also not allowed to vary premiums in a non-uniform way. The planned volume will increase causing the premiums paid to decrease. Low premiums will hence cause the competitiveness of the small businesses to increase and the profitability levels enabling them to compete effectively with the large companies (Cooper and Gardner 65).

The health care reforms have created a tax credit for the small firms that offer health insurance. The reforms have necessitated the creation of the significant tax credits to both the small firms that are beginning to offer health insurance to their workers and the continuing enterprises. The amount of tax credit will be proportional to both the size of the firm in terms of the number of employees hired and the amount of wages paid. This will hence increase the demand for the insurance policy to the small firms and their employees. The owners of the small businesses are hence able to invest in their firms enabling them to create employments to the potential workers. The small companies should as incur low costs as a result of the reduction in insurance premiums and they will manage to compensate their employees well and earn high profits (Kaestner and Lubotsky 55).

The health care reforms have provided financial incentives to the small firms to enable them to offer health insurance coverage to their workers through creating a pay-or-play provision. The provision would hence reduce other incentives that other firms were enjoying. This will result in these firms stopping to offer health insurance that is employer-sponsored. As a result, some firms will be exempted from employer responsibility requirement of contributing towards employees insurance. Certain small companies that do not meet specific threshold are as well exempted from employer responsibility. As a result, a vast number of small enterprises are exempted from employer responsibility. The effects will be reduced costs to the small businesses enabling them to grow and compete effectively with large and established companies in the same industries (Garthwaite, Gross and Notowidigdo 667).

The reforms in health care are accompanied necessitate for the subsidies for the workers working in small enterprises that do not offer health insurance to their employees. Exchange provides better option especially for the employees in small enterprises that do not provide insurances. The private insurance market has been characterized by high prices. There have also been a number of restrictive rules that have been injuring employees in small businesses due to the pre-existing conditions. Under the health care reforms, individuals and families that have incomes that are less than 400 % of the poverty line are supposed to receive a sliding-scale subsidy enabling them to buy insurance. For instance, considering a family generating an annual income of $ 40, 000 is supposed to contribute about $1,700 for a policy compared to initially $12,000 or more costs. The family is as well protected from very high co-pays and deductibles and they incur a maximum of $850 of out-of-pocket money. The subsidies for the health insurance premiums reduces while the level of income increases due to the increased ability to pay. The Medicaid program created by the reforms in health care would enable the worker that generates incomes of about 135 % below the poverty line be eligible to have health insurance. Health care reform has expanded health insurance coverage increasing the number of plan options and reducing premiums paid enabling workers from small enterprises to pay for their health insurance (Kaestner and Lubotsky 73).

The high costs that individuals incur to obtain the health insurance in small group and non-group markets, as well as the likelihood of pre-existing conditions, have contributed in preventing employees from obtaining coverage. This has contributed towards distorting the career choices of people and hence lowering demand for the employment in certain firms. The factors have contributed significantly to lowering people’s appetite to initiate a business idea and launch their companies. Individuals have also been discouraged and hence become unwilling to work with the small enterprises. The incidents as a result of pre-existing conditions have created a job lock phenomenon that has caused majority of employees to remain working with large companies irrespective of the poor working conditions and remuneration when compared with other small firms. Availability of health insurance from Medicare as a result of reforms in health care has increased the incentives for elderly employees to join small businesses. The expansions in health insurance as a result of reform-induced insurance coverage have increased the pool of available employees to work in small firms (Garthwaite, Gross and Notowidigdo 671).

Through the reduction of the prices of health insurance for small organizations and the individuals as a result of health care reforms and preventing insurers from excluding parties that have pre-existing conditions have been a major remedy to the initial distortions in employment. This results in increasing entrepreneurial activities and increasing incentives to workers that could not initially join the small firms. As a result, employees will join the jobs that will highly match their needs and skills irrespective of their sizes. The result will be increased the level of productivity at the place of work and reducing the absenteeism levels. The health care reforms hence increase the likeliness of employees in small firms to obtain insurance coverage increasing the innovation and productivity level of the company as well as boosting the motivation rate of the individual employees at the workplace (Cooper and Gardner 67).

Conclusion

The health care reform has high chances of reducing the burdens of the health insurance to both the small firms and their employees. The reforms are important, especially when considering the role played by the small businesses in the market concerning the creation of employments and innovation. The high number of uninsured individuals and the increasing costs of the health care are like to injure the economy and affect negatively the standard of living of the citizens as well as increase the government budget deficit. Small firms incur high costs in terms of employer-sponsored insurance. The cost lowers their profitability levels decreasing their competitiveness compared to the large enterprises. They, as a result, end up being competitive disadvantage when recruiting new workers and have low-quality products in the market as a result of failure to hire competent and qualified employees.  Health care reforms are hence likely to lower the costs and hence be beneficial to small enterprises and the entire economy due to the role these firms play in supporting economic growth. Health care reforms reduce future tax burden as a result of tax incentives to the individual employees and small firms. The effects will be increased investment in small businesses that will help in decreasing unemployment levels in the future.

 

Works Cited

Cooper, Robert W., and Lisa A. Gardner. “Extensive Changes and Major Challenges Encountered in Health Insurance Markets Under the Affordable Care Act.” Journal of Financial Service Professionals 70.5 (2016): 53-71. Business Source Complete.

Eibner, Christine. The Economic Burden of Providing Health Insurance: How Much Worse Off Are Small Firms? / Christine Eibner. n.p.: Santa Monica, CA: RAND Corporation, 2008.

Folland, Sherman, Allen C. Goodman, and Miron Stano. The Economics of Health and Health Care: Pearson International Edition. Abingdon, Oxon: Routledge, 2016.

Garthwaite, Craig, Tal Gross, and Matthew J. Notowidigdo. “Public Health Insurance, Labor Supply, And Employment Lock.” Quarterly Journal of Economics 2 (2014): 653.

Kaestner, Robert, and Darren Lubotsky. “Health Insurance and Income Inequality.” Journal of Economic Perspectives 2 (2016): 53.