Small Business Isn't Celebrating Health-Care Reform

Evidence that the new health-care law has increased coverage and brought down costs has not materialized yet, says Scott Shane

By Scott Shane

In March, Congress enacted the Patient Protection and Affordable Care Act (PPACA), a 2,000-plus-page law designed to dramatically change how health insurance is provided in this country. The law might have been more aptly named the Small Business Health Insurance Act because its effects—both good and bad—will fall most heavily on small companies.

That's because we have an employment-based health-care system and small businesses are less likely than large ones to provide employee health insurance. In 2010, the Kaiser Family Foundation, which keeps tabs on health insurance coverage, reported that 99 percent of businesses with 200-plus employees provided workers with health insurance, as compared with only 68 percent of businesses with 3 to 199 employees.

Given these numbers, it's fair to focus on small businesses when looking at the impact of the new law.
While it's only been eight months since President Obama signed the PPACA into law, and many of the law's provisions won't kick in for several years, advocates of the legislation argue that it is already benefiting small businesses. Under the new law, the owner of a very small business can obtain an income tax credit against the cost of employee health insurance premiums. The Wall Street Journal reported late last year that "the number of small businesses offering health insurance to workers is projected to increase sharply this year … a shift that researchers attribute to a tax credit in the health law."

Tax Credit Incentive?

Many of the law's supporters are basing this assessment on data from the Kaiser Family Foundation, which found that the percentage of firms with three to nine employees offering insurance jumped from 46 percent to 59 percent between 2009 and 2010, driving the share of all firms offering health benefits from 60 percent to 69 percent.

However, the tax credit isn't responsible for this change. Sellers of small group policies report little change in demand for employee health insurance policies among small business owners. The sellers explain that compensation limits for employees make few small businesses eligible for the credit and that the low value of the credit does little to get business owners to provide employee health insurance.

The Kaiser Family Foundation reports that the uptick in the share of firms offering employee health insurance is an artifact of high failure rates of the most vulnerable small businesses (which tend not to offer employee health insurance) during the economic downturn. With more of the companies not providing insurance out of the sample, the share of those providing insurance has increased for purely mathematical reasons.

Moreover, other surveys show the opposite trend. American Express Open Small Business Monitor, which surveys approximately 700 small business owners with fewer than 100 employees twice a year, reported a drop in the share of small businesses offering employee health insurance from 66 percent in March 2009 to 45 percent in September 2010.

Premium Costs

Another claim is that the new law is bringing down health insurance premiums. Even if the law might, possibly, maybe, at some time in the future, bring down premiums, it hasn't done that yet. Trade publication Employee Benefit News explains that private companies' spending on health insurance is expected to have increased by 4.3 percent in 2010, a rise from the 2.5 percent expected the month before the PPACA was passed because of changes in COBRA policies.

The passage of the law also hasn't stopped companies from pushing a higher share of insurance costs on to employees. From 2009 to 2010, the Kaiser Family Foundation data show that the average employee share of health insurance coverage for a single individual rose from 13.9 percent to 15.1 percent. Moreover, most of the increase in worker contributions was at companies with fewer than 200 employees, which saw single-coverage worker contributions jump 38.4 percent over the past year, from $625 to $865 per year.
Given these patterns, has the PPACA done anything yet to change small business owners' health insurance costs or willingness to cover employees? The answer is no, largely because most of the major provisions of the plan—coverage mandates and penalties—don't kick in until 2014.

So why am I challenging the claims of the law's cheerleaders? Because its effect so far has been a net negative. That's because many business owners have formed negative expectations of the future effects of the law. For instance, a survey of 459 businesses conducted by Fidelity Investments in June revealed that 49 percent of small employers expect the new law to increase their costs. Many small business owners are responding to these expectations by passing on health insurance costs to employees, by changing the type of insurance they offer, and by planning to drop employee health insurance coverage in the future. (The same Fidelity survey reports that 22 percent of small business owners expect to drop health insurance in response to the law.) In short, any "evidence" that the PPACA has cut small business employee health insurance costs or increased coverage isn't real.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.