Mythology of Health Care Reform

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Illustration by Paul Fell

By Jon Bailey

Nebraska, like most Midwestern and Great Plains states, has an economy dominated by small businesses and the self-employed. Nearly all Nebraska establishments with employees are considered “small businesses.” According to the 2008 U.S. Census Bureau County Business Patterns (most recent data available), 95 percent of Nebraska nonfarm establishments with employees have fewer than 50 employees. Thus, the concern over small business health care and health insurance issues and how health care reform would treat them was of paramount political importance during the debate on the Patient Protection and Affordable Care Act (ACA).

The dominance of small businesses in rural areas is even greater, with few businesses in rural Nebraska and the rural Great Plains having more than 10 employees, let alone 50. Rural areas are also experiencing a rapid increase in the number of self-employed. Since 1969, the number of self-employed workers in rural areas has grown by over 240 percent; by comparison, rural wage and salary workers witnessed only a 61 percent growth over the same period. This unique composition of the rural economy makes issues of uninsurance and underinsurance more prominent in rural areas. Since the late 1990s, according to the National Advisory Committee on Rural Health and Human Services, rural areas have witnessed a significant decline in manufacturing jobs and a rise in service-sector employment, losing jobs with higher rates of employer-sponsored health insurance while gaining jobs with much lower rates of employer-sponsored coverage. The lack of employer-sponsored health insurance is particularly acute for low-skilled jobs, which are more common in rural areas.

With an economy dominated by small businesses and self-employment (as well as seasonal and “patching” employment), rural people are generally less insured, more underinsured and more dependent on the individual insurance market. While rural residents have higher rates of uninsurance, the existence of underinsurance may be as large an issue. There are twice as many underinsured in rural nonadjacent areas (those areas not adjacent to a metropolitan area) as in urban areas, and the challenges faced by the underinsured are ultimately similar to those of the uninsured.

For example, rural residents living nonadjacent to metropolitan areas are responsible for nearly 22 percent more of their total health care costs (premiums and out-of-pocket costs) than are urban or rural adjacent residents. Further, the odds of rural nonadjacent residents being underinsured are 70 percent higher than for urban residents, suggesting the “actuarial value of private health plans held by rural residents is lower than for urban residents.” (Ziller, Erika C., Andrew F. Coburn and Anush E. Yousefian. “Out-of-pocket Health Spending and the Rural Underinsured.” “Health Affairs” (2006)

The key point in the Affordable Care Act for small businesses and the self-employed, especially those in rural areas, was to not rely exclusively on maintaining the current employer-sponsored health insurance system. If the law relied exclusively on an employer-based health insurance system, the new law would not be as relevant for rural areas because of lower rates of employer-sponsored insurance and the composition of the rural economy. Issues related to underinsurance and the individual and small group insurance markets had to be addressed in the law for the law to eventually achieve near universal coverage and access to health insurance and to be relevant to rural areas. And the problems are exacerbated as health insurance premiums rise and out-of-pocket medical expenses increase, resulting in more and more self-employed and small businesses dropping unaffordable coverage for themselves and their employees or resorting to higher deductible insurance with less coverage. Any health care reform legislation had to provide options to small businesses and the self-employed that provide comprehensive, affordable and continuous coverage in ways that are comparable to larger group coverage.

It is our view that the Affordable Care Act responded to these policy needs and represents a good start in resolving issues that had been left to fester for decades.

Because of the economic—and political—importance of small businesses, many charges were thrown and continue to be thrown against the Affordable Care Act and how it will treat small businesses. It is important to recognize the common myths being spread about the Affordable Care Act and to know, understand and accurately portray the effects of the law on small businesses.

When examining the law, in many respects, “small employer” is a more accurate term than “small business.” In fact, Section 1421 (Credit for Employee Health Insurance Expenses of Small Businesses) uses that term. In one of the weaknesses of the law, self-employed sole proprietors who are not employers (nonemployers in statistical parlance) and their immediate family members do not qualify for the small business tax credit benefits described below. They will qualify for the individual credits and premium assistance beginning in 2014 and the more immediate health insurance reforms, many of which have already taken effect with others taking effect in 2014.

MYTH No. 1: Small businesses have to provide health insurance to their employees or face penalties.

Not true. There is a general employer mandate in the Patient and Affordable Care Act as a part of the “shared responsibility” for providing health insurance. But the law specifically exempts from this employer responsibility any business with 50 or fewer employees (Section 1513). The result is that nearly all businesses in the nation are exempt from any requirements or mandates to provide health insurance to employees and are free from any penalties for not doing so. As in Nebraska, 95 percent of all business establishments in the nation have fewer than 50 employees. The House of Representatives Small Business Committee further estimates that when considering this exemption and the number of businesses that already provide health insurance to employees, the employer mandate will apply to less than 2 percent of businesses.

MYTH No. 2: Small businesses cannot afford the health insurance they are required to provide.

In many respects the health insurance reform law is all gain and no pain for small businesses, particularly initially. As discussed above, Section 1513 of the law exempts all businesses with 50 or fewer employees from providing health insurance for their employees and frees them from any penalty for not doing so. Section 1421 of the law establishes a Small Business Tax Credit for those businesses who do provide health insurance for their employees in order to make health insurance more affordable and to provide an incentive for employer-provided insurance in small businesses. The initial credit exists for tax years 2010 through 2013. It is a sliding-scale credit for businesses with fewer than 25 full-time equivalent employees and average wages of less than $50,000 who provide health insurance for their employees. A second credit exists for any two years beginning in 2014 when the Health Insurance Exchanges begin. The basic eligibility criteria for the credit are that a business must

✦ Have fewer than 25 full-time equivalent employees

✦ Average annual wages less than $50,000

✦ Purchase health insurance for employees

✦ Contribute at least 50 percent of the cost of premium

The credit is equal to up to 35 percent of premium contributions, and the full credit is available to businesses with 10 or fewer full-time equivalent employees and average annual wage of less than $25,000. The two-year credit available in 2014 and beyond is equal to up to 50 percent of the employer’s premium contribution.

It is estimated that over 3.6 to over four million small businesses across the nation with nearly 17 million employees will be potentially eligible for the premium tax credits, including nearly 94 percent of Nebraska small businesses. (Small Business Majority)

The Small Business Tax Credit provides both immediate and longer-term health insurance premium assistance for small businesses, especially the smallest businesses that dominate rural economies. The immediate tax credit beginning in 2010, and lasting through four tax years, acts as a bridge to the Health Insurance Exchange system that begins in 2014. The exchange system acts as a large insurance pool for the nation’s small businesses (more on that below), enabling more affordable insurance as a result of the combination of lowered administrative costs and spreading insurance risk over more people. The longer-term two year credits also allow the exchange system to be fully operational and for the pooling and risk-spreading aspects of them to take effect. The Congressional Budget Office estimates that with the law’s small business tax credits, the average premiums per person in the small group market will decline by up to 8 to 11 percent in 2016 relative to the current law. So a six-year tax credit system will allow small businesses—particularly the smallest—to be part of the shared responsibility concept of health insurance without mandate or penalty and with financial assistance.

MYTH No. 3: Small businesses should be able to pool together to purchase insurance, and the new law does not allow that.

Not true. In fact, the Health Insurance Exchange concept is based on the pooling idea. The Affordable Care Act mandates the creation of exchanges in every state by 2014 and allows businesses of up to 100 employees to participate. (Sections 1304 and 1311) If implemented correctly, the result should be the creation of a health insurance pool of small businesses, their employees and the self-employed. When fully implemented, the exchange should allow for more attractive insurance as a result of lower administrative costs (costs will be spread across the larger pool) and the spreading of risk across the larger pool. A larger pool will also allow annual premium volatility to moderate and enhance competition (more potential customers in the larger pool).

The law also allows states to create the Small Business Health Options Program (SHOP), a special exchange for small businesses, either within the larger state exchange or as a separate exchange. The SHOP Exchange is designed to assist small business employers in enrolling their employees in small group health plans.

The law also enables other insurance alternatives within the exchanges that could result in small business pools or groups. The law enables establishment of state-based nonprofit health insurance cooperatives and funds such efforts with loans. Small businesses or small business organizations could presumably establish a health insurance co-op that would allow small businesses across a state to band together to purchase health insurance.

The Nebraska Department of Insurance is currently gathering input from citizens across the state as they begin to develop a plan for Nebraska’s Exchange. For information on Department of Insurance activities and how to provide input, visit www.doi.ne.gov/healthcarereform/exchange/index.htm.

MYTH No. 4: The health reform law will cause my taxes to go up.

It is true the health reform law imposes some new taxes and increases others. But the real question is who is responsible for those taxes. While each individual and business has unique circumstances that will determine tax liability, it is clear that most small businesses will not be affected by the tax changes contained in the Affordable Care Act. Some of those changes are

✦ A new 10 percent excise tax on indoor tanning services (for services provided after June 30, 2010).

✦ A 0.9 percent Medicare surcharge on the wages of single taxpayers earning more than $200,000 per year and couples earning more than $250,000 per year (starting in 2013). In addition, these taxpayers would incur a special Medicare tax of 3.8 percent on unearned income (interest, dividends, capital gains, annuities, royalties and rents; tax-exempt interest and income from retirement accounts would not be considered “unearned income”).

✦ An excise tax beginning in 2018 on insurance companies providing “high-cost” employer-sponsored health plans, defined as those with values exceeding $10,200 for individual coverage and $27,500 for family coverage. The tax is equal to 40 percent of the value of the plan exceeding the threshold amount.

✦ Fees assessed on businesses that do not provide health insurance to employees will only be charged to businesses with 50 or more employees. As explained above, that’s a small fraction of businesses nationwide and even fewer in rural areas.

Initial data and behavior seems to suggest the Affordable Care Act is having positive results in meeting its goals. In the six months after the law was signed in March 2010, UnitedHealth Group, the nation’s largest insurer, added 75,000 new health insurance customers who work for companies with fewer than 50 employees. Coventry Health Care, Inc. of Maryland, an insurer that focuses on small businesses, added 115,000 new workers in the first nine months of 2010, an 8 percent increase. Warner Pacific Insurance Services of California saw business increase by 10 percent in 2010. And closer to home, Blue Cross Blue Shield of Kansas City reported a 58 percent increase in small businesses buying insurance since April 2010. A large number of those businesses had never offered health benefits.

Executives of these companies and other commentators have expressed surprise at these figures, and attribute the existence of the small business tax credit as one of the primary reasons for the overall increase in small businesses offering health benefits to their employees—59 percent in 2010, up from 46 percent in 2009, according to the Kaiser Family Foundation.

Over time many pieces of data and the circumstances of millions of families and individuals will determine if the Affordable Care Act is a success. But the provisions in the law concerning small businesses and the apparent early success of those provisions provide initial, though limited, proof that the extreme complaints about the Affordable Care Act by its opponents might have been overblown. And Rick Unger, a blogger for Forbes Magazine—not generally a publication proclaiming the good of progressive causes—states that apparently many small businesses and their employees do not agree with the “enduring complaint of opponents of the ACA” that the law will be “deathly bad for small businesses.” They ended up caring more about the health and financial circumstances of their employees and their families than ideology. According to Unger, if the Affordable Care Act was so onerous, why did so many businesses apparently choose to voluntarily provide their employees with private health insurance while taking advantage of a provision in the law?

 With increasing insurance costs many small employers are finding it difficult to continue providing health insurance coverage for employees, exacerbating the issues of uninsurance, underinsurance and health care costs for many people, especially rural residents. Taken together, these issues act as barriers to creating a strong economy based on entrepreneurial development. While the law is not perfect and will doubtless require tweaks in the future, the Patient Protection and Affordable Care Act is a start to lowering these barriers for many small businesses across the nation and a catalyst to rural small business development and the development of many rural and urban entrepreneurial dreams.

 

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