Health Care Reform: Don’t Shortchange our Growth Drivers
On the heels of the Senate Finance Committee’s long-awaited vote on its health care bill, I thought it would be helpful to once more comment on its effect on our entrepreneurs. The status quo in healthcare undermines entrepreneurship: small businesses are paying a higher cost to offer health insurance to their employees because of the smaller size of their workforce and the lack of competition in the small group market. Some entrepreneurs are dropping this benefit entirely not because they don’t want to provide insurance to their employees, but because the survival of their startups requires it. According to one estimate, 52 percent of workers in businesses with less than 50 employees were uninsured or underinsured during 2007. Even worse, many potential entrepreneurs and the talent they need to launch their ventures feel trapped in jobs that offer affordable health coverage for themselves and their families.
Unlocking entrepreneurship through a mandate for small businesses seems like a dangerous policy solution. Given that small businesses employ over half of all private sector employees and that firms less than five years old accounted for all net job growth in the past decades, this provision could actually decrease coverage for Americans if entrepreneurs are deterred. Certain provisions consider the difficulties for smaller companies. For example, the Senate Health, Education, Labor and Pensions (HELP) bill would exempt employers with fewer than 25 employees. The House Tri-Committee bill (Ways and Means, the Committee on Energy and Commerce, and the Committee on Education and Labor) would exempt small businesses with a payroll of less than $500,000 a year. Even if these provisions effectively protected the smallest, how would they affect businesses’ decisions to expand?
Senator Max Baucus, the Chairman of the Finance Committee, released a proposal with a price tag of $829 billion (just passed by the Committee on a 14-9 vote with Senator Olympia Snowe the only Republican voting in favor) that would not require employers to offer coverage. However, employers with more than 50 workers would have to reimburse the government for some or all of the cost of subsidies provided to employees who buy insurance on their own. This constitutes a penalty to employers who do not offer coverage even when the Baucus version would also extend tax credits to help small businesses buy insurance ($24 billion over 10 years). Even though it argues that the structure of the tax credit does not go far enough to help small businesses, the National Federation of Independent Business (NFIB) supports some aspects of this version, after opposing versions passed by the Senate HELP Committee and thee three versions in House of Representatives (click here for NFIB’s vision).
Other measures currently on the table hold some promise to ease the burden on our entrepreneurial workforce, although they are far from being the ideal solution. Prohibiting insurance companies from denying coverage or charging higher premiums because of a person’s health status or pre-existing medical conditions can do much to ensure that non-employer-based insurance becomes more widely available. Today, employer-provided insurance is the only reliable form of affordable private insurance coverage. Also interesting in this regard are the insurance exchange provisions. A recent analysis by the Commonwealth Fund argues that the ability to purchase health insurance through the new health insurance exchange would help small business by guaranteeing a standard benefit package and control premium costs. Eligibility for this option varies in current Congressional bills under consideration, ranging from opening the exchange to firms with fewer than 50 employees under the Senate HELP Committee bill to opening it to firms with 10 or fewer employees the first year and those with up to 20 employees in subsequent years under the House Tri-Committee bill. As long as the exchange system is consumer-driven, this kind of innovation could successfully alleviate the problem of lack of options for new ventures and their employees.
Yet all these measures still keep an enormous burden on entrepreneurs. Ideally, coverage should not be tied to employment, but purchased individually or through non-employer groups, just like other types of insurance. As I’ve said in a previous post, the current system of employer-sponsored health insurance is a mere accident of history. Employers began offering health insurance during World War II as a way of circumventing wage controls in place at the time. Employees were not required to recognize the health care benefit as part of their taxable income. The current employer-based system of health insurance developed as more and more firms began offering health care coverage. Phasing out the system of employer-based insurance would require a clarification of the tax code, such that employees can get the same tax benefits when they obtain a non-employer-based plan.
This ideal solution seems to be unreachable now, so the best hope for small business lies in the cost-containment measures and regulation to increase the number of options available to small business and their employees. As Congress is huddling to try to work through differences on health legislation proposals, it is crucial that it carefully considers how entrepreneurs’ behavior might be affected by these reform measures. If we are serious about providing every American with access to affordable, meaningful health care coverage and increase access to quality medical care, we absolutely should avoid increasing the burden on new entrepreneurs, who constitute the backbone of our innovation and growth potential.
Jonathan Ortmans is a senior fellow at the Kauffman Foundation where he focuses on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues