Change doesn't get much bigger than this.
Or more contentious.
President Obama's Patient Protection and Affordable Care Act has rewritten the rules on health insurance. And it has left small companies scrambling to figure out what it means for them.
The section that has caused the most fuss among businesses is the so-called employer mandate. Companies with 50 employees or more must provide health coverage or pay a fine. And that coverage must meet new minimum standards.
The administration recently put the mandate on hold for a year, but that hasn't stopped the head-scratching among small firms. How much will the changes affect their bottom line? What about their future plans for hiring or expansion?
Critics say the new requirements will cost small companies more and stall their growth, as well as forcing them to take on lots of new bookkeeping and other administrative headaches.
Advocates argue that premiums will likely rise only slightly, and they will be much more predictable than they are now. They also point out that the Act doesn't apply to companies with fewer than 50 employees—the firms that theoretically would be hardest hit—and say that the Act opens up new options for companies and employees alike.
Yes: At Last, Firms Will Have Affordable Options
By Jonathan Gruber
Small businesses have long faced a predicament with health insurance. The Affordable Care Act helps them solve it.
Many firms want to offer coverage. It's a good way to attract and retain workers, plus owners care about the well-being of their employees. On the other hand, it's costly and complicated, and premiums can vary enormously from year to year, as employees age or become sick.
The Act will help small employers that want to offer insurance, and open up new options for the few that don't.
Steady and Predictable
If a business provides insurance, premiums will be more steady and predictable, thanks to the new law. Insurers won't be able to vary premiums based on an employee's health condition and will have limited ability to do so based on age.
Jonathan Gruber
In addition, that business's employees will get a benefit that large-company workers have had for a long time: a choice of plans. Workers can either go with the plan their employer offers or take the money their employer pays for coverage and shop for a different plan on the insurance exchange.
The Act also recognizes that some small businesses would be better off not providing insurance, even after reforms are in place. The money and hassle just won't be worth it.
For firms with fewer than 50 workers, there's no penalty for making that decision. And their workers won't be left without coverage. Thanks to a reformed individual-insurance market, those employees will be able to buy insurance at fair prices and potentially offset the cost with tax credits.
Yes, firms with more than 50 workers must pay for not offering coverage. But instead of thinking of it as a fine, think of it as a choice: You can either offer your employees coverage, or help society pay for that coverage. Businesses are free to weigh the costs and benefits of both options.
What's the Cost?
Opponents argue that the Act will impose burdens on small business. But remember, there's no requirement for firms under 50 employees. For larger firms, the minimum benefits mandated are less rich than what almost all businesses offer today.
As for cost, most estimates of average small-group premiums suggest they will rise only modestly, because of the end of discrimination against sick workers. My estimates for several states find that the effects will be close to zero.
Others who project larger increases typically ignore key factors, such as the competitive insurance exchanges that will drive down premiums and the tax credit that offsets costs for many businesses. They also focus only on the subset of firms that will see premiums rise—ignoring the roughly equal subset that will see them fall.
A Red Herring
The argument that firms will not hire a 50th worker is a red herring. Only 2% of U.S. firms have between 40 and 75 employees, most offer insurance and the ones that don't are unlikely to have hiring decisions driven by this law.
Speaking of growth, let's not forget another important group: entrepreneurs. You might have an idea for a food shop or smartphone app. If you have a pre-existing condition that insurers won't cover, you might never start that business today. But the ACA will provide the insurance security that promotes entrepreneurship tomorrow.
The bottom line is that the Affordable Care Act will bring a leaner and better-functioning market for small businesses. Firms can assess the benefits of offering versus not offering insurance without worrying that they're leaving workers out in the cold. And if they do offer insurance, they'll have cost certainty and new choices.
Dr. Gruber, a professor of economics at the Massachusetts Institute of Technology, was a principal designer of Massachusetts' health-care overhaul and consulted on the Affordable Care Act. He can be reached at reports@wsj.com.
No: It Will Make It Harder for Small Firms to Grow
By Michael D. Tanner
Nearly half of small-business owners believe that the Affordable Care Act will hurt their business, according to a recent Gallup poll.
The evidence strongly suggests that they're correct.
Let's start with the most obvious and onerous mandate: Companies with 50 or more workers must provide insurance or pay a fine. That has an immediate effect—raising the cost of employing workers without delivering any benefit.
It also has a long-term effect on the plans of smaller firms and on the economy. Most small companies aspire to become bigger companies. Now the cost has been increased significantly.
Michael D. Tanner
Suppose that a firm with 49 employees does not provide health benefits. Hiring one more worker will trigger a penalty of $2,000 for every worker after the first 30. If you were that small-business owner with 49 employees, how fast would you run out to hire that 50th worker?
In fact, according to the Gallup poll, 41% of small businesses said they have already held off on plans to hire new employees, and 38% said they've pulled back on plans to expand in other ways. Worse, 11% indicate that they've laid off workers or cut back their hours.
Setting the Floor
Even businesses that provide insurance today may find themselves caught up under the mandate because they must offer coverage that meets the "minimum essential benefits" requirements. While current plans are grandfathered, businesses must come into full compliance if they make any change to those plans, such as changing deductibles. Moreover, noncompliant plans are closed from adding new clients. Eventually, most businesses will be forced to change to compliant plans.
Advocates argue that premiums will be more steady and predictable with these plans. But they will also be higher. While estimates vary widely, studies suggest that premiums in the small-group market could increase by as much as 50%.
There are several reasons. The number of insured will increase, as well as the number of covered services, but without a corresponding increase in supply. What's more, the pool of people in the small-business exchange will likely be older and sicker. That's because companies with healthier and younger workforces will likely to try to save money by staying out of the exchanges and self-insuring—paying their workers' medical costs directly.
Advocates note that companies with fewer than 50 employees will be exempt from the mandate. But the increased premiums will affect them, too, if they choose to offer coverage. And if they don't, the higher premiums will affect their workers as they shop for individual coverage.
Stalled Growth
While some businesses may be able to offset a portion of the costs through tax credits, perhaps only 12% of small businesses will use them, according to the Congressional Budget Office. Eligibility requirements are designed so that few businesses meet requirements—and, like the rest of the Act, qualifying for these credits involves a big bookkeeping commitment.
Advocates say the system will make it easier for companies to decide whether or not to offer insurance. What it will actually do is make them decide not to grow. It's worth noting that in France, where numerous regulations kick in at 50 workers, there are 1,500 companies with 48 employees and 1,600 with 49, but just 660 with 50 and only 500 with 51.
Helping Founders?
Then there's the argument that entrepreneurs are hesitant to launch companies without universal coverage. So, why does U.S. entrepreneurship outpace OECD countries with national health systems?
There's a long list of groups that will suffer under the new law: taxpayers, health-care providers and patients. Near the top are small businesses.
Mr. Tanner is a senior fellow at the Cato Institute. He can be reached at reports@wsj.com.
A version of this article appeared August 19, 2013, on page R1 in the U.S. edition of The Wall Street Journal, with the headline: Will the Health-Care Law Help Small Businesses?.
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