What is the impact of the Affordable Care Act , aka ObamaCare , on small business?
How will the 2014 implementation of the ACA impact small businesses?
Answer 1- It will destroy small businesses, increase their costs and destroy jobs.
Answer 1- It will help small businesses, lower their costs and help retain jobs.
One of these statements has to be incorrect. Let’s see if we can get to the bottom of this contradiction by looking at the question from a small micro-business person’s perspective. As an employer with fewer than 50 full-time employees, I may be in a position to give you a realtime non-political answer based on fact not fiction.
Let’s create a baseline understanding of the patient so we can understand if the treatment cures or kills the patient. I apologize for the silly analogy. The patient in this case is the small business. The treatment is the Affordable Care Act.
First, I need to find an agreeable definition of a small business. Prior to 2010, he Small Business Administration defined a small business as a business with under 500 employees. There was a different size standard for manufacturing as well and we know 90+% of small businesses are non-manufacturing. Many felt this 500 employee size standard did not really represent the vast majority local businesses. As a result, this definition was clarified and revised with the Small Business Act signed in 2010. The revised definition of a Small Business is: a business with fewer than 50 employees and under 13M in annual sales.
We need to also add a definition for a sub-section of small businesses – micro businesses. A micro-business is a small business with under $10M in sales and fewer than 2 employees. Of all small businesses, micro businesses account for 90% of all small businesses in the country. In other words, the vast majority of small businesses are under 20 employees. Clearly our start-up entrepreneurial businesses can be under 5 employees in their early stages. As a matter of fact, small micro-businesses numerically represent well over 95% of ALL BUSINESSES in America! Understand the fact that there are even smaller -more micro – businesses within the Small Businesses segment gives us more clarity.
Of the grand total of ALL businesses in the United States, 97% of them are classified as SMALL BUSINESSES with less than 50 employees and under $13M sales.
Secondly we need to confirm that we actually care about the success and survival of small businesses. We know 97% of all businesses are small, small businesses are the primary source of business license filings in every-single town -especially small rural towns, and small businesses create between 35-55% of all net new jobs, (depending on the data source you use). Therefore we must do everything possible to help them succeed. Small businesses are very important to job creation and our economy.
I have a saying : ” … inside every small business is a large business waiting to get out … at their own pace”. Many small businesses are perfectly happy being small. Small equals nimble and fluid. Small means incremental growth is always in sight – massive growth always possible -but the pressure to grow tends to be very mild. Small businesses can give family members access to multi-skill development and cross-training in real-time situations. A significant portion of all new patents are filed and implemented by small businesses. Frankly small businesses are the drivers of innovation, new industries and customer satisfaction because small companies expand consumer choice. Unlike larger companies that place tremendous resources to focus on mergers, acquisitions, consolidation and the commoditization of good and services, small businesses seem mostly focused on finding market niches that take advantage of their uniqueness. In many cases the most profitable companies, ( as measured by gross profit percentage), are small and sell more specialized solutions, not cost conscious commodities. Small businesses are almost never monopolies and therefore are always competing and driving active commerce.
I do want to make it clear, I love all business – large, medium and small. It takes intestinal fortitude to wake up each day and fight for a slice of the pie. Each type of business is very important to our economic survival and each should be given equal policy opportunities to thrive . I do nor denigrate any business nor do I pit large against small; although there will be time when it might seem that way. I instead try to help everyone understand the challenges of small businesses in a world where larger companies receive much more focused policy attention and a lot of public sector resources unavailable to smaller companies. An example of Policy” attention is the practice of “bundled-contracts” as a procurement method, something I will write about in a future Blog Post . This policy seriously hurt a lot of smaller businesses yet greatly assists a finite group of larger businesses. If we want to help larger businesses we can hurt smaller businesses because what is bad for 97% of American business can’t be good for the country.
Yes, all businesses deserve opportunities. My personal business would not exist if large companies did not prosper. Large companies are my clients and either clients of my customers , suppliers to my customers or simply engaged in other ways. We need large companies to grow and thrive. Yet I also assure you that large businesses would not exist without the dynamic presence of small businesses. We all need each other. The symbiotic relationships formed in the world of commerce teaches us all to root for each other.
Here is a crazy statistic provided by the UCLA Anderson School of Business, Milliken Institute, Washington Post and many other sources: from 2000- 2010, the United States produced No Net New Jobs. We are talking about 0% job growth for the decade 2000-2010. America did produce new jobs in the 80’s and the 90’s at a rate of 20% each decade. From 1990-1999, the US did create 15,000,000 net new jobs. Yet 2000-2010 will go down in history as the lost decade for net new jobs.
Who really creates the jobs, small or large businesses? While it is true that large mature businesses create more jobs per business, they also cut more jobs. Their peaks and valleys are more extreme with large mature firms and when one shrinks, thousands of jobs disappear at once. Too often the data shows large businesses create more jobs than small businesses because they are simply more mature if they are large. All too often, start-up businesses are excluded in the analysis but it is unfair to exclude them because clearly they represent a growth rate from employee number 1 to 1,000. In other words, successful small businesses become large businesses and when they do, their growth is now counted towards the large business growth. We can all spend time arguing over Gibrat’s theories and there are many ways to look at job growth.
From 1992-2005 firms with fewer than 500 employees accounted for 65% of quarterly net employment growth, representing 13.5 million out of 20.6 million net new jobs created by the private sector. In 2005, firms with fewer than 500 employees accounted for 55.8 of private sector employment. In 2011 the number is 65%
There are millions of US firms with under 50 employees. Small businesses represent over 97% of the total firms in the US. However small businesses represent only 30-40% of all employment.
Our country celebrates Fortune 500 companies and our policies tend to provide them with greater benefits than those available for small companies. You might say we have been using federal policy to support large businesses in some cases to the detriment of small businesses. If the last decade produced no net new jobs, what happened to large business employment strategies?
Fortune 500 companies produced NO NET NEW JOBS over the past 5 years. Don’t get me wrong, we need all businesses to thrive but during 2009, Fortune 500 firms cut 800k jobs in the US and added 2 million jobs outside the US.. Think about this, no net new jobs were created by the largest 500 companies in America. How is this sustainable? Over the same period, it has been the entrepreneur that has driven job growth in the US, sometimes encouraged by large companies but in many cases these folks are on their own. The small firms with 5, 10, 25 employees, they are working the most aggressively to create jobs so we need to do what we can to help them. Lowering their cost of health care could be a great help. The real job creators are those that create a great idea, take a risk, and just go for it. Many fail, yet enough of them succeed and help drive employment in our nation.
Let me conclude this question of large or small this way:
* Large Businesses employee more employees per business
* Large Businesses tend to be in business longer than small businesses from a percentage basis
* Small Businesses represent 97% of ALL businesses
* Small Business fail at a higher rate because small businesses represent nearly all start-ups.
* The country produces more new small businesses every day than new large businesses
* Almost every large business was a small business at some point.
* There can be no large company job creation without the initial creation of a small business
* Job creation plus Business creation must become the important narrative
Therefore, we need serious focus on how to assist in the growth of small businesses because they not only give us the economic jump start, they are the “big-bang theory” that originally created our current large businesses and will create all future large businesses.
If we want to see job creation, we have to make sure any policy decisions must be a benefit, but never a detriment to small businesses – especially the new business creating micro-business sector.
I apologize for pending do much time on the issue of small and large businesses, however it seemed important to the topic at hand.
Back to the question: How will the 2014 implementation of the American Care Act impact small micro-businesses?
Answer: The implementation of the ACA will help small micro-businesses by lowering costs and retaining workers.
How can this be true?
In the 2010 world of health insurance, small micro-businesses have been getting screwed. Because of their size and the concept of insurance premiums based on “group size”. The smaller you are, the more you pay. Now keep in mind that health insurance is unlike any insurance product in the country. Their surface is normally priced strictly based on RISK. In other words, a smoker pays more for Life Insurance because there is a greater risk of negative health outcomes as a result of smoking. If you do not smoke, there is a chance you become less likely to have the same issues as a smoker and therefore you become a better risk to insure. Your premiums will be lower. However health insurance is not priced using the normal model.
Another flaw in the healthcare model is simply that health care is not really a proper insurance product; insurance is just the vehicle that we use to pay the docs. But here is the massive contradiction: Unlike life insurance, auto insurance, burial insurance, general liability insurance, professional lability insurance, business interruption insurance, and nearly every other conceivable insurance product , health care insurance is the ONLY insurance product individual Americans actually want to use as often as necessary. In other words, you can only use your life insurance or burial insurance … once! It makes the product fairly easy to price and the premiums pretty reasonable. None of us ever want to use our auto insurance because none of us plan the exact date we will have an accident. Yet, we all know that we will need to use health care services multiple times in our lifetime, so why are we using an insurance policy business model to pay for it and why in the heck are we paying an insurance company to basically function very similar to VISA or MASTERCARD?
My point is this, health insurance is very difficult to properly price for an insurance company and that is exactly why the premiums swing upward every year. In the 2010 model for health insurance, as long as the customer is buying a product from an entity (insurance company) that loses money if the customer accesses the product (healthcare services from docs , clinics, and hospitals) and doctors lose money if they provide care to the customer that the insurer deems too excessive, there is gong to be a problem. The insurers response is to raise co-pays, limit pay-outs, and basically deny coverage as a way to limit customer use of the healthcare product. The customers response is to stay sicker longer, go without coverage, risk catastrophic healthcare quality outcomes. By rolling the dice and gambling on their health to save a buck they also lose workplace productivity by either arriving to work sick and unproductive, getting everyone else sick at work, or simply missing work and therefore lowering GDP output. This is the way life was before the ACA passed and in reality not much has changed because the system is still largely an health insurance product not a healthcare product.
Yet in 2014, there are real changes that will benefit small micro-businesses.
First: Small micro Businesses – businesses with under 50 employees are exempt from the mandate of providing their workers healthcare or paying a penalty for not dong it. Therefore the ACA does not add cost or risk jobs for small micro businesses.
Second: insurance companies must spend 80% of their revenue on healthcare related expenses otherwise they must rebate the difference to their policy holders. This means that doctors and hospitals will receive a larger share of health insurance premiums from insurance company customers since prior to 2014, an insurer kept a larger percentage of the premium for their own profits. I am a capitalist so i realize taking money from the insurance company and giving it to either the health care provider or back to their customer in a rebate must sound like socialism until you make this connection : its my friggin money in the first place because “we the insurance customer” are the ones paying the premium. “We the customer” are the ones financing this system that has been underfunding healthcare providers but costing us 8x more per person than any other major economy in the world. Frankly, I want as much of my premium going to the people providing me with the care – the docs, hospitals and clinics. For heavens sake, VISA only takes 2-3 % and they seem to do a fair job reimbursing merchants that accept VISA for their customer transactions.
So I say getting more of my premium dollar to the provider will get me better care or a rebate sounds like a win for rate-payers and the health care consumer.
Third: Employers with fewer than 25 employees and average payrolls less than $50k per employees can receive an enhanced subsidy so they can purchase health insurance for their employees. The employers will need to cover 75% of the premium for an individual. This means small micro-businesses that currently offer healthcare insurance will see lower costs and those that do not offer it will receive a 75% subsidy that was unavailable to them prior to 2014.
Fourth: Employers no longer need to feel obligated to provide health insurance because once the state-created health insurance exchanges are brought on-line, individuals will have the ability to purchase health insurance on their own and the insurance will be portable. In other words, if you have under 50 employees and you offer health insurance, your premiums will fall but if you want to, you can drop the coverage knowing your employees can still buy insurance directly through the exchange for probably a lower price than what their small employer was paying. While employees may not like an employer that drops coverage, at least they will have a valid quality option if it happens. However employers will have a new option to lower operating costs while still knowing their employees will remain healthy.
The exchanges are private insurance companies competing for customers. They are required to offer the same price for insurance premiums to ALL customers in the state. This means the lowest available price will be enjoyed by everyone that purchases through the exchange. The exchanges will create a large group – potentially millions of customers in a state like California, New York, Illinois, Florida or Michigan for example. In this case, unlike the premium rates foisted on small companies when they were priced as a company with only a few employees, now they will have access to “bulk-pricng” normally reserved for large companies with tens of thousands of employees. Remember, small companies always paid more per worker than large companies so the logic should still apply once the exchanges act as aggregators. Even though I do not like the insurance model for healthcare, the exchanges should drive down premium cost for individuals and the facts bear that out. Larger groups pay lower premiums so an exchange creates the largest group ever created for a state. Individuals will finally be getting a price break.
For years, employers have wondered why they were expected to provide health insurance to their employees in the first place. Prior to the 40’s, employers were not providing health insurance. Yes, they were required to provide Workman’s compensation insurance coverage to protect workers during the workday, when they workday ended, employees were on their own. Workers Compensation, the first nationwide mandatory health insurance for workers mandated for every employer with more than 1 non-family employer. Every state in the Union requires employers to provide workers comp or self-insure and the country has not fallen off a cliff. As a matter of fact, since every employer has to provide the insurance, employer have a level playing field to compete on. Employers that focus on safe working environments have lower Workman’s Compensation costs. Employers that do not focus on safety have higher costs and are less competitive. Frankly the mandate for workers compensation has benefitted business and employees because being safe and healthy is good for productivity and employee satisfaction.
However by 1950, many employers created their own unfunded liability by agreeing to provide health insurance coverage to their workers – creating a new unfunded liability. An instant market was created and costs have risen dramatically ever since because employers received no incentive or premium benefit for controlling the healthcare outcomes of their workforce. The costs were the costs and they just went up every year. Today, many employers feel obligated to provide health insurance to their workers. Would it be beneficial to employers if they got out of the health insurance business? Yes.
In the case of one of my current business which I have had since 1995, my premium increased every year by double-digits. The only way I ever avoided a double-digit increase was to either switch insurers and the providers my employees had in the prior year, or I had to increase co-pays, find a more limited plan or reduce the percentage I covered for my employees. I happen to be an employer that covers 95% of the premium for each eligible employee and up to $600 per month for any additional family members. I tried to balance keeping people with the doctors they relied on and keeping my annual increases to a minimum. However, from 1995, my premiums have increased by an average of 10% each year – and this include 2011 when my premium actually went DOWN for the first time ever without changing insurers because this year my insurer spent more than 80% of my premium on health care reimbursement so my premium actually fell. This 2011 lowered premium was due to the passage of ACA.
Fifth: Employers that do not provide coverage for their workers must pay a penalty or tax or penalty tax of $2,000 per employee per year. However, small micro-businesses are exempt so the fine/penalty/tax does not impact small micro-businesses.
Sixth : The uninsured have been adding to the premium cost of anyone that purchased health insurance. Since the uninsured are still receiving care at greatly increased costs, the hospitals and insurance companies are including the uncompensated cost of caring for the uninsured in the price of your health insurance premium. The ACA includes a number of incentives that will improve healthcare outcomes like the creation of Accountable Care Organizations, Electronic Records Management, Cloud-based retrieval, Healthcare IT, Personalized Care Initiatives, Preventative Care incentives, incentives for Nutrition and Healthy living, and most importantly, the coverage of an additional 15-30 million uninsured.
You should all read up on the concept of Accountable Care Organizations. San Diego has two hospitals and medical groups that are pilots for ACO’s. An ACO a healthcare organization that takes responsibility for a patient from the time they enter the hospital the first time and then provides pro-active maintenance level care with the goal of reducing the possibility the patient ends up in the hospital again. In some cases, a nurse may stop in and visit the patient at home to ensure they are taking their medication, walking their dog or making positive lifestyle choices that contribute to their healthy outcome. ACO’s provide all of the care and coordinate the whole patient.
The ACO’s have an incentive. Once a baseline of patient expense is developed, ( everyone knows how much it costs to treat a patient that has an in-patient diabetic incident), the ACO receives 50% of the savings they can realize for improving health outcomes versus hospitalization or being paid to treat in the hospital but receiving no compensation for proactive care. In some cases, healthcare IT advances can provide cloud-based monitoring of specific medical diagnostics that can help doctors with real-time assessment and treatment before a problem actually occurs. All of this lowers costs yet improves healthcare outcomes.
In San Diego, both of our ACO’s have realized savings and have exceeded their target goals for savings. In the coming years, the passage of the ACA will create more permanent ACO’s and the savings can be realized system-wide. Imagine the savings when we have a large percentage of the 15-30 million currently uninsured?
Anyone that wonders how you can add 30 million people to the system and have costs go down simply does not understand how broken the 2010 healthcare system was/is. When have you heard a capitalist complain that someone just created millions of new paying customers? When have you heard of capitalist not rushing to fill a void created by the need for more medical professionals in order to care for a large pool of potentially proactive customers? I completely understand some of these new professionals may not be paid the same as some are today, but there will still be a large market for talented medical professionals. Markets may be unpredictable but they always seem to find a way to seek balance. There will be new jobs created in the medical industry and more paying customers can drive down the unit cost of healthcare.
Back to the 30 million people driving down costs. Here is what I mean: For whatever reason, hospitals do not let people without health insurance die on the street. Life-flight helicopters arrive on scene to treat an accident victim without ever asking for your AMEX and the providers will spend a million dollars saving and stabilizing any American that finds themselves in need. We simply are unwilling to kick people to the curb do everything possible to help Americans in medical need. Now, I have just described the most expensive level of care possible. Emergency rooms are required to not just have a bed available, they have to be staffed 24 hours per day by specialists and general practitioners. Not everyone arriving in the emergency room or in a clinic is in dire catastrophic shape yet the all seem to receive care. This is an expensive delivery system. And lest someone say emergency room care is not the major driver of the uninsured, I will add the other huge cost of the uninsured, they make everyone else sicker. An uninsured person with TB or a communicable disease sitting in a classroom next to your kid will drive up YOUR healthcare cost when your child gets sick.
Covering more of the uninsured will lower the RISK of uncompensated cost to the insurers and providers. Covering more of the uninsured creates a large RISK POOL which lowers the unit cost of insurance. Covering more of the uninsured creates a healthier public which reduces the cost of healthcare RISK and lowers premiums. When the State of California , through a public initiative, made it mandatory to have Auto Insurance otherwise you could not register your vehicle, our cost of auto insurance dropped by 20% the year the Proposition passed. Today, the cost of auto insurance is still lower than it was 10 years ago. Unlike healthcare premiums, the concept of everyone being in the universal auto insurance canoe has lowered the auto insurance premium costs of The average Californian.
I realize I have compared Workman’s Comp and Auto Insurance with Health Insurance and some may argue the narrative yet the facts should or be lost. Insurance is a product we hope to never use, however if healthcare insurance must remain as the payment vehicle, we need to make sure the product is as close to universal as possible. Universal mandatory Workers Compensation and Universal mandatory Auto Insurance have focused employers on safety and lowered premium costs for autos. The Affordable Care Act can produce similar positive results.
So, let me conclude by stating the obvious. As a small business person with fewer than 50 employees, the 2014 implementation of the Affordable Care Act will reduce my operating cost, give me the option to let my employees stay with my insurance or get into the exchange, and create more customers for my business. As a fiscal conservative I do not want to pay for the healthy to opt-out of paying into a healthcare system that they so freely take advantage of when they need it. The overall health of my state can improve as ACO’s begin to provide a proactive level of care producing healthier people. More people will get care for the sniffles instead of giving my kids and your kids the flu because more people will have greater access to preventative care. New medical professionals will be required and there will be a need for educators and trainers to develop this workforce. If 15-30 million new customers are being created some business person is going to hire some additional employees and that business will eventually need some consulting, design, construction or office furniture – products and services my companies will sell to them. New demand is good for all businesses. Remember what I have said in my earlier posts, it is the demand for goods and services that ultimately creates jobs.
Lower costs, added options, business flexibility, potential for increased commerce … I see a lot of good stuff here and I make the business decision to support the new law.
If I have written anything you feel is incorrect or unclear, please send me a comment and I will attempt to send you a response.
My analysis as a small business concludes the implementation of the Affordable Care Act does not hurt my business nor will it negatively impact my future hiring decisions.