Industry Market Trends

Health Care Reform's Impact on Small Biz

May 25, 2010

Months after sweeping changes to national health care were signed into law, sorting out the legislation's new requirements from the new perks is proving difficult for small-business owners. Recently updated IMT coverage breaks down what the changes mean to businesses.

One of the biggest concerns for small businesses continues to be ever-rising costs of health insurance. A 2009 report from the United States Small Business Administration (SBA) found that small businesses, on average, pay up to 18 percent more than big businesses for the same insurance policies. Moreover, employees of small businesses are 50 percent likelier to lose coverage than workers at large businesses.

The health care reform package signed into law in March is intended to bring down those costs by minimizing administrative costs, offering a tax credit and creating a health insurance exchange.

Depending on the size of the business, the legislation's benefits and ramifications will vary tremendously.

Starting in 2014, employers with more than 50 employees will pay a $2,000 fee for each full-time employee without health coverage. Though companies with fewer than 50 workers won't face penalties if they don't offer insurance, the law does encourage small businesses to "ante up" with coverage through a sizable tax credit, contributor Robb Mandelbaum recently wrote at the New York Times' You're the Boss blog.

"As many as 4 million small businesses might be eligible for federal tax credits to help cover the cost of health insurance for their workers [...] one of the first benefits to flow from the recently enacted health-care overhaul," the Washington Post explains.

A tax credit is available for any business that has fewer than 25 full-time-equivalent employees, pays average annual wages of less than $50,000 and covers at least half of individual coverage costs. The full credit will be available to employers with 10 or fewer full-time employees with annual wages averaging $25,000 or less.

Enterprises that qualify will get up to a 35 percent break on health insurance premiums reimbursed by the government, beginning this year, according to a new U.S. Treasury Department fact sheet. (Small businesses may receive state health care tax credits and still qualify for a federal tax credit.)

The credit phases out as firm size and average wage increase. Employers with more employees or higher average wages than those stated above don't get the credit at all.

In addition, states must set up small business health options programs, a.k.a. "SHOP Exchanges," by 2014. These are basically purchasing pools where small businesses can band together to buy insurance. Here "small businesses" are considered those with no more than 100 employees, though states can limit the pools to companies with 50 or fewer employees through 2016. (Beginning in 2017, a state may allow large employers — with at least 101 employees — to take part in the exchange.) The state-run marketplace exchanges will work with carriers to pool insurance options, with the hope that costs will be lower for a larger, more powerful group.

"The pools will probably only slightly shrink your insurance costs," according to, which cites a Congressional Budget Office report that says coverage small businesses purchase through an exchange "would have lower administrative costs, on average, than the policies those firms would buy under current law, particularly for very small firms."

Once the business begins buying insurance through an exchange, the tax credit increases to 50 percent and is available for any two consecutive years, according to a statement from Senator Mary Landrieu (D-La.), who chairs the Senate Committee on Small Business and Entrepreneurship.

Among the other provisions that will affect small businesses directly:

  • Aid and cash offered to small businesses that encourage employees to be fitter and healthier;
  • Online resource established to provide information specifically for small businesses regarding affordable health care options; and
  • Accelerated adoption of uniform standards and operating rules for the administration of health insurance plan transactions (i.e., administrative simplification).

Although most small-business advocates are likely to agree that the current health care system is flawed, not everyone thinks the new model is the solution. The National Federation of Independent Business, for instance, has criticized the law as too limited in scope. NFIB opposed the health law and has joined a lawsuit brought by states challenging its constitutionality: "The individual and employer mandates, onslaught of new taxes, and onerous paperwork requirements in this unconstitutional law will devastate small businesses."

In fact, many businesses owners must be wondering whether the reform's benefits will be worth the added complexities.

"As an entrepreneur, the effects of the new legislation on your taxes may prove to be problematic," Wise Bread's Thursday Bram writes at AMEX OPEN Forum. For earnings that exceed $200,000 for an individual or $250,000 for a couple, the Medicare hospital insurance tax on those wages will increase by 0.9 percent, to 2.35 percent in 2013.

"While taxes may hit many small business owners, the largest impact may be the increase in administrative costs when it comes to managing employees' health coverage," Bram adds.

"One thing you may want to start preparing for this year is extra paperwork," warns. "Beginning in 2011, companies will have to start reporting on W-2s the value of the health plans they provide to employees. And as the government ramps up tax collection efforts to pay for health care reforms, in 2012 you'll have to report every single business-to-business payment of $600 or more to the IRS on a 1099."

In a separate OPEN Forum article,'s Anita Campbell explains that the "wild card" in health care reform is cost. She writes:

The No. 1 ranked issue for years for small businesses [...] has been cost of coverage. While both sides on the healthcare issue make claims about the cost of healthcare under the new law [...] the size and scope of the reform is so massive, and our understanding of it so new, that it is likely we just don't know all the complex reverberations on the economy, taxes and coverage costs over a period of years. It's difficult to predict the full extent to which all those costs and taxes, taken in totality, will impact small business pocketbooks down the road.

Employers are looking for answers to a host of health reform questions, and sorting out the new requirements from the new rewards is a daunting task for small-business owners, who are already having a difficult time trying to stay afloat.

To that end, both the National Federation of Independent Business and the Small Business Majority recently set up tax credit calculators for entrepreneurs. In addition, by July 1, the Department of Health and Human Services plans to set up a Web site that has a section organized by state for small businesses to consult when shopping for insurance plans.

The federal Web site "will have every health plan listed that is authorized by each state, a list of the plans' network of providers, the services they offer, who is eligible and how to sign up," according to Kaiser Health News. "The portal will include private plans, Medicare, Medicaid, the State Children's Health Insurance Program and the new high-risk pools."

UPDATE (7/19):

Over the next few months, some of the new health care provisions discussed above will take effect, including tax credits for small businesses to cover their workers. Businesses with 25 employees or fewer are eligible for tax credits of up to 35 percent of premiums. Proponents of the new health law now claim that most small businesses will receive credits, according to Kaiser Health News, which cites small businesses in Utah, Colorado and Arizona as examples.

"In 2014, government tax credits will help uninsured workers and their families pay premiums, and Medicaid will take in many more low-income people," the Associated Press reports. "Eventually, more than 30 million will gain coverage, sharply reducing the number of uninsured and putting the nation on a path to coverage for all citizens and legal immigrants."

According to the New York Times, "the country's biggest insurers are promoting affordable plans with reduced premiums that require participants to use a narrower selection of doctors or hospitals." The plans "are likely to appeal especially to small businesses that already provide insurance to their employees but are concerned about the ever-spiraling cost of coverage."

In fact, the Times continues, "companies may be able to reduce their premiums by as much as 15 percent, the insurers say, by offering the more limited plans." Large employers are also interested, and many insurers "also expect the plans to be popular with individuals and small businesses who will purchase coverage in the insurance exchanges, or marketplaces that are mandated under the new health care law and scheduled to take effect in 2014."

High-risk pools are the biggest program implemented so far under the health reform law. Congress allocated $5 billion to run these temporary pools until 2014, when insurers will be barred from denying coverage to individuals based on pre-existing conditions. In all, 29 states and the District of Columbia so far have decided to run their own high-risk pools while the rest opted to let eligible residents join a federally run pool. Some state officials say they have doubts that the federal funding will last.

The first stage of the overhaul is "expected to provide coverage to about 1 million uninsured Americans by next year," according to the AP, based on government estimates. "That's a small share of the uninsured, but in a shaky economy, experts say it's notable. Many others — more than 100 million people — are getting new benefits that improve their existing coverage.

"Overall costs appear modest at this point, split among taxpayers, employers and individuals who directly benefit, although the biggest part of the health care expansion is still four years away," the AP continues. "Many Americans covered through employers won't see the changes until Jan. 1, the start of their next health plan year. That means 2011 will be the first year that the early benefits are fully in place."

As for the federal Web site set up by the Department of Health and Human Services, earlier this month the White House announced the launch of, which the administration says "provides one-stop shopping access to a wealth of information, including your new consumer rights and benefits under the Affordable Care Act, a timeline of when new programs under the new law will come online between now and 2014 and a new insurance finder that will make it easy to find both private and public health insurance option that works for you."

Kaiser Health News provides a need-to-know guide about the new insurance Web site.

Earlier: House Passes Health Care Reform Bill

Resources (updated to reflect added editorial content)

U.S. Department of Health and Human Services, 2010

Focus on Health Reform

Kaiser Family Foundation, April 21, 2010

Employer Health Benefits 2009 Annual Survey

Kaiser Family Foundation, Sept. 15, 2009

...Insurance at Risk: Small Business Employees Risk Losing Coverage

U.S. Small Business Administration, Oct. 20, 2009

Obama Signs Landmark Health Bill

by Laura Meckler and Gregg Hitt

The Wall Street Journal, March 24, 2010

Millions of Small Businesses Could be Eligible for Health Care Tax Credits

by Lori Montgomery

The Washington Post, May 17, 2010

Fact Sheet: Small Business Health Care Tax Credit

The White House, April 1, 2010

Administration Releases New Guidance on Small Business Health Care Tax Credit

The White House, May 17, 2010

The Affordable Care Act

The White House

Small Business Health Options Program (SHOP) Act: Frequently Asked Questions

Women Impacting Public Policy, Aug. 3, 2009

What Health Care Reform Means for Your Business

by Courtney Rubin, March 22, 2010

An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act

U.S. Congressional Budget Office, Nov. 30, 2009

President Signs Health Reform Bill that Aids Small Businesses

by Mary L. Landrieu

U.S. Senate Committee on Small Business and Entrepreneurship

Bribe Your Workers to be Healthy

by Sonya Stinson, May 12, 2010

UPDATE: Small Firms May Claim Health Tax Credit For Dental, Vision

by Martin Vaughan

Dow Jones Newswires (via Wall Street Journal), May 17, 2010

NFIB'S Involvement in the Healthcare Lawsuit

National Federation of Independent Business, May 14, 2010

How Health Care Reform Will Impact Your Small Business

by Thursday Bram

American Express OPEN Forum, March 26, 2010

Health Care Reform Promises More Paperwork

by Courtney Rubin, March 26, 2010

For Small Businesses, Health Care Reform Has Some Positives — But Health is the Wild Card

by Anita Campbell

American Express OPEN Forum, March 26, 2010

Swamped Insurance Departments Hope Website Will Answer Overhaul Questions

by Maggie Mertens

Kaiser Health News, May 12, 2010

How the Health Care Law Affects Your Business

by Robb Mandelbaum

You're the Boss (The New York Times), March 31, 2010

Why Health Care Reform Won't Put Greg EP Out of Business

by Robb Mandelbaum

You're the Boss (The New York Times), March 22, 2010

Small Businesses Grapple with New Health Care Law

by Courtney Rubin, March 24, 2010

Health Law Backers Say Most Small Businesses Will Get Tax Credits

Kaiser Health News, July 16, 2010

First Health Overhaul Provisions Start to Kick in

by Ricardo Alonso-Zaldivar

The Associated Press, July 6, 2010

Insurers Push Plans that Limit Choice of Doctor

by Reed Abelson

The New York Times, July 17, 2010

High-Risk Pools: $5 Billion for Preexisting Conditions

by Julianne Pepitone

CNN Money, June 29, 2010

High-Risk Pools Off to Slow Start

by Gloria Park

Politico, July 14, 2010 (last updated)


by Secretary Kathleen Sebelius

The White House, July 1, 2010

What You Need to Know About the Government's New Health Insurance Website

by Phil Galewitz

Kaiser Health News, July 1, 2010