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Will Small Business Have To "Pay Or Play"?

This story was written by political reporter Stephanie Condon.

In his strongest appeal yet for comprehensive health care reform, President Obama on Monday spoke of the burden rising costs have placed on small businesses.

Over one third of small businesses have reduced benefits in recent years, and one third have dropped their workers' coverage altogether since the early '90s, the president said.

Still, Mr. Obama said, "every American bears responsibility for owning health insurance, so long as we provide a hardship waiver for those who still can't afford it. The same is true for employers."

Most Americans with health insurance obtain it through their employers, and as Washington attempts to expand health care availability to all Americans, one looming unanswered question is how government reforms will impact small businesses. One particular proposal -- a mandate for employers to either provide "meaningful" coverage for their workers or contribute to a public fund to cover the uninsured -- could have a significant impact on the costs businesses must bear and the way people acquire insurance.

Some argue the mandate - also referred to as "pay or play" - could also help reduce costs the government will take on to ensure universal access to health care. Others argue it is simply politics masquerading as economics.

The employer mandate is part of Democrats' plan to establish "shared responsibility" for health care -- in other words, to distribute the cost of health care among government, individuals and business in order to make the cost less burdensome for everyone involved.

"The idea is everybody pays in a little bit more to make it work better for everybody else," explained Peter Harbage, a senior fellow at the Center for American Progress, a liberal think tank.

Harbage added, though, that employers are putting in a lot of money into the system today already. "That's who the system really needs to be fixed for," he said.

Len Nichols, the director of health policy at the nonpartisan New America Foundation, said an employer mandate would be a rather ineffective and generally unwise way to create "shared responsibility."

"Shared responsibility is really about people," he said. "Real people own small firms, and we should tax them. But to make it hard for them to pay workers doesn't seem like smart way to extract their responsibility."

Many in the business community contend the proposal would make it harder for employers to maintain a payroll with decent wages as well as the required benefits. Moreover, said James Gelfand, senior manager of health policy for the U.S. Chamber of Commerce, the free market offers the best mechanism for sustaining employer-based insurance.

"Market forces say if you want the best employees, you offer the best insurance you can," he said.

A Look At The Numbers

It is clear, however, that employee benefits are not as secure as they once were. Nichols said the employer mandate in large part simply represents a resistance to this fact.

"The world is changing," he said. "It's harder and harder to maintain that level of benefits in a global economy. Part of the impulse behind pay or play is to try to lock down historical benefit levels because they can't be sustained in the marketplace."

"This is a classic case of weighing economics against politics," Nichols added.

A 2008 National Small Business Association survey showed a only 38 percent of small businesses were able to afford insurance for their employees last year - down from 67 percent in 1995. Since 1989, small businesses have created 93.5 percent of all net new jobs, according to the association.

While the Senate bill may rely on employers to take on more of the burden of keeping people insured, it is likely Congress would give significant breaks to small businesses. Businesses with fewer workers and lower wages would be exempt from the mandate and offered a new tax credit to purchase health insurance for their employees, according to a description of policy options written by the Senate Finance Committee, one of the two Senate groups responsible for health care legislation.

Given that a significant number of the firms that do not currently offer health care may end up exempt from the program or eligible for tax credits, "the amount of potential revenue here is not that great," Nichols said.

Not all businesses are against the employer mandate. A report from the Small Business Majority, a national nonprofit advocacy organization founded by executives of small companies, suggests that benefits would thrive under an employer mandate - so long as other reforms were implemented as well.

The group's study considered three scenarios with a sliding scale of tax credits to be provided to employers who offer insurance and a sliding scale of payments from employers who do not. The report concluded that depending on the variables, health care reform could save up to 128,000 jobs that would have been lost because of high health care costs. It also estimated small businesses could save as much as $855 billion under the changes it considered.

Opposing reports make it clear that the success or failure of an employer mandate will depend on both how the mandate would be set up and how the rest of the reform package is structured.

A recent study by the National Federation of Independent Business Research Foundation concludes that an employer mandate could eliminate 1.6 million jobs over the course of five years and reduce GDP by around $200 billion. The study assumed the mandate would require all employers (including small businesses) to offer private health insurance, and that employers would have to finance at least 50 percent of their employees' health insurance premiums.

Economics Vs. Politics

Gelfand said it is "simple economics" that the mandate would result in lost jobs and decreased U.S. productivity.

"It'll be a stimulus for India, and Brazil and Mexico," he said. "Administrative costs are such that it's not even worth it for many employers."

Ultimately, the employer mandate may not make it in the final legislation.

Chuck Grassley (R-Iowa), the ranking Republican on the Senate Finance Committee, has said he will not support a bill that includes pay or play. Meanwhile, Democrats will be negotiating to preserve more important provisions like insurance market reforms, commitments to subsidies and changing the incentive structure for doctors and hospitals. No proposal will cost Democrats more political capital than their fight to create a government-sponsored health plan.

In the meantime, businesses will be watching the debate closely.

"There are businesses out there who want to see change, who know they can't live under the current system, and they see health reform in a very positive way," Harbage said.

Gelfand concurred reform is needed - but with more skepticism about how that change will be delivered.

"We are hurting," he said. "If Congress can't manage to find a bill we can support, then something is very wrong on Capitol Hill.

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