Image Image Image Image Image Image Image Image

Center for Labor Research and Education

About:

Scroll to top

Top

Federal Health Reform: Impact on California Small Businesses, Their Employees and the Self-Employed

The health reform law enacted in March 2010, the Patient Protection and Affordable Care Act, will benefit many small businesses, their employees and self-employed Californians. This brief analyzes the impact the law will have on the 610,000 California small businesses that employ 5.3 million workers and the 2.8 million who are self-employed entrepreneurs. Small business employees and the self-employed comprise a disproportionate 71 percent of California’s total uninsured population.

The law will make it more affordable for small businesses to offer coverage by reducing administrative costs for small group health plans and offering $4.4 billion in health insurance tax credits to California small businesses over ten years. All California small businesses with fewer than 50 full-time equivalent employees will be exempt from the employer responsibilities and most small businesses offering coverage will be minimally affected by the health plan standards as they already offer qualifying health plans.*

The law will also extend Medicaid coverage to 660,000 self-employed and small business employees who are currently uninsured, purchasing coverage in the non-group (individual) market or enrolled in unaffordable employer-based coverage in California. Nearly one million additional self-employed and small business employees lacking affordable employer-based coverage will be eligible to purchase subsidized coverage in a health insurance exchange.* These Californians will spend $904 to $5,159, or 15 to 88 percent, less on premiums and out-of-pocket costs per year under the law than they would in the current non-group market. Those who are not eligible for subsidies will benefit from new insurance market regulations requiring insurers to accept all applicants and charge the same prices for those with pre-existing conditions.

Together, these reforms will reduce barriers to entrepreneurship and improve small businesses’ competitiveness in attracting employees.

Current Insurance Status of California Small Business Employees and Self-Employed

Over 5.3 million Californians are employed by 610,000 small businesses with fewer than 100 employees. One and a half million of these small business employees are uninsured. An additional 689,000 out of 2.8 million self-employed Californians are uninsured. Together, small business employees and the self-employed comprise 71 percent of California’s total uninsured population and 45 percent of the workforce (Table 1, page 3). Small business employees are more likely to be uninsured in large part because their employers, especially those with fewer than ten employees, are less likely to offer coverage than medium and large businesses (Graph 1, page 3).

A recent national survey found that 78 percent of small businesses that do not offer coverage would like to do so, but 80 percent of such businesses cite cost as a barrier.1 Small businesses pay higher premiums than other businesses; recent studies by Roland McDevitt, Jon Gabel and colleagues found that small business premiums averaged 10 to 18 percent more than those paid by larger businesses.2 The California Employer Health Benefits Survey found that, compared to larger firms, small California businesses with fewer than 200 employees were more likely to experience large premium increases in 2006 through 2009.3

In large part, small group premiums are higher because of higher administrative costs per enrollee. According to the Congressional Budget Office (CBO), health plan administrative costs vary significantly by size of firm, from about 7 percent of premiums for firms with at least 1,000 employees to 26 percent for firms with 25 or fewer employees.4 Much of this variation reflects the economies of scale achieved in providing coverage to larger firms. In particular, sales and marketing costs are higher for small businesses because at least half of firms with fewer than 50 employees use the services of brokers. Brokers’ commissions, which often range from 2 to 8 percent but can be as high as 10 percent, are typically paid by health plans and built into premiums.5 In the non-group market where many self-employed Californians purchase coverage, administrative costs are also high, accounting for roughly 30 percent of premiums.6

Table 1: California Workforce (ages 18-64) and Employers by Firm Size
Graph 1: Percentage of California Employers Offering Coverage by Firm Size

Californians lacking affordable coverage through their own employer or through a family member often face difficulties in trying to purchase coverage in the non-group market. A recent Commonwealth Fund study found that most adults who tried to purchase coverage in the non-group market found it impossible or very difficult to find an affordable plan, and low-income adults who shopped for coverage were even more likely to never enroll.7 In addition, many Californians are denied coverage due to a pre-existing condition.

The lack of affordable health care options serves as a significant barrier to small business development and self-employment in the United States.8 Higher health benefit costs put small businesses at a competitive disadvantage compared to larger firms.

Improved Affordability for California Small Businesses Offering Coverage

Under the law, small businesses with fewer than 100 employees will be eligible to purchase coverage through a health insurance exchange in 2014. The exchange will offer small businesses a wide choice of plans that meet standards for coverage and will provide information to small businesses and their employees to help them make educated choices about the policies they are purchasing.

Administrative costs for small group plans9 offered in the exchange would be lower under the law due to economies of scale and the standardization of benefits in the exchanges, according to a CBO analysis of the Senate’s health reform bill which was similar to the final legislation.10 In addition, the law requires all small group plans to provide rebates to consumers if the percentage of premium revenue spent on clinical services and quality improvement activities falls below 80 percent, creating a strong incentive for inefficient plans to reduce their administrative costs.

Research has shown that some of the costs for uncompensated care provided to the uninsured are shifted to health plan enrollees through higher premiums. One study estimated that approximately 5 to 6 percent of California premiums can be attributed to this cost-shifting.11 The law will reduce the number of uninsured Americans by 59 percent compared to current law in 2019,12 which is likely to reduce average premiums to some extent for all enrollees, including small group enrollees.

The CBO found that premiums for a given amount of small group coverage would be from 5 percent lower to 1 percent higher under the Senate bill compared to under current law in 2016, primarily due to a reduction in administrative costs and a change in the mix of enrollees. These premium estimates include the net impact of insurer fees proposed under the Senate bill which are likely to be passed on to consumers through slight premium increases.13 We assume that the net impact on premiums would be similar under the Senate bill and the final legislation, except that in the initial years the premium savings may be slightly greater under the law because it delays implementation of the insurer fee from 2011 to 2014.

The law will also help to stabilize premiums by prohibiting insurers from raising a small business’ premiums if one of their employees gets sick. Additionally, state governments and the federal government will be required to review rate increases and insurers must justify any rate increases that are found to be unreasonable.

Small business tax credits offered under the law reduce the employer cost of providing coverage by as much as 35 percent for eligible tax-exempt businesses and 50 percent for all other eligible businesses. These time-limited tax credits are available to firms with 25 or fewer full-time equivalent employees with average wages of less than $50,000. Credits are greatest for those firms with ten or fewer full-time equivalent employees and wages of less than $25,000, and phase out as average wage and firm size increases. We estimate that these tax credits will be worth more than $4.4 billion to California small businesses over ten years14 and that 450,000 Californians will benefit from subsidized coverage through their small employer or a family member’s small employer in 2016.15

The law contains an excise tax on high-cost employer health insurance plans which will tax insurers at 40 percent of the plan’s aggregate value above a high-cost threshold of $10,200 for single coverage and $27,500 for family coverage, beginning in 2018. Nationally, this tax will affect 17.1 percent of small business employees enrolled in plans covering fewer than 100 employees in 2018.16 The tax will also apply to an unknown number of self-employed Californians who are enrolled in a high-cost plan and deduct any portion of the cost of coverage. The CBO and Joint Committee on Taxation (JCT) have estimated that “most people would avoid the cost of the excise tax by enrolling in plans that had lower premiums; those reductions would result from choosing plans that either pay a smaller share of covered health care costs (which would reduce premiums directly as well as indirectly by leading to less use of covered medical services), manage benefits more tightly, or cover fewer services.”17 Alternatively, the excise tax may encourage employers to shift to “high performance networks,” narrow networks with larger discounts from providers.

Most California Small Businesses Exempted from Employer Responsibilities

The law will require employers to pay fees if any of their employees enroll in subsidized coverage in the exchange, but these “free-rider” provisions will only apply to employers with more than 50 full-time equivalent employees. Specifically, the law will require large employers that do not offer coverage and have at least one employee receiving subsidies in the exchange to pay $2,000 per full-time employee. Large employers that offer coverage and have at least one employee receiving subsidies in the exchange will pay the lesser of $3,000 per full-time employee receiving subsidies or $2,000 per full-time employee. The law also reduces the impact by subtracting out the first 30 workers above 50 workers from these payment calculations.

Minimum Health Plan Standards for Covered Workers Established with Minimal Impact on Most California Small Businesses

The law contains minimum standards for plans offered in the small group market (100 or fewer employees) inside or outside of the exchange. These standards will benefit small business employees who are currently enrolled in non-compliant plans, especially employees who have significant health care needs. Some of the new requirements will be phased in over time. Existing health plans will be grand fathered initially for current employees, their family members and new employees, but grand fathered plans will have to meet most of the new requirements by 2018.

Most California small group plans already meet most of the new standards, requiring minimal to no plan changes for most small businesses. Table 2 (page 7) outlines the plan standards and discusses the impact on California small business covered workers. Much of the impact analysis included in this table is based on a recent California study by Jon Gabel and colleagues that defined small group plans as those with fewer than 50 employees.18

Coverage and Affordability Improved for Californians Lacking an Affordable Employer Plan

Californians of all income levels who are self-employed or work for small businesses will benefit from the insurance reforms. Under the law, insurance companies may no longer deny coverage based on pre-existing conditions or drop coverage or raise premium rates after someone becomes ill or is in an accident.

Table 2: Small Group Plan Standards

Adults and children in families with incomes up to 133 percent of the Federal Poverty Level (FPL) will become eligible for Medicaid under the law. We estimate that in California, 660,000 self-employed and small business employees who are currently uninsured, purchasing coverage in the non-group market, or offered unaffordable employer-based coverage will be Medicaid-eligible (Table 3).

Table 3: Eligibility for Medicaid and Non-Group Coverage: California Self-Employed and Small Business Employees (ages 0-64)

The law will also provide subsidies to Californians in families with incomes below 400 percent FPL who do not qualify for Medicaid and do not have access to affordable employer-based coverage. These subsidies come in two forms, premium subsidies which cap the percentage of income families spend on health insurance, and cost-sharing subsidies which reduce the amount families spend out of pocket on health care. We estimate that in California, nearly one million self-employed and small business employees who are currently uninsured, purchasing coverage in the non-group market, or offered unaffordable employer-based coverage will be eligible for premium or cost-sharing subsidies in the exchange (Table 3). Not only will these Californians gain access to affordable coverage, but they will have a choice of plans which is rare for small business employees today.

Employees who do not qualify for subsidies in the exchange will still benefit from the insurance market reforms that require insurers to accept all applicants and do not allow for differential cost based on pre-existing conditions. The majority of those who fit this category are in families with incomes above 400 percent FPL. We estimate that in California, 1.2 million self-employed and small business employees who are currently uninsured, purchasing coverage in the non-group market or offered unaffordable employer-based insurance will be eligible to purchase coverage in the exchange without subsidies (Table 3).

Table 3 shows the number of Californians who are self-employed or employed by a small business and will be eligible to enroll in Medicaid or purchase a subsidized or unsubsidized plan in the non-group market in the exchange. This table focuses on the employees who lack an affordable employer plan, rather than the millions of Californians who will enroll in a small group plan offered by their employer. The table includes employees and the self-employed only. The law will also expand coverage to family members of employees, but dependents are not included in this table.

Californians with average health care use who purchase subsidized single non-group coverage in the exchange will spend $904 to $5,159, or 15 to 88 percent, less per year under the law than they would on premiums and out-of-pocket costs in the current non-group market. Graph 2 shows how much less average Californians will spend as a percentage of income in the exchange compared to what they would spend if they purchased coverage in the existing California non-group market. It shows that, for persons with family incomes below $34,000, savings are substantial–as much as 36 percent of income. At higher income levels, savings are approximately 2 percent of income.25

Graph 2: Cost to Self-Employed and Small Firm Employees with Average Health Use for Premiums and Out-of-Pocket Medical Expenses in Existing California Non-Group Market Compared to Health Reform Law after Subsidies: Californians with Single Coverage in Non-Gropup Market, 133-400 Percent FPL

The 1.2 million Californians who are eligible to purchase unsubsidized coverage in the exchange will also see premium savings. According to the CBO, prices in the non-group market would decrease by 14 to 20 percent in 2016 under the Senate bill compared to under current law, holding the level of benefits constant. This price decrease would primarily be due to reduced administrative costs, increased health plan competition and a greater share of enrollees with below-average health spending. The CBO notes that the Senate bill would be likely to increase the richness of benefits in the non-group market substantially.26 We assume that the impact will be similar under the law.

Discussion

The health reform law will make it easier for small businesses to offer coverage to their employees by reducing plan administrative costs and providing subsidies to certain small businesses that offer coverage. Most small businesses that currently offer coverage will be required to make only minimal changes to meet plan standards. No employers with fewer than 50 full-time equivalent employees will pay penalties for not offering coverage or not contributing enough towards coverage. Additionally, the law will greatly benefit self-employed and small business employees without access to affordable coverage by expanding Medicaid and by providing subsidies that will result in much lower spending on coverage in the exchange than in the current non-group market.

Reform will not only benefit small business owners, their employees and the self-employed, but it will also have broader economic benefits. Small firms’ competitiveness will improve by making employment in the small business sector more attractive for skilled workers. Worker productivity will improve as a result of improved workers’ health and reduced absenteeism. Premium savings achieved by small businesses may be reinvested back into the economy and used to create new jobs and save existing jobs. Expanding coverage will decrease “job-lock,” improving jobs matches between employers and workers. Finally, reform will reduce barriers to starting a small business, leading to an increase in entrepreneurship.27

Endnotes

  1. Businesses surveyed primarily had fewer than 50 employees. Larry McNeely, “The Small Business Dilemma: How Rising Health Care Costs are Tough on Small Businesses,” U.S. Public Interest Research Group Education Fund report, July 2009.
  2. Roland McDevitt, Jon Gabel, Ryan Lore, Jeremy Pickreign, Heidi Whitmore, and Tina Brust, “Group Insurance: A Better Deal for Most People than Individual Plans,” Health Affairs, 29, no. 1 (2010): 1-9. Jon Gabel, Roland McDevitt, Laura Gandolfo, Jeremy Pickreign, Samantha Hawkins, and Cheryl Fahlman, “Generosity And Adjusted Premiums In Job-Based Insurance: Hawaii Is Up, Wyoming Is Down,” Health Affairs, 25, no. 3 (2006): 832-843.
  3. California HealthCare Foundation/NORC California Employer Health Benefits Survey: 2006, 2007, 2008, 2009.
  4. Congressional Budget Office, “Key Issues in Analyzing Major Health Insurance Proposals,” December 2008.
  5. Conwell, LJ, “The Role of Health Insurance Brokers: Providing Small Employers with a Helping Hand,” Center for Studying Health System Change Issue Brief No. 57, October 2002.
  6. Congressional Budget Office, “Key Issues in Analyzing Major Health Insurance Proposals,” December 2008.
  7. Commonwealth Fund, “Issue Brief: Failure to Protect: Why the Individual Insurance Market Is Not a Viable Option for Most U.S. Families,” July 2009.
  8. John Schmitt and Nathan Lane, “An International Comparison of Small Business Employment,” Center for Economic and Policy Research, August 2009.
  9. CBO defines small group plans offered by employers with 50 or fewer employees.
  10. Congressional Budget Office, Letter to Senator Bayh, “An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act,” November 30, 2009.
  11. Institute for Health Policy Solutions, “Covering California’s Uninsured: Three Practical Options,” Prepared for California HealthCare Foundation, October 2006.
  12. Congressional Budget Office, Letter to House Speaker Pelosi, March 20, 2010.
  13. Congressional Budget Office, Letter to Senator Bayh, “An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act,” November 30, 2009.
  14. CBO estimated that lost federal tax revenue due to the small business tax credit will total $37 billion nationally between 2010 and 2019 in a March 20, 2010 letter to House Speaker Pelosi, on the Patient Protection and Affordable Care Act. We estimate that 12 percent of this spending will go toward California businesses, based on the state share of all firms with fewer than 20 employees and the state share of all paid employees working for firms with fewer than 20 employees, according to 2006 Census Bureau data.
  15. Ken Jacobs, Laurel Tan and Dave Graham-Squire, “Eligibility for Medi-Cal and the Health Insurance Exchange in California under Federal Health Reform,” UC Berkeley Center for Labor Research and Education issue brief, April 2010.
  16. This analysis was primarily based on 2008-2009 Kaiser Family Foundation and Health Research and Education Trust Employer Health Benefit Survey data. The analysis excluded the value of dental and vision coverage, as proposed by the White House. The law includes the value of employer contributions to Flexible Spending Arrangements, Medical Savings Accounts and Health Savings Accounts under certain arrangements, but those amounts were not included in our analysis; therefore, the percentage of workers exceeding the high-cost threshold could be slightly higher than estimated. For more information, see the following paper which used a similar methodology: “Who Benefits from the Proposed Amendment to the Senate Excise Tax on Employer Health Premiums?” a UC Berkeley Center for Labor Research and Education Issue Brief by Ken Jacobs, William H. Dow, Dave Graham-Squire and Laurel Tan, published in February 2010.
  17. Congressional Budget Office, Letter to Senator Bayh, “An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act,” November 30, 2009.
  18. Jon Gabel, Ken Jacobs, Laurel Tan, Roland McDevitt, Jeremy Pickreign, and Shova KC, “National Health Reform Requirements and California Employers,” UC Berkeley Center for Labor Research and Education Issue Brief, December 2009.
  19. California HealthCare Foundation/NORC California Employer Health Benefits Survey: 2009.
  20. Analysis of 2009 California Employer Health Benefits Survey by the National Opinion Research Center (NORC) at the University of Chicago.
  21. Minimum services include: preventive and primary care, emergency, hospital, physician, outpatient, maternity and newborn care, pediatric (including dental and vision), medical/ surgical care, drugs, lab, and mental health and substance abuse.
  22. Congressional Budget Office, Letter to Senator Bayh, “An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act,” November 30, 2009.
  23. Congressional Budget Office, Letter to Representative Boehner, November 4, 2009.
  24. The methodology used to calculate the coverage impact is described in “Californians’ Access to Coverage under the Health Reform Proposals,” a UC Berkeley Center for Labor Research and Education Issue Brief by Ken Jacobs and Dave Graham-Squire published in December 2009.
  25. The methodology used to analyze the affordability impacts is described in “The President’s Health Reform Proposal: Impact on Access and Affordability in California,” a UC Berkeley Center for Labor Research and Education Issue Brief by Ken Jacobs, Laurel Tan, Dave Graham-Squire, Jon Gabel and Roland McDevitt published in February 2010.
  26. Congressional Budget Office, Letter to Senator Bayh, “An Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act,” November 30, 2009. 27 Ken Jacobs and Jacob Hacker, “How to Structure a “Play-or-Pay” Requirement on Employers: Lessons from California for National Health Reform,” UC Berkeley Center for Labor Research and Education and Berkeley Center on Health Economic and Family Security Policy Brief, June 2009. Executive Office of the President, Council of Economic Advisors, “The Economic Effects of Health Care Reform on Small Businesses and Their Employees,” July 25, 2009. Jonathan Gruber, “The Economic Impact of Healthcare Reform on Small Business,” released by the Small Business Majority on June 11, 2009.
  27. Ken Jacobs and Jacob Hacker, “How to Structure a “Play-or-Pay” Requirement on Employers: Lessons from California for National Health Reform,” UC Berkeley Center for Labor Research and Education andBerkeley Center on Health Economic and Family Security Policy Brief, June 2009. Executive Office of the President, Council of Economic Advisors, “The Economic Effects of Health Care Reform on Small Businesses and Their Employees,” July 25, 2009. Jonathan Gruber, “The Economic Impact of Healthcare Reform on Small Business,” released by the Small Business Majority on June 11, 2009.

About the Authors

Laurel Lucia is a policy analyst at the Center for Labor Research and Education at UC Berkeley. Ken Jacobs is chair of the Center for Labor Research and Education at UC Berkeley. Dave Graham-Squire is a research associate at the Center for Labor Research and Education at UC Berkeley.

Acknowledgements

Our thanks to Roland McDevitt, Jon Gabel, Shova KC and Terry Gardiner for their helpful feedback and comments, and to Jenifer MacGillvary for her help in the preparation of this issue brief.