Why Small Biz Is Skittish About Health-Care Reform

Small business owners have emerged as a crucial constituency in the health-care debate—and one President Obama is having trouble winning over at the moment. That's why Obama and White House economists such as Austan Goolsbee have launched a public charm offensive to convince entrepreneurs they will see their health-care cost burden fall significantly if proposed reforms in Congress become a reality.

Creating the right mix of incentives to prod more small enterprises into offering health insurance for employees is crucial to Obama's quest to extend coverage to uninsured Americans. The share of small companies offering health benefits dropped from 68% in 2000 to 62% in 2008 as the average price of premiums more than doubled, according to research from the Kaiser Family Foundation. There are 16.8 million uninsured workers at companies with fewer than 100 employees, accounting for about 63% of the total 26.8 million workers without coverage, estimates the Employee Benefit Research Institute.

Few executives would argue with the Obama camp's contention that small businesses that offer health coverage pay more and get less in the current health insurance market than big companies. Because of their lack of negotiating clout, tiny outfits pay up to 18% more per worker than larger employers for the same health insurance policy, a study by the Council of Economic Advisers concludes.

As a result, many small businesses have dropped coverage, shed jobs, or closed up shop entirely, Obama noted in his July 25 weekly address focused on health-care reform and small business. "This is unsustainable, it's unacceptable, and it's going to change when I sign health insurance reform into law," he promised.

Yet moves by House Democrats have lobbying groups such as the National Federation of Independent Business (NFIB) and the National Small Business Assn. steamed. The House bill now requires all but the smallest of employers to offer health coverage or face a payroll tax of up to 8%, though these tough measures may be softened in any final legislation. While the NFIB supports some White House reform ideas, says Brad Close, vice-president for public policy, "The problem with the House bill is that all of these things are completely outweighed by the payroll tax and employer mandate."

SAVINGS ON COVERAGEThe House bill would exempt employers with annual payrolls of $500,000 or below. The White House argues that proposed tax credits to companies offering coverage would relieve the sting. Also, small businesses would reap savings by being able to buy affordable policies through a proposed insurance exchange. According to an estimate by the Small Business Majority, a nonprofit research group, health-care reform could save smaller employers some $855 billion on coverage costs over the next decade.

Even so, talk of a payroll tax increase amid a brutal recession seems ill-conceived to David Prescott, chief executive of Talon LPE, a 130-person environmental and engineering consulting firm in Amarillo, Tex., that offers health coverage to full-time employees. "I agree that health care is broken and something needs to be done, but you can't put the entire debt load on business right now," says Prescott, who voted for GOP candidate John McCain last year.

Even some Obama supporters are disappointed by the direction of the health-care debate so far. Ava Seavey runs a five-person advertising firm called Avalanche Creative Services in New York City. A passionate Obama backer during the campaign and an advocate for reform, she now fears the health-care overhaul treats smaller companies as if they had the resources of bigger ones. Instead of tax increases and mandates, she "expected some help to move the onus of health-insurance costs off of small business." White House economist Goolsbee says the Administration is trying to do just that: "We won't all agree every time, but we're giving a lot of thought to small business."

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