It’s no secret that the template for President Obama’s health-reform legislation was the Massachusetts health-care plan enacted in 2006. And it’s likely that many of the problems now cropping up in the Bay State will reappear at the national level when key provisions of Obamacare go into effect over the next several years. While the legal fights over Obamacare are grabbing the headlines — on Tuesday, Missouri voters resoundingly rejected the individual mandate — voter approval will ultimately swing on the economy, where the new law will be a lead weight, particularly for small businesses.
When it comes to health-care costs, small businesses are the canary in the coal mine. Lacking the bargaining power to demand lower rates from insurers, small businesses face higher health-insurance costs — and thus are much less likely to offer their employees coverage to begin with. They are also much more likely to drop coverage when costs rise.
In Massachusetts, small-business owners “are giving up out of frustration,” an insurance broker recently told the Boston Globe. More and more small businesses “simply can’t afford health insurance any more.” Prices are certainly going up in Massachusetts’s small-group insurance market. The Retailers Association of Massachusetts reports that insurance premiums have risen by about 15 percent annually over the last five years.
Earlier this year, insurance companies asked for large rate increases (up to 32 percent) in the small-group and individual-insurance markets (which were merged into one market as part of the 2006 reforms). The state’s response has been to strike back at the insurers: On April 1, in an unprecedented move, the Massachusetts Department of Insurance denied 235 of 274 increases requested by insurers.
Bashing insurers may make for good politics, but it’s bad policy. In a leaked email, Robert G. Dynan, the official charged with keeping insurers solvent, wrote that caps (set at 2009 rates) “have no actuarial support” and could lead to “a train wreck” for the state’s insurers. Dynan may have a point: The four largest state insurers posted first-quarter losses of over $150 million, which they attributed to rate restrictions imposed on premiums.
Defenders argue that Massachusetts was a high-cost state before the 2006 health-care reforms took effect (which is true), and that those reforms have made insurance more affordable for low-income individuals even if they haven’t kept a lid on overall costs.
The reforms, however, may also have shifted costs to small businesses. A July study by health economists John Cogan, Glenn Hubbard, and Daniel Kessler suggests that state reforms may have increased premium trends for employer-provided health insurance, particularly for individual coverage and for small businesses. The authors found that “health reform in Massachusetts increased single coverage employer-sponsored insurance premiums by about 6 percent in aggregate and by about 7 percent for firms with fewer than 50 employees. . . . For small employers, the differential Massachusetts/US growth in small group [family] premiums from 2006-2008, over and above the growth from 2004-2006, was 14.4 percent.”
What implications does this have for national health-care reforms and the economy?
For starters, Obamacare makes Massachusetts’s expensive, heavily regulated insurance market the model for the rest of the country. New regulations on insurers — including no caps on annual or lifetime coverage and a requirement to cover “children” until they are 26 — will drive up costs for small businesses.
Obamacare is also worse than its Massachusetts precursor in several respects. At least Massachusetts was able to finance its insurance expansion largely from existing revenue sources (in fact, about half of the initial funding came from the federal government). Congressional Democrats, however, don’t have a rich uncle they can borrow from. So Obamacare includes large new taxes on prescription drugs, health insurance, and medical devices. All of these costs will be passed on to businesses and their employees in the form of higher premiums.
Obamacare also imposes penalties on any firm with more than 50 employees that doesn’t offer coverage and has at least one employee receiving a premium tax credit to purchase coverage from one of the state health-insurance exchanges starting in 2014. The fines would be levied as a set fee per employee (excluding the first 30 employees). A new study from the American Action Forum, by former Congressional Budget Office director Douglas Holtz-Eakin and policy analyst Michael Ramlet, explains the implications for job creation:
Hiring one more worker to raise employment to 51 will trigger a penalty of $2,000 per worker multiplied by the [number of workers above 30]. In this case the fine would be $42,000 [21 workers multiplied by $2,000]. How many [firms] will choose not to expand?
Firms with more than 50 employees — those with, say, 55 — could also decide to lay off workers or outsource jobs to avoid the penalty.
To be fair, Holtz-Eakin and Ramlet note that the health-care law does include a tax credit for firms that offer employee coverage — but the credit can only be claimed by very small firms (those employing fewer than 25 workers) with average wages below $50,000. Proprietors and their family members are excluded from claiming the credit, even though many small firms are family-run. The value of the credit also gradually phases out as businesses expand beyond ten employees, or as average wages approach $50,000. Given these limitations, the National Federation of Independent Businesses estimates that only 35 percent of firms with fewer than 25 employees will be able to qualify for the credit.
The Bay State’s frustration is likely to spread nationwide in coming years, as Obamacare drives costs up and more small businesses drop coverage and slow down hiring to avoid potential penalties. One small business owner (an IHOP franchisee in New Jersey) anticipates that Obamacare’s penalties for his 140 workers (up to $220,000) will force him to raise prices or possibly lay workers off. “We are still figuring out how to deal with this,” he told the Cleveland Plain Dealer in July. “Ultimately, either businesses will close or consumers will pay more.”
Small businesses are one of the primary engines of American job creation. Imposing Massachusetts’s expensive reforms on the entire nation is likely to put a drag on that engine for years to come.
– Paul Howard is director of the Manhattan Institute’s Center for Medical Progress.