ACA and Entepreneurship
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Affordable Care Act
The Patient Protection and Affordable Care Act was passed by Congress and signed into law by President Obama on March 23, 2010. Together, the Health Care and Education Reconciliation Act of 2010 and the Affordable Care Act (ACA) transformed the existing health care system in the United States and expanded Medicaid and Medicare services, while mandating all individuals to sign up for health insurance coverage. Since its passage, the ACA has taken on a decisive, divisive, and defining role in American politics, markets, and everyday life, and an estimated 17 million Americans gaining coverage as a result of the mandate. The controversy surrounding “Obamacare”, healthcare reform has understandably thrusted healthcare to the center stage of the discussion table in the 2016 U.S. presidential election, with both candidates taking strong stances on either side of the aisle.
The magnitude of the effect of Obamacare regulations and mandates on small businesses depends heavily on the size of the firm, as well as the composition, of its workforce (i.e. number of full time employees, average wages, state of operation). In determining which businesses may qualify as a “small business” and thus be exempt from the employer mandate, the ACA relies on a criterion of “full-time equivalent” (FTE) employees.
The total number of FTEs can be computed by adding the number of full-time employees to aggregated number of part-time employees hours divided by 30. A full-time employee is considered to be any employee who worked on average more than 30 hours a week for 120 days or more in a year. Another criterion for determining mandate-exemption or tax-credit status is the average annual wage of employees. the annual average wage can be calculated by dividing the total wages paid by an employer by the number of FTEs, rounding down to the nearest $1,000.
While the ACA has received significant backlash for its perceived potential detriment to small businesses, for the most part, small businesses with fewer than 50 FTEs are not significantly burdened by the ACA. In fact, companies with fewer than 50 FTEs, which make up an overwhelming majority of small businesses, as evidenced previously, are exempt from the employer mandate.
However, the ACA’s small business size qualifications differ from the Small Business Association’s (SBA) established summary of size guidelines that defines which businesses qualify "as a small business concern for SBA and most other federal programs.” [3] Under SBA guidelines, a small business includes mining and nonmanufacturing firms that employ under 500 employees and non-manufacturing firms that accumulate an annual receipt of less than $7.5 million in average annual receipts for non-manufacturing firms. Considering the SBA’s broader guidelines, while there may exist classifications that distinguish even further within industries, it is clear that that the ACA defines a small business much more narrowly than current SBA standards.
Still, there are almost 6 million small businesses that fall under small business size classifications in the United States, and 90 percent of these small businesses employ fewer than 20 people [4]. More precisely, 61 percent of firms employ between 3 and 9 employees, and 98 percent of firms employ between 3 and 199 employees. [5] Thus, the ACA’s employer mandate will only apply to relatively “larger” small businesses, firms that employ more than 50 FTE employees.
Obamacarefacts.com states that the 5.8 million small businesses in the United States that employ under 50 employees will not be penalized for not providing health coverage to their employees. However, many small businesses are providing health insurance for their employees, with 96% of firms that employ under 50 FTEs already covering full time workers. These firms, along with larger companies are paying higher premiums, as the cost of health insurance rises. If employers with fewer than 50 FTEs find themselves unable or unwilling to match the rising costs of health insurance premiums, small firms may be forced to discontinue employer-sponsored coverage.
Because insurance companies can no longer “conduct medical underwriting to determine the risk associated with an applicant or a pool of applicants when it priced its insurance premiums,” small businesses that choose to provide health insurance for their employees will face rising premiums and increased regulation in providing health insurance. Under the ACA, insurance carriers are no longer allowed to utilize a risk rating process to value premiums in the small business market, and only three factors may considered in determining premiums: age of the insured, place of residence, and tobacco usage. With carriers unable to rely on health factors to compute the risk of its insured, the cost of providing insurance depends on the insured’s relative age, as well as the state in which they reside in, more heavily than before. (source: forbes article at bottom of page)
A small business may attempt to avoid and alleviate the increased costs of insurance coverage by opting out of employer-sponsored health care or increasing the employee contribution to coverage if possible with cost-sharing. Additionally, firms might also consider participating in the SHOP Exchange; negotiating on private insurance plan prices; and switching from group plans to individual employer-sponsored options, such as Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA), and direct primary care [12].
The SHOP (Small Business Health Options Program) Exchange, created by the ACA and intended to earn small businesses lower health insurance rates by using group plans and tax credit, did not open up to employers with fewer than 50 FTE employees until 2015 and only opened recently in 2016 for businesses that employ between 50 and 100 FTEs. SHOP offers increased employer choice functions, enabling employers to choose from a larger pool of available coverage options for employees [18] The financial advantage of purchasing insurance through the SHOP exchanges remains uncertain, however, because insurers in the marketplace will still be unable to charge premiums based on health status. Additionally, workers participating in SHOP will become ineligible for subsidies once they have to buy their own insurance [19]. Notwithstanding these limitations, SHOP offers small businesses increased buying power in the group-plan market - an advantage once possessed only by larger firms - and a simpler mechanism for comparing prices, coverage, and quality of plans [20].
A temporary health insurance tax credit is available to firms with 25 or fewer employees and making less than $50,000 in annual wages. However, many firms do not meet the strict requirements necessary for obtaining the tax credit that would cover up to 50 percent of employer contributions to employees' health insurance premiums and up to 35 percent for tax-exempt employers. According to Holly Wade, the director of research and policy analysis for the NFIB Research foundation, "the small business tax credit is a better talking point than it is a financial incentive for small businesses" [24].
For small businesses that are nearing the 50th FTE mark, however, the 51st hire presents a very large marginal cost to the firm. Firms that employ 50 or more FTEs and fail to provide qualified health insurance coverage must pay a tax penalty of $2,000 for each uninsured employee beyond the first 30 employees, possibly dis-incentivizing small firms from expanding their labor forces. Furthermore, firms that employ more than 50 workers must contribute, at a minimum, 60 percent of the cost for employees' coverage. [13]. This increased marginal cost for the 50th employee serves as a reason why many critics of the ACA believe that the ACA is “killing jobs” and also why many small business owners have concerns about expanding their businesses.
The ACA, although accused by its opponents of killing small businesses, does not seem to have accelerated or spurred the abandonment of startup plans or even the death of small firms themselves. Instead, the effects of the ACA on small businesses, if any, are mostly felt by employees, as some businesses are slowing or halting their hiring practices and cutting employees’ hours.
In 2012, two years after the introduction of the ACA, Gallup and Wells Fargo conducted a survey of 600 small business owners. The survey revealed that 48 percent of small business owners pointed toward "potential healthcare costs" as a reason for not hiring more employees [2]. According to another survey conducted by the Society for Human Resource Management of more than 600 small business owners, more than four out of ten small business owners have delayed hiring due to uncertainty about the effects of the ACA [14], and one in five small business owners reported that they have cut their number of employees [15]
Uncertainty surrounds the effects of the ACA on small businesses due to the many delays and exemptions in the rollout process of the ACA’s mandates and provisions, especially in analyzing the effects on relatively larger small businesses that are now required by the law to provide health insurance to its employees, as the employer mandate penalty for firms with greater than 99 employees was delayed until 2015.
Considering both the status quo and general trends of the health insurance market, it seems unlikely that the ACA will turn out to be the job-killer or enemy of small business it was predicted to bed. While insurance premiums continue to rise for the firms that provide employer-sponsored health insurance to its employees, the bill should not seriously harm small businesses and startups with fewer than 50 full time equivalent employees. Head of the CBO, Douglas Elmendorf, doesn’t believe “the healthcare law is having a significant impact on the economy today.” Elmendorf predicts that the law may “reduce the amount of labor used in the economy by about a half a percent at the end of the decade,” but this will mostly be voluntary, as people will choose “not to work because they can obtain health insurance at an affordable price outside of the workforce”[25].
Even if ACA itself may turn out be a tentatively benign, if not beneficial, policy for small business in the long run, the critical question remains: where do the two 2016 U.S. presidential candidates stand on the issue? Hillary Clinton, whose website claims she will "be the small business president," takes a strong stance for the law, vowing to defend the Affordable Care Act, strengthen its benefits, and minimize the law’s detriments to small business. Donald Trump on the other hand vehemently opposes the Affordable Care Act, stating that he will request a congressional repeal of the act on his first day in office.
Moving forward in American healthcare system reform, it is important to consider the possibility of the ACA’s effects on small businesses growing more pronounced or remaining neutral. Regardless the outcome of the election, the American population and economy requires a U.S. Congress and President who are willing and prepared to reap the potential benefits of the ACA - increased coverage for millions of Americans- and reform and protect against the potential detriments of rapidly rising premiums. Instead of introducing preemptive policy to replace or eliminate the ACA, a more measured, nuanced, and methodical process should be followed, to ensure that access to affordable and comprehensive health insurance coverage is available for all citizens.
