Last in a Series: Today, it’s a given that small employers face substantial disadvantages relative to large employers when it comes to providing health insurance for their workers. Even if a business can get over the high costs, they still face a maze of complex administrative and regulatory requirements.
The Coca-Cola Bottler’s Association tried to help its 60 small employers by pooling them in one program to spread costs and cut administrative expenses. But those savings evaporated over time because state regulations and coverage mandates forced plan administrators to design distinct plans and claims-processing rules for every state. In CCBA’s case, it meant nearly every small bottler participant required different policies.
After 2000, the CCBA dropped its small business pooling program because virtually all insurance companies stopped participating in multistate pooling arrangements. Since then, health insurance premiums for smaller bottlers have increased from 20 percent to 25 percent annually.
For companies like CA Eckstein Roofing in Cincinnati, which provides coverage for its 35 employees, yearly double-digit increases in premiums have become the norm, and one or two serious illnesses among its employees ratchet rates even higher. Dropping coverage would put the firm at a severe disadvantage against larger competitors, yet a growing number of small businesses are going that route.
Today, the majority of the nation’s uninsured work for small companies. Without any policy change, that number is forecast to increase by 15 million, from roughly 52 million in 2009 to 67 million in 2018, according to a study by the Urban Institute/Brookings Institution Tax Policy Center. The crisis is real: It’s consistently one of the top three concerns of small employers, and both presidential candidates have made health care reform a central part of their platforms.
Republican John McCain’s proposal, which I examined in last week’s column, is by far the most sweeping. It would end employer-based insurance by eliminating the tax break companies now receive for subsidizing employee coverage. In its place, it would give families tax credits to help them shop for individual policies. McCain’s plan also counts on businesses to pass along cost savings in the form of higher wages.
Insurance companies would be allowed to sell insurance across state lines, bypassing state mandates, to increase competition. But insurance companies would be allowed to “cherry pick” the healthiest customers. Those rejected for coverage by private insurers would be shuttled into a high-risk pool, and would likely pay higher rates.
Democrat Barack Obama takes a far less radical approach, although it, too, would likely lead large numbers of employers to drop coverage. He proposes preserving the current tax break so businesses can continue to offer coverage. Those that choose to drop coverage would pay a payroll tax instead, although certain small businesses would be exempt. For businesses that want to escape the uncertainty of rising insurance premiums and administrative burdens, paying the payroll tax would be an attractive option, because it would be less prone to unpredictable increases.
Workers without employer-sponsored health plans would have the option of joining an insurance exchange that would offer a range of private plans and a public option that is the same plan now offered to federal employees and members of Congress. The key difference between the two is that Obama’s plan would create a huge national pool or health insurance exchange. The costs would be spread across all pool members and no one could be denied coverage based on their health. Presumably the pool would supersede state mandates.
David M. Cutler, a Harvard economics professor and Obama campaign advisor, argues that with large patient pools, a few people with high medical costs won’t upend the entire system, a situation that Eckstein Roofing faced. What’s more, insurers would no longer need to waste resources weeding out the healthy from the sick through a costly underwriting process, saving administrative costs.
Obama would also take a more aggressive regulatory approach to shift the focus of health care to prevention. In today’s health care market, less than one dollar in 25 goes for prevention, even though preventive services — regular screenings and healthy lifestyle information — are among the most cost-effective medical services, according to Cutler.
Guaranteeing access to preventive services will improve health and in many cases save money, says Cutler. The McCain plan counts on individuals taking out high-deductible policies limited to covering serious or catastrophic illnesses. Such policies are likely to curb preventive care because people would have to pay for it out of pocket.
A big question, of course, is overall cost. Both candidates claim substantial savings, but estimates vary widely and real costs remain largely unknown because neither candidate has provided enough detail to make solid estimates. McCain, for example, has not explained how he would pay to subsidize low-income families or those in the high-risk pool he envisions.
Both plans will also be subject to Congressional scrutiny and likely extensive modifications. In the looming debate, which should take place the first year of either administration, small business owners should keep several key issues in mind. Many were spelled out in a recent study by the Heritage Foundation, a conservative think tank in Washington, D.C.
First, the nature of the workforce is changing. People are changing jobs more often and working shorter periods for each employer. More and more people are working part-time or as independent contractors and have no access to employer-subsidized insurance.
Therefore, insurance needs to be portable. In other words, if you lose your job, you shouldn’t lose your health insurance. Health insurance is a factor in deciding where to work, inhibiting labor market efficiency and working against small businesses that can’t afford to offer coverage.
Right now, unequal tax treatment skews the system toward large employers to the exclusion of small firms and the self-employed. In addition, neither candidate has addressed how to handle companies that self-insure under the Employee Retirement Income Security Act (ERISA), which gives them significant advantages, including an exemption from state mandates.
To remedy the problem, the Heritage Foundation recommends creating insurance exchanges with menus of portable health plans based on a large and diverse insurance pool with stable and predictable premiums. Employers should be facilitators, not sponsors, of coverage by handling such things as payroll deductions and consolidating and distributing premium payments.
Insurance exchanges would get the same tax exemptions enjoyed by the employer-based system today. In addition, a cap on the tax exemption for health benefits and a refundable, advanceable credit for low-income families would be introduced to promote fairness, the foundation study says.
For my money, that sounds much closer to the Obama plan, which seems to be the best approach to make health coverage more affordable, more portable, and available to the broadest number of people. It will also level the playing field between large and small businesses so health insurance is no longer a bottom line cost, or a factor in deciding where people choose to work.