Issue at Hand - January/February 2010

A Difficult Pill to Swallow

by Michelle Dimarob

The president and small business agree on one thing: Time is running out for Congress to pass meaningful healthcare reform.

Unfortunately, the proposed healthcare reform package poised to become law solves none of the problems plaguing America’s job creators. In this Issue at Hand, NFIB examines the healthcare bills that cost too much and deliver too little.

Whether you are a small business owner offering healthcare and struggling to maintain that coverage or a small business owner sitting on the sidelines because the cost of coverage is simply too high, the desired goal of reform is the same.

In the fight to secure quality, affordable healthcare, small business has three big wants and a simple two-part evaluation to determine whether a proposal passes the test. Small business wants lower costs, more choices and real competition for private insurance. And as we evaluate the pathways toward that goal, we continually ask two questions: First, will this policy proposal lower heath insurance costs? Second, will this policy proposal increase the overall cost of running a small business?

Unfortunately, the only things that appear to prosper and grow in the bills emerging from Congress are the taxes, rules and regulations that will be laid at the feet of small business. The healthcare reform bills being finalized as this issue goes to print include a few reforms that help and many that hurt. No doubt, it is a tough and costly pill for small business to swallow.

What’s In

New Small Business Health Insurance Tax: Unlike large businesses, which self-insure and find security under the blanket of ERISA, most small businesses are only able to find and purchase insurance in the fully insured marketplace. The Senate bill includes a new $60 billion tax that falls almost exclusively on small business because the fee is assessed on companies and marketplaces where 87 percent of small businesses that buy insurance purchase their coverage. A study produced through the Congressional Budget Office shows that those costs will ultimately be passed on to consumers, who will be disproportionately small business consumers in the individual and small-group marketplace. Their only choice is to purchase those products or forgo insurance. Estimates suggest that this tax alone could increase insurance premiums by $500 a year for family coverage.

New Employer Mandate: Both the House and Senate bills have different employer mandates, which fail employers and employees in two ways. First, mandates do nothing to address the core issue facing small business--high healthcare costs. Second, mandates destroy job opportunities for employees. The job loss, whether through reduced hiring or greater reliance on part-time employees, harms low-wage and entry-level workers the most. The House mandate requires anyone with a payroll of $500,000 or more to provide insurance or pay a payroll tax penalty of up to 8 percent. The Senate mandate assesses multiple penalties on firms that do and don’t offer coverage, based on employee wages. The penalties are assessed on the full-time workforce, and will result in a move from full-time to part-time workers, as well as discourage hiring applicants who might qualify for a government subsidy.

Temporary Small Business Tax Credit: As originally structured, the small business tax credit did little or nothing to encourage more firms to take up coverage or produce greater overall affordability. Though it remains a weak bridge to greater affordability, the revisions NFIB worked to secure make the full value of the credit available to more small businesses and extend the duration (originally two years) of the overall credit.

New Paperwork Costs Imposed on Small Business: The cost associated with tax paperwork is the most expensive paperwork burden that the federal government imposes on small business owners. Both bills dramatically increase that cost with a new reporting requirement that is levied on business transactions of more than $600 annually. This new $17 billion "fee" will leave small business buried in paperwork and increase their compliance expenses.

Unprecedented New Payroll Tax on Small Employers: Since its creation, payroll taxes that fund Medicare programs have not been wage-based and have been dedicated specifically to funding Medicare. The Senate bill increases the Medicare payroll tax nearly 1 percent and uses the additional revenue to pay for non-Medicare programs, creating a dangerous precedent of using payroll taxes to pay for future non-Medicare programs.

Limitation on Flexibility for Employers and Employees: Small business needs the freedom and flexibility to preserve options that are already proven. Both bills prohibit the use of HSA, FSA and HRA funds to purchase over-the-counter medications. The bills also place a $2,500 limit on FSA contributions, which diminishes flexibility and further limits the options employers have to provide meaningful healthcare to employees.

Surtax on Job Creation: Seventy-five percent of small businesses are structured as pass-through entities and pay their business taxes at the individual level. As a result, the surtax included in the House bill could hit more than one-third of small businesses employing 20 to 250 employees. Finally, since the tax is not indexed for inflation, its effect will creep downward, making more and more businesses vulnerable to a tax increase.

Benefit Package With a Big Price Tag: NFIB has long voiced concern over establishing a minimum benefit plan that has too high a price tag for small businesses, which are especially price- sensitive when purchasing health insurance. They need flexible coverage options that meet their business needs. It remains to be seen whether Congress will recognize these challenges and adjust the standards outlined in the legislation. One thing is clear: If they do not, what may be affordable this year could be unaffordable next year. As a result, small business owners may have to drop coverage due to cost increases that outpace their healthcare budgets.

New Rating Reforms and Phase-In Timelines: NFIB members have long sought balanced federal rating reforms that protect access and affordability, regardless of individual or group health status or pre-existing condition. But if the rating reforms are too tight, costs will increase more than they will decrease, making coverage unaffordable for the populations that most benefit the insurance pool--the young and the healthy. Independent actuaries have analyzed the rating reforms in the House and Senate bills and have indicated there will be devastating effects to the long-term viability of a pool and overall insurance premium costs without action to correct this rating imbalance. Additionally, rating reforms must be applied to all marketplaces and phased in over a reasonable period of time. Otherwise, changes will have a negative impact on the new exchanges that are meant to improve affordability for small business and individuals. Both of these issues remain unresolved.

National Plans: Leveling the playing field for small business starts with allowing uniform benefit packages to be purchased across state lines. If done right, workers will be more secure changing jobs and moving from state to state because they will be more likely to keep their plan. National plans would be particularly helpful in places with smaller populations and can stimulate private choice and competition. While the Senate bill included national plans, its design creates more disincentives than incentives for insurance companies to participate. Unless national plans are restructured to make them a viable option, these new opportunities will be lost to small businesses.

Government-Run Public Option: A government-run plan can’t compete fairly with the private market, and threatens to destroy it, further limiting choices. We believe that with proper reforms, the private market can be held accountable to provide greater competition and lower-cost solutions where insurers will compete based on their ability to manage, rather than shed risk. Though dropped from the Senate legislation, the public option remains in the House bill. The fate of this provision isn’t clear; but it probably couldn’t survive a second vote in the Senate.

What’s Out

Meaningful Liability Reform: Both bills completely fail to address the need for true liability reform. NFIB strongly supports medical liability reform as a means to both inject more fairness into the medical malpractice legal system, and to reduce unnecessary litigation and legal costs. Taking serious steps to adopt meaningful medical liability reform is a significant step toward restoring common sense to our medical liability litigation system. It also is critical to improving access to healthcare for those living in rural areas, where it is becoming increasingly difficult to locate specialists such as obstetricians and surgeons.

Waiting Periods That Reflect Small Business Realities: Small employers face much higher turnover rates than their large business counterparts. They also face significant challenges related to providing healthcare benefits to their workforces. While the House applies the employer mandate to part-time workers, the Senate bill doesn’t apply reforms to part-timers, but does implement fines of $600 per affected worker for any employer who does not provide healthcare within a 60-day period. In industries with above-average turnover and longer waiting periods (e.g., the restaurant industry has roughly a 75 percent annual turnover rate), and that tend to be dominated by small businesses, these provisions would lead to new costs, fewer full-time workers and less hiring overall. The outcome of these provisions is still under debate.

New Options for Small Employers to Offer Insurance: Small employers need more affordable health insurance options and new opportunities to voluntarily contribute to individually owned plans (see sidebar on page 32 outlining a new NFIB-endorsed voucher option). Despite being offered as an amendment to the Senate bill, this bipartisan provision was not included. Similarly, the simple cafeteria plan language in the Senate bill still excludes owners of many pass-through business entities from participating in these arrangements. If owners can’t participate in the plan, they will be less likely to provide insurance to their workforce. This is critical for small employers who are looking for options that meet their needs and those of their workforce.

True Tax Equity for the Self-Employed: Currently, self-employed business owners are unable to deduct their health costs as a business expense when calculating their self-employment tax. Unlike other businesses, the self-employed pay an additional 15.3 percent self-employment tax on these costs. This means a self-employed individual paying $7,000 annually for health insurance is also paying $1,071 in extra self-employment taxes because he or she can’t deduct these expenses when calculating his or her taxes, adding to the already high cost of health coverage. Despite efforts to add this change to the Senate bill, it was not accepted. NFIB will continue to fight with other partners throughout the self-employed community to address this issue.

What’s Next

After both the House and Senate pass legislation, the two versions are merged together in a "conference." Once that revised legislation is approved by both chambers, it will be sent to President Obama, who is expected to sign a bill into law.

Following the legislative process, the regulatory process takes center stage. During this time, the legislation is translated into the rules and regulations that will govern the future of healthcare. These must be adopted according to when specific provisions take effect. A timeline for Senate- and House-passed revenue provisions is included. Note: The final bill may not include all these provisions.

2010   

• $2.3 billion annual fee on branded drug manufacturers
• Modification of Section 833 treatment of certain health organizations

2011
   

• W-2 reporting of health benefits
• Prohibit HSA, MSA, FSA, HRA funds for purchase of over-the-counter drugs (except insulin)
• Increase penalty for nonqualified HSA distribution to 20 percent
• Limit FSA to $2,500
• 5.4 percent surtax on single filers earning over $500,000 in adjusted gross income and on couples earning more than $1 million AGI
• $2 billion small business insurance tax (rises later)
• Medical device tax; $2 billion 2011–2017; $3 billion thereafter
• Eliminate deduction for expenses that can be allocated to Medicare Part D subsidy
• 10 percent tax on tanning services

2012

• Require information reporting on payments for transactions over $600 annually
• Small business insurance tax rises to $4 billion

2013   

• Cadillac tax: 40 percent on plans exceeding $8,500 for individuals or $23,000 for families
• Small business health insurance tax rises to $7 billion
• Raise 7.5 percent AGI floor on medical expenses to 10 percent (except for those 65+ and spouses)
• Raise hospital payroll tax on wages and self-employed income over $200,000 for individuals, $250,000 for couples by 0.9 percent; unindexed
• Revenue-related provision; impose fee on insured/self-insured health plans

2014

• Small business health insurance tax rises to $9 billion

2017

• Small business health insurance tax rises to $10 billion
• Raise 7.5 percent AGI floor on medical expenses to 10 percent (including those 65+ and spouses)

2020

• End of revenue-related provision; impose fee on insured/self-insured health plans

The battle for greater access to quality, affordable healthcare is far from over. Regardless of its outcome, it is critical that small business remains engaged in the regulatory process at both the state and federal level where you will have a variety of opportunities to shape the regulations governing comprehensive reform. Stay tuned to NFIB for more details and for the next report on this chapter in healthcare reform.