States' Health Plans
May Aid Small Firms

By KELLY K. SPORS

Wall Street Journal
April 9, 2007; Page A2

As states look to shrink the swelling ranks of those without health insurance, the crucial test for one approach gaining favor with policy makers is likely to be its impact on small business.

Massachusetts and Vermont are gearing up to introduce programs this year that require employers either to provide health benefits to their workers or make annual payments to help cover the uninsured. The governors of California, Pennsylvania and Illinois have proposed similar plans, and others are percolating in the legislatures of several other states.

Among the loudest critics of so-called pay-or-play requirements are business groups, which say the added cost would hurt legions of small businesses, ultimately forcing them to raise prices or lay off workers. But a closer look suggests that while some small businesses might be squeezed, a great number would be exempt from the rules. And many businesses and self-employed workers could even benefit by dropping their current health plans and picking up cheaper coverage through state-sponsored programs.

"The new reforms actually help small business a lot more than hurt them," said Stuart Altman, dean of the Heller School for Social Policy and Management at Brandeis University, in Waltham, Mass. Companies "that don't have insurance often don't have it because it's too expensive," he said. "This gives them another option."

California Gov. Arnold Schwarzenegger's health-insurance proposal would force businesses to buy health insurance for their workers or pay a sum equal to 4% of their payroll into a fund that would subsidize the state's cost of providing care for the uninsured. The proposed requirements would fall hardest on those who employ large numbers of minimum-wage workers who lack health insurance. Tony Palermo, owner of Tony P's Dockside Grill, a waterfront restaurant in Marina del Rey, Calif., said he can't afford to insure his workers and estimates it would cost him $48,000 a year under the Schwarzenegger plan to "opt out" by paying into the proposed state fund. He said his restaurant, which has about 90 employees, weathered the recent $1.25-an-hour increase in California's minimum wage by raising menu prices to cover the estimated $60,000-a-year cost of the increase. "There's only so much you can raise menu prices," he said.

Others small-business operators in California say the governor's proposal wouldn't have much effect on them. For one thing, the rules typically wouldn't apply to the smallest employers. Gov. Schwarzenegger's proposal would exempt businesses with 10 or fewer workers. That includes about 80% of all employers in the state, according to the Small Business Administration's Office of Advocacy.

The Massachusetts plan and Illinois Gov. Rod Blagojevich's proposal exempt businesses with fewer than 11 employees, while Pennsylvania Gov. Ed Rendell's plan -- introduced in January -- would exempt businesses with 50 or fewer workers. Vermont's program, scheduled to take effect Oct. 1, exempts businesses with eight or fewer employees in the first year.

Health insurance is already the norm for most small businesses that wouldn't be exempt. A 2006 survey by the Kaiser Family Foundation found that just 47% of firms with three to nine employees offered health insurance, but that jumped to 72% for businesses with 10 to 24 employees and 93% for those with 50 to 199 workers.

GotVMail Communications, a telecommunications provider in Weston, Mass., offers its 30 employees a health-maintenance-organization plan with dental and prescription-drug benefits. The company pays 75% of the premium.

"One of our major initiatives in the next several months is to double our work force," Chief Executive Siamak Taghaddos said. "Especially in the [information-technology] world, benefits are very important."

Some small employers welcome the chance to cut their costs by opting out or buying or lower-priced coverage that will be offered through some of the new state pools.

Opting out would cost $295 per employee under Massachusetts's plan, though employers could end up paying more if an employee racks up more than $50,000 in medical bills. Under Gov. Schwarzenegger's proposal, the cost would be about $1,600 for an employee earning $40,000 annually. Pennsylvania's proposal would levy a 3%-of-payroll assessment on employers without health coverage.

Many states' plans also include setting up state insurance programs in which some small businesses could buy insurance at more-affordable rates than they could typically buy in the open market. Massachusetts's Connector program, for instance, would let businesses with 50 or fewer workers offer coverage to them for less than $300 a month.

In each case, the cost of buying health insurance through conventional channels would be substantially higher, usually running $11,500 a year to cover a family of four. Individual coverage costs roughly $4,200, according to the Kaiser Family Foundation's annual employer survey.

Critics said that even if employer mandates have a minuscule impact today, they are sure to cost more tomorrow. William Dunkelberg, chief economist for the National Federation of Independent Businesses, predicted that states initially will strive to keep the cost of opting out or buying state-sponsored coverage low to win broad support, and then raise prices in coming years.

Some states' reform proposals also have a not-so-obvious cost to employers. Massachusetts's plan, and the California proposal would force individuals to get insurance, which means that employers who already offer insurance could see previously uninsured workers signing up.

Renee Fraser, owner of Los Angeles marketing firm Fraser Communications, said she supports Gov. Schwarzenegger's efforts to build a state program where employers can buy insurance for less. "If there was a program where I could have my employees insured through the state and it would cost me less, I would do it," she said.

Write to Kelly K. Spors at kelly.spors@wsj.com