Unbiased Analysis of Today's Healthcare Issues

House Bill excludes small business insurance mandate

Written By: Jason Shafrin - Jul• 30•09

House Democrats have agreed to a health reform bill in the house, but one that would exempt small businesses from having to provide health insurance.  The L.A. Times reports that “The House bill originally exempted small businesses with payrolls of less than $250,000 from the penalty. Under the new proposal, businesses with payrolls of less than $500,000 would be exempt.”  Does exempting small businesses from providing health insurance make sense?

Yes it does.  This blog has reviewed on multiple occasions that small businesses do not have the scale to provide health insurance efficiently.  Forcing them to do so will put them at a competitive disadvantage since health insurance costs per employee are much higher in small businesses than large businesses.

One problem with the rule is that the discrete jump at the $500,000 payroll level will give small businesses a disincentive to grow.  By going from a payroll of $499,999 to a payroll of $500,o00, a small business will incur a huge discrete marginal cost if they must add health insurance to for employee and possibly their family.  

Thus, on a whole, exempting small businesses from insurance mandates is a good idea, but it may stifle businesses from transitioning from being a small to a mid-sized firm.

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3 Comments

  1. Nice post, however we need some basic facts upon which to properly evaluate the situation. Is this Washington, that puts out sound bites that sound good, but are of little consequence?

    First, how many people work for companies whose payroll is less than $500,000 and who do not currently offer health care to their employees? Is it a significantly large number? If it is not, then is there a problem that needs to be solved with massive legislation? If it is a significantly large number and these people are exempted (and I support the economic reasoning) then we need to work on solutions that address the issue. Simply exempting them won’t solve the uninsured problem, it will only shift the cost to society – or leave that cost with society.

    Hence an individual mandate rather than an employer mandate may be more effective in solving this issue — if it is the real problem.

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