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.