Presidential Debate Puts SMBs Center Stage on Health Insurance

First in a Series: Small businesses were prominently mentioned in the most recent presidential debate and much of the discussion focused on health insurance. Few issues affect small employers more. If any common ground exists between Democrat Barack Obama and Republican John McCain, it's that both recognize the current system is broken.

So it's largely a given that the next presidential administration will tackle health care reform no matter who is elected. At the core of each candidate's plan are proposals to address the disparities in health care coverage that now exist between large and small businesses. But their approaches are radically different -- and complex.

Which one is best for small businesses? It's a subject that is too big for one column. So, over the next couple of weeks, I will examine the problem and explore the alternatives, not only offered by the presidential candidates but also by other groups. But first, understanding how we got into this mess is key to finding our way out.

To understand how we arrived at this point, you have to go back to World War II. At the time, the government imposed wage controls on all businesses to control the cost of the war effort. But it also created a tax exemption for employer-sponsored health insurance, both to encourage employers to offer health insurance and to give them an alternative form of compensation.

While the effort greatly expanded health care insurance for workers, it created a patchwork of insurance plans that were tied to employment. Workers who lose their jobs also lose their employer-subsidized insurance. The current system is also ill equipped to address the skyrocketing cost of health care and increasingly fails to reflect the changing nature of the nation's workforce.

In 1983, almost two-thirds of men in their fifties had spent 10 or more years with the same employer. By 2004, that ratio had fallen to about one-half. Today, as much as a quarter of the workforce changes jobs every year. In addition, the number of workers with alternative working arrangements, such as independent contracting, has increased substantially and now represents about 11 percent of the workforce, with another 17 percent of the workforce classified as part-time, according to Stuart M. Butler, vice president of domestic and economic policy studies at the conservative Heritage Foundation, who testified recently before a House Small Business Committee hearing on health care costs.

These workers lack the close and long-standing links to large firms assumed by the current health coverage system. The result is a two-tiered workplace. "In one, long-serving employees of large firms receive adequate and dependable health care coverage. In the other -- which generally includes workers who are more mobile, part-time, self-employed, or employed by smaller firms -- health care coverage is far less predictable and often more costly," said Butler.

Today the disparity is pronounced. Only 48 percent of firms with 3 to 9 employees, and 73 percent of firms with 10 to 24 employees, offer coverage at all, compared with 98 percent of firms employing 200 or more, according to an annual survey of employers conducted by the Kaiser Family Foundation and the Health Research and Education Trust. Employers who dropped coverage were responsible for almost half the decline in adults with employer-sponsored insurance between 2001 and 2005, according to the group.

When it comes to providing health insurance, small employers are clearly at a disadvantage compared to large employers, according to Linda J. Blumberg, principal research associate at the Urban Institute, a nonpartisan economic and social policy research center, and who also testified at the hearing. At the root of the problem are higher administrative costs, a limited ability to spread health care risk, and a lower wage workforce. All of these problems must be addressed if insurance coverage is to increase significantly among workers in small firms, she noted. But that's not all.

Since regulating the insurance industry traditionally has been a function of state governments, reform must also deal with the patchwork of state regulations that mandate a wide variety of coverage. For example, nine states, including New York, California, and Texas already mandate that as many as 50 benefits be covered, from in vitro fertilization to mental health services to prescription drugs.

Health care reform must also address how to provide affordable coverage for those who are sickest or suffer chronic illnesses compared with those who are healthy. Many states us a "community rating" system to determine coverage. It requires insurers to charge the same premium no matter what the age or health status of the individual. Community ratings are one way to spread risk over the entire insurance pool and prevent insurance companies from "cherry picking" customers, that is, insuring only the healthiest who are least likely to require medical services.

Finally, it must address how to provide coverage for the poor and low-wage workers. On that point, the presidential candidates and both conservative and liberal think tanks agree that some form of government subsidy must be available to cover the cost.

As for the presidential candidates, both would rely on a series of changes in the tax code that support the current system of employer-provided health insurance to help underwrite their plans. And both plans offer advantages.

McCain's is far more radical and ideologically driven. Essentially, he wants to remove employers from the health insurance equation and shift the burden onto individuals, who would buy the insurance they need in the private marketplace. Theoretically, giving consumers more control to shop for health insurance that fits their needs is appealing. But as the current banking crisis shows, broad deregulation can be disastrous.

Obama takes more of a hybrid approach; his plan would be based on traditional employer-sponsored plans and the Federal Employee Health Benefits Program (FEHBP), through which federal employees, including members of Congress, currently get their health insurance. But critics say his plan doesn't contain any mechanism to control the ballooning costs of medical care. In fact, some believe it may dramatically increase costs.

It's obvious that crafting effective reforms will be a difficult task. And it's likely that proposal put forth by both candidates will end up being substantially modified. What separates each plan, and is likely to remain unchanged, is their philosophical approach to the problem. Next week's column will examine that issue.