Tags: obama | health | care | law

Obama's New Health Insurance Law Hammers Small Businesses

Tuesday, 17 Mar 2009 12:17 PM

By David A. Patten

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Business owners are warning that Obama administration efforts to help unemployed workers by subsidizing their COBRA health insurance premiums actually may harm their chances of getting what they need most: a job.

Problematic COBRA regulations attached to the $787 billion stimulus plan now require businesses to “front” the cost for tens of millions in insurance premiums each month for workers who have lost their jobs.

The growing controversy over the new rules may be only the first of many unintended consequences created by the Obama administration as it rapidly expands the size and scope of government.

Small businesses around the country are just starting to wake up to the implications of the new COBRA rules. Sandy Reynolds, executive director of the Associated Industries of Massachusetts, told the Patriot-Ledger newspaper her organization has been “off-the-wall busy” fielding questions about the new system.

On Monday as President Obama rolled out his plans to ease the credit crunch for small businesses, the White House acknowledged the essential role that small business will play in the economic recovery.

It credited small businesses with creating 70 percent of all new jobs, adding that the economic recovery “will be driven in large part by America’s small businesses.”

Yet experts are warning that COBRA regulations intended to ease the burden on vast numbers of unemployed workers will also create more red tape and expenses for the very businesses that are expected to serve as the spawning ground for future U.S. job growth.

“Somehow, during a recession, it doesn’t seem just or fair,” Norma Thompson, manager for a California auto dealership, Folsom Lake Dodge, told the Sacramento Business Journal regarding the new COBRA rules.

The dealership has laid off 50 workers since September and will be on the hook, at least temporarily, for 65 percent of those employees’ health insurance premiums under the new rules.

“The impact on employers who couldn’t afford to keep them on board in the first place is now they have to pay more to the people they fired,” Tom Sher, a San Francisco insurance broker, tells the Journal.

COBRA is the provision that gives most American workers the right to continue their health coverage with their current employer for 18 months after they are laid off. The catch: The employee must pay 100 percent of the premium.

That can be in the neighborhood of $1,000 a month for many employees, which explains why only a fraction ever accept their former employers' offer to enroll in the COBRA program. Instead, they quickly find other work, or enroll in a high-deductible “catastrophic” medical coverage plan.

Only companies with 20 or more employees are required to offer COBRA under federal guidelines. But 40 states offer so-called “mini-COBRA,” which may apply to much smaller businesses.

In an apparently well-intentioned attempt to respond to the nation’s growing unemployment, Democrats and the Obama administration followed the advice of several leading economists and added a provision to the stimulus package to make COBRA far more affordable.

It calls for former employees to contribute just 35 percent of the cost of their COBRA premiums. But the remaining 65 percent of COBRA premiums are making small-business owners increasingly nervous, as the new system’s ramifications become evident.

Initially, the former employers of the laid-off workers are responsible for that other 65 percent. The federal government will reimburse employers for that 65 percent share, in the form of a tax credit deducted from payroll taxes that are due from employers each quarter. Companies will simply deduct the 65 percent owed to the government when they submit their payroll taxes.

That might appear to be a win-win proposition. The early rumblings from the small-business community, however, suggest that it may hurt workers’ chances of finding new employment, by discouraging businesses from hiring.

That’s because businesses will hire new workers knowing they may be required to pay 65 percent of workers’ health-insurance premiums, if they have to lay off the workers later. And the fact that the government will reimburse the 65 percent eventually isn’t sweetening the bitter medicine as much as the administration had no doubt expected.

Bill Randell, CEO and president of Advantage Benefits Group Inc., a Worcester, Mass., a firm that advises employers on insurance, tells Newsmax there are a host of potential problems with the revised COBRA regulations. One major objection is that it asks businesses to advance what could be a substantial amount of money at a time when credit is tight and businesses are desperate for capital.

”The truth of the matter is a lot of businesses don’t have the money,” Randell says. “They’re asking businesses to float this money three months in a tight economy already. It’s not conducive to people wanting to hire people. It’s not good for business.”

Companies that advise smaller firms on their health insurance needs say they’re already hearing stories about how some employers will use the federal subsidy to lower their insurance costs – essentially gaming the system to take advantage of government subsidies. Extra costs, they say, will inevitably shift from employers to the taxpayers, who probably don’t want to pay others’ insurance premiums.

“When you know there’s a 65 percent subsidy out there, I’m sorry, people are going to try to find a way to manipulate the system,” Randell says. “That’s just the way it is. That’s the reality of it.

Other issues that may arise from the program include:

  • In many companies, laid-off workers will enjoy lower insurance premiums — because of the government subsidy — than workers who are still on the payroll. “A lot of companies are doing a 50-50 split right now,” Randell says. “So I say to you, ‘Hey you stay with the company, you’re working hard. You’re going to pay 50 percent of your health insurance premium to me each month.’ Meanwhile, to the guy I laid off, I say to him ‘You’re going to pay 35 percent of your health insurance each month.’ It’s kinda crazy, it really is.”

  • The new COBRA hits hardest those firms that are struggling the most. It is backdated to Sept. 1, 2008. So if you laid off 10 workers that month because you were barely able to make payroll, and each of them has a $1,000 monthly health insurance premium, your monthly overhead would increase $6,500 – at least until you receive reimbursement. That does not include the additional paperwork and administrative costs.

  • Paperwork and administrative costs associated with the program will increase “tenfold,” Randell predicts. The reason is simple: With premium costs plunging to 35 percent, many more employees are expected to opt for the coverage. The employer will be expected to contact the employee to collect their 35 percent portion of the premium each month. That may be a small issue for major employers, it could eat up precious time for mom-and-pop stores. “For small businesses that don’t have a dedicated HR department,” says Randell, “it’s a burden. It’s that much more paperwork. They’ve got to track down employees each month, they’ve got to collect money from you each month. Any small business will tell you it’s a pain.” Also, the program requires an additional tax report to be filed with the IRS.

  • Small firms that employ a limited number of people will be tempted to game the system. A business run by a husband and wife may “lay off” a spouse, thereby cutting the spouse’s insurance cost by 65 percent. Taxpayers would underwrite that discount.

  • Some small firms will save money by taking employees off the books. A firm paying $500 to $1,000 per month for an employee’s insurance might let the employee go. “That way you’ll get 65 percent of your health insurance paid, and you can go collect [unemployment compensation], and between you and me, I’ll pay you some cash for a few hours a week.’ I mean, that’s happening,” Randell says.

  • State COBRA plans may exacerbate market distortions. Massachusetts officials, for example, are planning to add their state plan to the federal COBRA subsidy of 65 percent. This will reduce insurance costs for unemployed workers to just 7 percent of premiums – far less than ordinary workers.

  • The federal subsidy is supposed to last for only nine months of unemployment. But with reports filed on a quarterly basis, it may be difficult to track if a worker remains on the program beyond nine months. “The government may say the subsidy only lasts 9 months but I can easily see people collecting it the whole 18 months,” says Randell.

  • Businesses may react to the subsidy by discontinuing their voluntary efforts to aid workers. For example, many companies now pay laid-off employees’ COBRA premiums for a few months to help ease the transition for jobless workers. With the government now picking up 65 percent of the tab, they may no longer find that an economically rational practice – again, thereby shifting more of the healthcare cost to taxpayers.

  • Companies with seasonal hiring patterns may be affected disproportionately. In the Northeast, for example, there’s not much work for pavers, painters, and landscapers in the winter. Companies in those sectors could face a deluge of COBRA premiums on a seasonal basis, which at the very least will wreak havoc with cash flows.

  • Also, some firms could actually accumulate more tax credits than they would owe in payroll taxes. How long it would take them to receive a reimbursement from the federal government for the additional amount is unknown. There is a special form they must complete to request the refund.

    Randell, who has authored several articles on the topic, says he sympathizes with the premise of reducing COBRA premiums to help droves of displaced workers. It’s just the reality of the economic impact that has him gravely worried.

    “It’s a slippery slope toward universal health insurance, in my opinion,” he says. “Before you know it, they’re going to pay everyone’s health insurance.”

    Reynolds, the employer-group administrator whose phones have been ringing off the hook, worries businesses could be affected seriously.

    “There could be quite a few months where a significant amount of cash could be tied up,” she told the Patriot-Ledger. “Our biggest concern is the financial obligation … and the administrative burden on companies that are laying people off because of the economy. In a very uncertain economic environment, employers are being asked to do more.”

    And with businesses already wary of the administrative hurdles involved in hiring new employees, Randell predicts it will “absolutely” discourage the hiring of new workers. The COBRA premiums, he says, are “the money they need for capital to make things happen to keep the rest of the people busy.”

    “It’s just one more burden,” Randell tells Newsmax. “On the other side, even if you’re doing well and you’re thinking of hiring someone, you might say, ‘This is one less headache I want. I’m not sure if this guy’s going to be right or not, and if I’m wrong I could own this guy for the next 18 to 36 months trying to get health premiums out of him.’”

    He adds, “I’m really going to think twice before I hire you.”

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