Health care reform is now the law of the land, and the rollout has begun. If the law stands without major revision, only time will tell how it ultimately affects health care costs, coverage, and quality. Like everyone else, I have my own thoughts, but opinion and forecast must give way to reality. Congressional Budget Office and Centers for Medicare & Medicaid Services scores prepared before the reform legislation passed are now museum pieces. Without a doubt, however, the new law radically alters the environment for small business, and some firms will struggle to survive the changes.
The new law complicates small firms’ administrative burdens, their access to capital, and their capacity to estimate input costs. Few of the smallest firms have human resources, accounting, or legal departments to help them adapt. Hence, they rely heavily on outside advisors: brokers, CPAs, attorneys, and others. Time will also tell whether this network of outside advisors is up to the task at a price that small businesses can afford. If not, this shortcoming will have serious macroeconomic ramifications given the immense role that small business plays in job creation.
Like all firms, small businesses will face a heavy dose of new reporting requirements. But again, most will do so without the benefit of specialized departments to handle the load. The best example concerns Internal Revenue Service Form 1099. At present, if a firm pays $600 or more for services from an unincorporated vendor in a year, it must mail the vendor and the IRS a Form 1099. At present, purchases from corporations are exempt from this requirement; in 2012, the new law drops the exemption.
So, if Sue’s Flower Shop pays $25 for supplies from two locations of a chain hardware store every other week ($25 x 26 = $650), Sue has to obtain a taxpayer ID number, aggregate her purchases over a year, and mail the store and the IRS the 1099. But what if the hardware store fails to send her their taxpayer ID? What if the ID number is typed incorrectly? If the two locations are franchises, are they still considered part of the same corporation? How much time must she devote to tracking down this information from her many vendors? How difficult will it be to aggregate hundreds, even thousands of payments each year by vendor? Who is at risk when errors are made? These and hundreds of other questions will be subject to years of regulation writing, interpretation, education, and enforcement. Those who have not worked in a small business may not adequately understand how disruptive and expensive these microscopic reporting requirements will be.
The new law also exacerbates the difficulty that small firms are encountering in accessing credit. Small firms have relied heavily on real property equity for collateral, and much of that equity has been consumed by declining property values. Beginning in 2013, individual filers earning more than $200,000, and joint filers earning more than $250,000, will be subject to an additional 3.8 percent tax on investment income (such as dividends from the business or gains on the sale of capital assets). This additional tax will induce an indeterminate number of potential investors to place their capital elsewhere.
The new health insurance exchanges will offer firms opportunities and risks. Their subsidy structures are complex and, in a number of ways, will make it difficult to predict the cost of labor inputs. Here’s an example: When a firm goes from 50 to 51 employees, it runs up against the law’s employer mandate and its arcane rules. Suppose a firm with 80 employees does not offer health insurance but instead sends its employees into the new health insurance exchanges to purchase coverage. As long as none of the employees’ household income falls below 400 percent of the federal poverty level, the company incurs no fines. Now suppose one employee’s wife loses her job at another firm, so the family’s combined income drops below that roughly $88,000 mark. At that moment, the company incurs a $100,000-per-year fine ($2,000 x 50 of the 80 employees). This employer’s annual profit will now depend heavily on the employment and wage decisions of some other firm and on whether an employee is married. (The potential employee privacy issues are troubling. In effect, your employer now gains the right and need to know personal information about your family status and your spouse’s income.) One way for a firm to avoid these complications is to simply avoid growing past the 50-employee mark—not a useful incentive for hiring given today’s high unemployment.
The 1099, the payroll and investment taxes, and the subsidy structure are only a few of the myriad complications that the health care law brings to the life of a small-business owner. Notice that the potentially disruptive changes described here have little or nothing to do with improving health care or business efficiency. At the very least, small businesses will need a whole new information infrastructure to deal with all of these issues. For some, the cost will be too much; they and the jobs that they provide will simply be lost.
Finally, it’s worth noting that many physician offices, laboratories, and other health care providers are themselves small businesses. The increase in administration, taxation, and uncertainty will affect these businesses as well. Like other small businesses, some will not survive the changes. And that will occur at the very moment that an estimated 30 million people gain health insurance and, hence, access to health care. Supply-side constraints could push costs upward; for small businesses, high costs were the problem in the first place.
Small businesses can be fragile things. For many of our least advantaged residents, they are the entry point into the American economy. These firms will be severely tested as the new health reform law unfurls.