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What is the Patient Protection and Affordable Care Act (PPACA) and How Will it Impact Small Businesses and Job Growth in the Economy? Rising healthcare costs and the vast amount of uninsured amplified the need for reform of the United States healthcare system. According to the Department of Health and Human Services (DHHS), between 1996 and 2006 premiums for single coverage increased 107 percent and premiums for family coverage rose 130 percent. In the meantime, the number of uninsured individuals in the U.S. grew from 39 million in 1999 to 46 million in 2007 (Gravelle 3). As a result, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA) which aims to provide health insurance to all Americans regardless of their ability to pay. The Act imposes many new regulations on employers and introduces financial penalties for failure to comply. In the face of these new healthcare mandates created by the PPACA, small businesses must begin to make employee healthcare coverage choices which may have a major impact on job growth and the economy. Some of the key provisions of PPACA in relation to small businesses include a tax credit up to 35% for small, low-wage businesses that pay for 50% or more of their employees premiums. A small, low wage-business is one that has 25 or less full time equivalent (FTE) employees with average salaries under $50,000. Because this is a sliding scale credit, employers with 10 or fewer FTE employees with average salaries of under $25,000 will receive the maximum credit. The credit is phased down as the number of employees grows and the average wage rises. In addition, employers with 50-200 employees will face a new pay-or-play provision, wherein the employer can choose to either offer coverage or pay a penalty if one or more of their employees receives subsidized coverage in the newly implemented healthcare exchange (Demause 2). Given that small businesses generate most new jobs, a breakdown in reducing healthcare cost plays a major role in strengthening the economy.

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Small businesses are an important source of job growth in the U.S. According to the data from an ADP Employment Report, since January of 2001 firms having one to 49 employees have on average contributed 33 percent of monthly employment growth, while those with 50 to 499 employees contributed 50 percent. Depending on ones definition of small, the average ranges from 33 to 83 percent. Cutting the data slightly differently, since January of 2001, the smallest category (one to 49 employees) was responsible for 36 percent of cumulative job growth, while the group of somewhat larger firms (50 to 499) is credited with 44 percent (3). By any metric, small business hiring is crucial to the labor market and U.S. economy. Small firms account for 87 percent of net job creating to support the recovery of the economy thus far (Holtz-Eakin, and Ramlet 4). Substantial new costs that curtail this hiring should be of great concern due to the potential impact on the economy. While the PPACAs objective was to make healthcare coverage more available and affordable for small businesses, research shows that PPACA will do little to ease the financial burden of providing healthcare to employees of small businesses (The Economic Effects of Healthcare). One reason is small businesses that employ less than 50 people may decide not to grow their workforce merely to stay below the 50 employees to avoid the mandate. This intervention in the labor market creates a permanent disincentive against business growth. If a 50-employee small business that did not offer health insurance wanted to expand by merely adding one new employee, they would become subject to the employer requirements of the law. So it is actually in the business interest not to hire an additional employee, lest they be hit with thousands of dollars in fines. For a fraction of that money, the business could hire a part-time employee or independent contractors to perform tasks, rather than grow the business by adding

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an employee (Gravelle 7). With fewer incentives for entrepreneurs to grow their businesses, hiring and productivity gains in the U.S. will be negatively impacted. Furthermore, if small businesses don't expand, the lower expansion and growth will trickle down to lower hiring rates and GDP growth. The Congressional Budget Office (CBO) estimates that the legislation, on net, will reduce the amount of labor used in the economy by a small amountroughly half a percentprimarily by reducing the amount of labor that workers choose to supply, which is more than 788,470 employees. Another independent estimate predicted the overhaul will destroy a total of 120,000 to 700,000 jobs by 2019 (Barnes and Terrell 337). This is a massive number of future jobs and future workers that will be effectively sidelined because of the health reform legislation. With more than 14 million Americans out of work today, the economy cannot afford to lose more jobs. According to a 2009 simulation study completed by the National Federation of Independent Business (NFIB) Research Foundation, it is projected that between 2009 and 2013 over 1.6 million jobs will be lost as a consequence of the employer mandate. These job losses will result from business closings and contractions, which leads to lay-offs and the elimination of positions along with reductions in employee compensation. The overall impact on small business employment was severe, with 65.9 percent of jobs lost (1.1 million jobs) at firms with fewer than 500 employees; 55.0 percent (888,000 jobs) at firms with fewer than 100 employees; and 28.9 percent (467,000 jobs) at firms with fewer than 20 employees (12). In addition, the NFIB study showed that in cumulative job losses over time, the small business size group experiencing the most job losses is employers with 20 to 99 employees. Businesses in this category were forecasted to do away with approximately 421,000 jobs between 2009 and 2013. Businesses with 100 to 499 employees are expected to lose roughly

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175,000 jobs which accounts for the second largest number of job losses. The remaining business size groups which include companies with one to four, five to nine, or 10 to 19 employees were each forecasted to lose between 141,000 and 174,000 jobs (15). Another major factor is the role that small business innovation plays in the growth of U.S economy. Companies that innovate, create, and develop life-saving, life-improving devices are likely to lose jobs under the PPACA mandate. Manufacturers of medical devices are concerned because of a provision of the law that levies a $20 billion excise tax on their industry (Baicker and Levy 13). The Boston Globe reported that the 2.3 percent excise tax on companies that supply medical devices like heart defibrillators and surgical tools to hospitals, health centers and ambulance services, will force industry leaders to lay off workers and curb the research and development of new medical tools. One manufacturing company CEO said the new tax threatens his business sustainability because it has relegated his companys profitability to merely a break-even position (What Healthcare Reform Means). One final cause for concern is the impact the healthcare mandate has on employer cost and employee income. Since PPACA requires small businesses to provide healthcare or pay the penalty, even with the tax credits most small businesses will be forced to lower wages to absorb costs. Many small businesses will have an incentive to avoid increases in the average rate of pay for their company. For example, if the average wage in a small (3 worker) company is $25,000 and the owner decides to add a more highly paid supervisor at $50,000 the average wages in the company will increase to $31,250 thereby reducing the tax credit per worker from $2,100 to $1,596. As a result, the structure of the tax credit raises the cost of adding an employee in the leadership capacity. Based on this example, it is clear that the structure of the credit can impose large effective tax rates on raising the quality of the labor force for those receiving the

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small business credit. Similar incentives affect the decision to hire additional workers because the overall tax credit falls by 6.7 percent for each additional employee beyond 10 workers. This is a very strong disincentive to expanding the size of the firm (Bernstein and Gould 5). When it is not possible to reduce wages, employers may respond in other ways by outsourcing work and relying on placement agencies for temporary help. Workers may also be moved into part-time jobs where healthcare mandates will not apply. With workers ultimately feeling the impact of taxes and fines, many minimum wage employees will likely face unemployment if their small business employers cannot afford to provide healthcare insurance (Barnes and Terrell 10). Small businesses are now faced with healthcare coverage decisions that have a substantial impact on economic growth. Instead of lowering healthcare costs for small businesses, PPACA mandates will ultimately increase costs and disrupt the labor market by providing an incentive for small employers to not expand their businesses and hire additional employees. As a result, millions of jobs may be lost. As a critical source of innovation and growth in our economy, small businesses need healthcare reforms that reduce employer cost and promote expansion and growth.

Works Cited

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Baicker, Katherine, and Helen Levy. "Employer Health Insurance Mandates and the Risk of Unemployment." Risk Management & Insurance Review 11.1 (2008): 109-132. Business Source Complete. EBSCO. Web. 3 Dec. 2010. Barnes, Stephen, and Dek Terrell. "The Impact of the Labor Market on Health Insurance." Journal of Labor Research 30.4 (2009): 328-339. Business Source Complete. EBSCO. Web. 4 Dec. 2010. Bernstein, Jared, and Elise Gould. "Comment on Employer Health Insurance Mandates and the Risk of Unemployment." Risk Management & Insurance Review 11.1 (2008): 133-139. Business Source Complete. EBSCO. Web. 17 Nov. 2010. Chow, Michael, and Bruce Phillips. " Small Business Effects of a National Employer Healthcare Mandate. NFIB Research Foundation, 26 January 2009. Web. 4 Dec. 2010. < http://www.nfib.com/Portals/0/PDF/.../ NFIBStudy_HealthcareMandate.pdf>. DeMause, Neil. "What Health Care Reform Means for Your Small Business - Mar. 22, 2010." CNNMoney.com. CNN.com, 22 Mar. 2010. Web. 21 Oct. 2010. <http://money.cnn.com/2010/03/22/smallbusiness/small_business_health_reform/ >. Gravelle, Jane. Health Reform and Small Business. Congressional Research Service, 8 April 2010. Web. 4 Dec. 2010. <http:// www.austin-chamber.org/.../ HealthReform_SmBus-CongResearch.pdf>. Holtz-Eakin, Douglas and Michael Ramlet. The Patient Protection and Affordable Care Act: Will Small Business Need Protection from Its Cost? American Action Forum, July 2010. Web. 4 Dec. 2010. http://americanactionforum.org/ archive_key_research. "June 2010 National Employment Report." ADP Employment Report. 30 June 2010. Web. 6 Dec. 2010. <http://www.adpemploymentreport.com/ report_analysis_archive.aspx>. The Economic Effects of Healthcare Reform on Small Businesses and Their Employees. Rep. Executive Office of the President, 25 July 2009. Web. 27 Oct. 2010. <http://www.whitehouse.gov/administration/eop/cea/Health-Care-Reformand-Small-Businesses/>. "What Health Care Reform Means for Small Business | Business Pundit." Business Pundit: Your Daily Dose of Smart Business Opinion. Businesspundit.com, 24 Mar. 2010. Web. 24 Oct. 2010. <http://www.businesspundit.com/what-healthcare-reform-means-for-small-business/>.