Many Small Businesses Won't Survive the Health Care Fix

The simple answer is no. Unless they can improve productivity, out-source or lower costs or lower health care expenditures. One of the three must happen before a small company can hire more people, creating jobs, and continue to offer health insurance.

Business seems in a race these days—to the bottom. Everything is measured by price—not quality. More small firms are still lowering prices in many industries instead of raising them, according to NFIB. If quantity sold is rising very slowly, and many prices are declining, it means that total revenue is also declining. Let’s look at the supply side of the equation. Health care costs are rising, and most analysts agree that the present proposals on Capitol Hill in Washington will do little to bend the health care cost curve downward. Translate that as meaning that health costs will continue to rise, although possibly at a slower rate. For a small firm owner without revenue growth, that is a recipe for shutdown.

And it is not just rising healthcare costs. But rising taxes—higher income taxes for the most successful business owners. But higher excise taxes, property taxes, sales taxes increasingly on services and internet transactions.

And what about higher insurance costs? If this does not make you wonder how many small companies remain in business, it should.

How can productivity be increased? Increase the usage (utilization) of existing capital. That is fine in manufacturing. However it is not so fine in many service industries. Witness the transportation sector. Train rides are getting more expensive (less federal subsidy, newer capital), and airlines have cut flights about as much as possible to raise prices. Maybe productivity is increasing a bit in the latter. But there are rising costs; consumers are about fed up, and fewer on a percentage basis flew this Thanksgiving than last. Passenger railroads and airlines are not capital poor small firms. 

Did unemployment rates over 15 percent in about 20 states have something to do with Thanksgiving tourist flights this year?

It is getting increasingly difficult to out-source services. You cannot outsource an airlines pilot’s job. How about FED-EX deliveries? Or a firm

of bicycle messengers in urban areas? Or the corner gas station and fast-food restaurant? And of course, such establishments are among the least likely to offer health insurance let alone produce excessive profits.

While medical tourism has been occurring for wealthier folks, it has many drawbacks. Older workers and consumers needing long rehabilitation periods (knee, spine surgeries) may not want to be in India or Bangladesh to recover, despite generally comparable facilities with the U.S. Many of these anecdotal surgeries illustrate problems with the U.S. health care system: surgeries resulting from degenerative conditions and aging are sometimes not called illnesses. And obtaining the newest medical devices all over the world—instantly—may not be possible.

If a small employer has stagnant revenue from less consumer spending, and cannot outsource many labor-intensive services, what is he or she to do? Since the fastest rising component of benefit costs is healthcare, the owner who may not want to eliminate healthcare insurance tries to switch to a high deductible policy with a large $2500 family deductible. Difficult for many  lower wage workers: of course. The trap comes if the deductibles are not affordable, and the family income is above Medicaid limits. Yes, you put the deductibles on credit cards—and hope.

Many new startup firms no longer offer health insurance—at least not right away. The have to survive first. What if the proposed health care bills pass? Firms with fewer than 50 employees are likely to be exempt. Where do the new employees of small firms in the 20 employee range secure health insurance? From an specified public option? Perhaps. From Medicaid? Perhaps. From a cooperative bare bones policy partly paid for by the employer, the employee, and government at some level? More likely.

Let’s end on a more promising scenario. Productivity will rise high enough so that small price increases may be possible. Small business revenue and consumer spending will pick up a bit from pent-up demands and a partial recovery in housing. A second stimulus—yes a second one—helps avoid a double dip recession, and 401’Ks gradually return to pre-recession levels.

If the growth of health care costs can be slowed down, and we actually have insurance reform—purchasing policies across states—perhaps small business owners will feel less under constant attack.

And, of course, let’s assume that the large banks finally cooperate, as predicted by Bill Gates and Warren Buffet. And as Russian comedian Yaakov Schmirnoff used to say, “What a great country.”