The Negative Impact of the Affordable Care Act on Small Employers and their Employees

February 07, 2017

by Devon M. Herrick, Ph.D.

Chairman Chabot, Ranking Member Velázquez, and members of the committee, thank you for the opportunity to submit written comments about the impact of the Affordable Care Act (ACA) on small businesses and their employees. I am Devon Herrick, a senior fellow at the National Center for Policy Analysis. We are a nonprofit, nonpartisan public policy research organization dedicated to developing and promoting private alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector.

The Patient Protection and Affordable Care Act (ACA) inhibits the growth of small businesses by raising the cost of growing beyond a certain size. This is more pronounced for firms employing low-skilled workers. The ACA’s employer mandate requires firms employing more than 49 workers to offer health coverage that includes an essential benefit package or pay a fine. The fine is $2,000 per worker beginning with the 31st worker. For firms that do not offer health benefits, this means the marginal cost of hiring the 50th worker is $40,000 in penalties on top of compensation costs for the 50th worker [(50 – 30) x $2,000]. Thus, small firms that employ less than 50 workers are unlikely to expand beyond 49 workers — especially if their workers are modest wage earners.

As a 2015 New York Times article illustrated, this perverse incentive is hardly theoretical. The Times piece highlighted the dilemma of LaRonda Hunter, a hair salon entrepreneur from Fort Worth, Texas. Ms. Hunter owns four Fantastic Sam’s hair salons and would like to open more. However, at 45 workers, opening another salon (employing, say, an addition 11 or 12 workers) would push her number of employees past the threshold where she would have to begin offering health benefits or pay a fine. This is something she claims would wipe out her profits and the salary she pays herself.

The men and women who work for Ms. Hunter could be described as mostly lower-paid workers, most of whom presumably feel they cannot afford to spend, say, $4,000 per year on health coverage. Health coverage through work is not merely a cost of doing business as some would have you believe. Health coverage is a noncash component of employees’ total compensation. Absent the ACA, Hunter would be largely unaffected whether or not her workers would collectively trade $4,000 in pretax wages for $4,000 worth of health coverage. The problem is: Her workers are not indifferent to whether she pays them less cash and buys them health insurance. Her workers presumably would quit and seek work elsewhere if she ratcheted down their compensation and provided the health coverage the ACA requires. She could even run afoul of minimum wage laws if she paid her workers less so she could provide $2 per hour worth of health benefits. Stated another way, employers don’t pay for health benefits, workers do. To the extent employers are required to offer mandated benefits that workers are unwilling to pay for, the difference is a tax on labor that inhibits job creation. Even if workers are willing to pay, they may be unable to pay.

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