A Small Biz Health-Care Headache

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"If you have a $9 an hour person, if you were to supply insurance for them, you would pay as much again in health insurance premiums," says Sheehan. In fact, a bill was already defeated in the Maryland General Assembly on Mar. 13, 2006, that would require all Maryland businesses to pay at least 4.5% of their payroll toward employee health benefits.

In California, a proposed San Francisco ordinance would mandate minimum health benefits for businesses with 20 or more employees. That law would take effect July 1, 2007, though Hauge says he expects a lawsuit to be brought against it.

As an alternative to employer mandated systems, the NFIB and other groups support federal legislation known as the Small Business Health Plan (SBHP) to allow employers to band together across state lines to get a better deal on health insurance for their workers. That bill has so far failed in the Senate (see BusinessWeek.com, 3/16/06, "Fighting Off Health-Care Headaches"). But in states such as California, there is evidence that small business supports this pooling of resources. According to the Small Business California poll, 90% support the creation of purchasing pools to make health care more affordable for small businesses.

The ability to pool their resources could result in significantly lower premiums. Keith Ensminger, co-owner of Merced (Calif.)-based Kramer Translations, which employs just his wife and him, says he pays about $25,000 in health insurance premiums per year under his current coverage. "It doesn't make sense to spend $25,000 for one company when we could pool our resources and pay around $10,000 a year. For me it makes a lot of economic sense to pool," says Ensminger.

Cutting Back

The disputed case in Maryland and the new system in Massachusetts are certain to affect the plans of other states. "You're going to see more state legislatures following the Massachusetts model, using broader revenue sources. State legislatures are continuing to look for ways to move the health-care issue forward, but I do think the defeat of this Wal-Mart bill will dissuade legislators from copying that model," says Gaudio.

Even without employer mandates, many small business owners are cutting back on their employee health-care subsidies. Some have already had to terminate their employee health plans altogether. In 2003, about 41% of the smallest firms of between three and nine employees offered a health plan, according to NFIB, down from about 57% in 2000.

Those small business owners who don't provide insurance for their employees say they simply can't afford to. "My problem with mandated health care at this point in time is that it's unaffordable. It would put me in a position where I'd have to cut employees wages to afford it. I can't offer benefits for someone starting out, with the cost," says Tammy Hnarakis, owner of Precision Small Engines, a nine-employee lawn and garden equipment company based in College Park, Md.

Gangemi is a reporter for BusinessWeek.com in New York.