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If Obama's health plan borrows heavily from Massachusetts' model, how will small business cope?

Cheryl Rumley is confused, frustrated, and worried. "Massachusetts took a huge step forward in demanding that all people have health insurance," says Rumley, owner of Apex Health Care Services in Springfield, Mass., a $1 million provider of at-home care. "But my problem is that they put it all on the backs of employers."

Health insurance sets Rumley back some $10,000 a year, even though only 6 of her 70 employees, a mix of full- and part-time, use it. But her profit margin is just 4%. If more employees sign up, or if premiums rise significantly—hers shot up 25% last year—"I would have to go under," she says. "It's just too much of a burden." If Rumley stopped offering coverage, which she doesn't want to do, she'd be fined $395 per full-time employee each year.

It's too soon to call Massachusetts' three-year-old health-care reform a success or failure. The law requires individuals to have health insurance and businesses with 11 or more full-time employees (or full-time equivalents) to offer it. According to the most recent data from the National Opinion Research Center (NORC), 83% of Massachusetts employers with 11 to 50 employees offered health benefits in 2008, compared to 80% before the reforms. Few employers are paying fines in lieu of offering insurance, and more people are getting coverage.

But questions about the state's experience linger, not least because President Barack Obama is expected to take a nod from the Massachusetts plan in developing his own model. Will employers continue to pay for benefits in a full-blown recession? How can anyone manage skyrocketing costs? Are stingy benefits better than none at all? And, most of all, how well can a single wealthy state—especialy one that, before the reforms, had only a 10% uninsured rate—inform the national debate?

This much is clear: The major issue with Massachusetts' reform is costs. Business owners are willing to shoulder some of the burden, but some are worried about losing their businesses altogether. "When Massachusetts passed the plan, they thought, 'first we'll get universal coverage and then bear down on costs,'" says Jon Gabel, senior fellow at NORC. "Nationally, you have to get cost control initiatives in place before any coverage expansion occurs." He acknowledges that it won't be easy: "Cost control is the third rail of health politics."

Nonetheless, the state is trying to curb costs. Legislators are expected to propose a law later this spring that would change how doctors and hospitals are paid by insurers—a fundamental piece of cost containment, says Jon Kingsdale, executive director of the Commonwealth Health Insurance Connector Authority (known informally as the Commonwealth Connector), a state agency that offers support to residents and businesses looking for health care. "We know small business has felt it's been the victim of runaway health-care costs," says Kingsdale. "But we needed to tackle universal coverage before cost."

The Obama Administration seems to be considering both cost and coverage. "They are really stressing cost control at the outset, and not just expansion of coverage, which we think is a wise move," says Rick Lord, chief executive of lobbying group Associated Industries of Massachusetts. "A short-term gain in coverage doesn't do much if the price keeps going up and more people and employers can't afford it."

Global Advanced Technology in Scituate, Mass., offered benefits to its 15 employees before reform passed in 2006, but contributed less than the 33% of premiums now required. "We have a high co-pay and a $1,000 deductible because we cannot afford to offer the insurance plan any other way," says founder Shirley Young. Expecting costs to rise again next year, she'll be shopping for a new plan. "We're losing, whether it's time or energy or money," she says. She uses an outside agency to manage paperwork and document that she's in compliance. "Of course," she says, "that comes with a fee, too."

The state hopes to help with a purchasing program launched in February by the Commonwealth Connector. The state's small business plans don't necessarily come with lower premiums, but the Connector can offer more options than an entrepreneur would get buying directly from an insurer. Ryan Twomey, co-founder of the $250,000 Dragonis Software, a three-person software development firm in Woburn, Mass., bought insurance through the Connector even though he's not required to offer it. "The state did a good job telling us that there was reform and what our responsibilities were, but they didn't do a good job of telling us what our actual options were," he says. "I had to do quite a bit of digging."

The most frustrating aspect of health reform, Rumley says, is that it hasn't improved the benefits she can provide. She can't afford to offer benefits to her employees' families, for example. "I thought we'd be able to get a decent rate because of the legislation, because with everybody buying, the costs were supposed to moderate. And it's not true," she says. "So I'm buying the cheapest benefits for my staff, which is all I can afford. We can say our staff is insured, but it's hardly any benefits at all."

Return to the BusinessWeek SmallBiz April/May 2009 Table of Contents

Choi is a staff writer for BusinessWeek SmallBiz in New York.

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