It's not always easy to be the small fish in a large pond. Consider the field of health insurance -- that's a big business, and it's made for other big businesses. When a large company approaches an insurer, it brings along a large risk pool in the form of its many employees, which makes it easy for the insurer to spread the risk and keep premiums low. Small businesses aren't able to provide that big risk pool, and so they face much higher premiums and insurance costs. The small fish has no bargaining power to keep the big fish from taking it for a ride.
According to the White House, small businesses pay premiums that are 18 percent higher than those of large businesses. Much of this higher cost can be attributed to administrative costs that are three to four times as much as a large company's administrative costs. And there's nothing protecting a small business owner from seeing insurance premiums skyrocket when just one employee gets sick. These high costs and discriminatory measures make it impossible for some small business owners to offer insurance to their employees, which can prove frustrating in the competition for the best and brightest workers.
Small businesses, therefore, had a lot at stake in the recent battle over health care reform. The new Affordable Care Act includes several measures aimed at relieving the financial stress that these small businesses face. Some of the benefits won't be available until 2014 -- that's when the health insurance exchanges will open. These exchanges are designed for businesses that have fewer than 100 employees; when a bunch of these "little fish" get together, they become the equivalent of the big fish that currently has an easier time procuring affordable insurance. Insurers who take part on the exchange will be compelled to offer competitive plans to stay in business, but regulations in the new legislation ensure that the plans won't be second-rate. This new insurance system will cut those high administrative costs that small business owners are up against, and new regulations will also prohibit insurers from jacking up the costs of a group premium when one person gets sick.
Some benefits, though, are available now. On the next page, we'll take a look at the new tax credits for small businesses that provide health insurance.