If Perception Is Reality, Then Obamacare Will Crush Small Business

"Small Businesses have always formed the backbone of the American economy. These entrepreneurial pioneers embody the spirit of possibility, the tireless work ethic, and the simple hope for something better that lies at the heart of the American ideal." – President Obama 

The full implementation of the Patient Protection and Affordable Care Act, also known as Obamacare, is now just six and a half months away. This bill will drastically change the landscape of how we view health care reform by limiting insurers' medical loss ratio, or MLR, to 80% and ensuring that patients receive high quality care when they need it. In addition, it will also require individuals carry health insurance or face a penalty.

The purpose behind the PPACA for President Obama was to increase the quality of care Americans received while also stemming what's been a precipitous rise in medical costs over the past couple of decades. As we've looked at over the past few weeks, there are clearly defined benefits associated with Obamacare and plenty of weaknesses -- as well as unanswered questions.

Perhaps the biggest question of all is what Obamacare will do to the small businesses that President Obama has fought so vigilantly to protect during his presidency.


President Obama at the Famous 4th Street Deli in Philadephia. Source: White House on Flickr

If perception is reality, we're in deep trouble
In a Gallup poll released last Friday, 603 small business owners gave their views to the research agency on various topics such as their overall perception of the PPACA, the PPACA's impact on the quality of health care received, and their health care costs as a business. Needless to say, the results were very disappointing:

Poll question

Good for your business

Bad for your business

Have no impact on your business

Small Business owners' perception of PPACA

9%

48%

39%

Poll Question

Improve it

Reduce it

Have no impact

Perception of PPACA's impact on health care quality

13%

52%

30%

Poll Question

Lower costs

Raise costs

Have no impact

Perception of PPACA's impact on health care costs

5%

55%

37%

Source: Gallup.

Less than one in 10 small business owners view Obamacare as beneficial to their business, with more than five times as many business owners expecting it to be bad for business. An overwhelming majority of small business owners also anticipate that the quality of health care they currently receive and/or offer employees will decline. But, the most disappointing statistic here -- since the PPACA is meant to curb the rising inflationary costs of medical care – is that 11 times as many small business owners expect their health care costs to rise as those who expect costs to fall.

You might roll your eyes at these figures since large corporations tend to dominate the public view in America. Yet, according to the U.S. Small Business Administration, more than half of all nonfarm GDP in the U.S. comes from small businesses, and small business comprises 99.7% of all employers. When small business speaks, we as investors should be listening -- and what they're telling us with this poll isn't good.

Who it could hurt?
This poll would obviously be bad news for health insurance providers like WellPoint (NYSE: WLP  ) and CIGNA (NYSE: CI  ) , which cater to small businesses.

Both companies have made big purchases in order to diversify their health-benefit offerings to Medicaid participants (WellPoint buying AMERIGROUP and CIGNA buying HealthSpring). Under Obamacare, some 16 million previously uninsured people should fall under the subsidized government plan known as Medicaid, and WellPoint and CIGNA are poised to capitalize on that trend.

Conversely, though, poor perception of the expected benefits of this law and the prospect of higher costs could cause an estimated 6 million people to simply pay the penalty than buy into the reformed health care system under Obamacare. WellPoint and CIGNA are counting on new members to drive growth with their MLR capped at 80%, so any negative view that puts rising costs or lower quality of care in the spotlight could harm that movement.

I'd suspect this is also proof in the pudding that small medical device companies may struggle. Take Hansen Medical (NASDAQ: HNSN  ) as a perfect example. Hansen -- a medical device company that developed and sells the Sensei Robotic Catheter system and has but 160 employees -- is still in the process of increasing physician awareness of its product and isn't currently profitable. Yet, it'll still need to contend with the medical device excise tax, which will require it to pay 2.3% off top-line revenue to help pay for the Medicaid expansion under Obamacare. Also, if health care costs do head higher, as this poll suggests, it could constrain the company's expansion efforts when it's needed most.

But wait -- it gets even scarier
The final question in the Gallup poll was possibly the scariest of all: "Have you done any of the following in response to the Affordable Care Act, or Obamacare, or not?"

Question

% Yes

Held off on plans to hire new employees

41%

Pulled back on plans to grow your business

38%

Considered dropping health insurance coverage for your employees

24%

Reduced the number of employees you have at your business

19%

Reduced the hours of employees to part-time

18%

Source: Gallup.

This poll actually adds fuel to the fire that America may be indeed become a nation of part-time workers. As I noted three weeks ago, the effects of the PPACA are being felt in both large and small businesses throughout a number of sectors. Regal Entertainment (NYSE: RGC  ) , the largest movie theater chain in the U.S., cut thousands of workers' hours below the 30-hour minimum threshold in order to ensure that it wouldn't have to provide them with health care coverage. The restaurant sector has also seen a similar shift with Darden Restaurants (NYSE: DRI  ) paring back its workers' hours in order to avoid the higher costs of either providing coverage, or paying the penalty for not providing coverage for full-time employees. Small business leaders would love to do what's right and provide coverage for their employees; but if it means the survival of the business, we could see hours cutbacks become the norm.

More so, the fact that 41% of those small business owners polled held off on hiring and 38% pushed back expansion are the scariest facts of all. Small business growth is one of the major factors what drives the U.S. economy, and weakness here could harm a number of sectors, including banks. According to Biz2Credit -- which compiles a monthly index to track loan approval rates for small business by the nation's largest lending institution -- 16.8% of all loans in April were approved by big lending institutions. This means that if small businesses push growth plans back, they'll be limiting loan growth for big banks, but they'll also really hurt the remaining 83% of loans that go to smaller institutions that rely on small business activity to stimulate their own growth.

Plenty of questions still unanswered
If anything, it's clear that all we know is that we really don't know a lot about how Obamacare will ultimately affect the economy. We've certainly seen a handful of polls that would suggest Obamacare will have a positive effect on the health care sector, and there are certainly numerous tax breaks built into the PPACA designed to ensure that small businesses don't see growth stymie because of its implementation. However, we've also been offered plenty of skepticism from polls such as this one which demonstrate a lack of faith in the system as we barrel toward its Jan. 1 implementation date. It's still really anyone's guess if this bill will be a net positive for the American public.

Obamacare will undoubtedly have far-reaching effects. The Motley Fool's new free report, "Everything You Need to Know About Obamacare," lets you know how your health insurance, your taxes, and your portfolio will be affected. Click here to read more. 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 17, 2013, at 4:38 PM, milfalcon wrote:

    Did the poll ask respondents basic questions about how Obamacare works to determine if they are basing their opinions and actions on actual knowledge or someone's talking points (good or bad from our hyper-politicized reality)? That would be useful to know.

  • Report this Comment On May 17, 2013, at 5:36 PM, TMFUltraLong wrote:

    milfalcon,

    That would certainly be good to know as I highlighted a similar point recently that most people simply don't understand this bill.

    http://www.fool.com/investing/general/2013/05/03/6-incredibl...

    Fool on,

    Sean

  • Report this Comment On May 17, 2013, at 6:05 PM, TMFCrocoStimpy wrote:

    Sean,

    I was just about to ask the same question as milfalcon - you stress that these polls are based on small business owners perception of Obamacare, but the reality of what the bill ultimately will do is still shrouded in mystery. I definitely agree that the last question is the scariest, because if there is a substantial amount of action being taken by business that is/is not backed up by reality, the whole economic picture could get distorted unnecessarily. At this stage I'd like to see the implementation a done deal since it is inevitable, and let the reality of the law(s) displace perception.

    Xander

  • Report this Comment On May 17, 2013, at 11:49 PM, seattle1115 wrote:

    Wait - you mean month after month after month of relentless propaganda and constant bald-faced lies ("death panels," anyone?) might lead to distorted perceptions? You don't say. This is my shocked face: 0_0

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