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:

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 (WLP 0.99%) and CIGNA (CI +0.00%), 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 (HNSN +0.00%) 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?"

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 (DRI 2.89%) 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.