Whither Health Care Reform Part I: Health Insurance Coverage for the Nonprofit Sector

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For decades now, the nonprofit sector has been struggling to be taken seriously. Part of that struggle is to be able to provide competitive wage and benefit packages that can attract people to the nonprofit sector on career paths, not simply as temporary way stations to better-paying jobs in the corporate and government sectors. A crucial component of that package is benefits—retirement and health. If policy-makers fail to recognize and address the needs of nonprofit employers and their 12.8 million employees, the damage to the sector will be serious and long lasting.

Nonprofits as Small Businesses and Small Employers
Among the various counts of the uninsured, 30 million according to President Obama’s recent speech to Congress, are a good number of poorly paid people working for nonprofits, particularly the smaller organizations in the U.S.

Remember that 93 percent of 501(c)(3)s had annual revenues in 2007 of less than $1 million; 73.2 percent of filing public charities had revenues below $300,000; 60.8 percent of (c)(3)s actually filing 990s and 78.7 percent of all registered (c)(3)s had revenues less than $100,000. Public charities are predominantly a sector of small and very small employers. What are nonprofits with revenues and assets that low? They’re small businesses—except that their missions are public service, not profit, their deliverables measured in people helped and communities uplifted.

For for-profit and nonprofit small employers alike, providing and affording health care coverage has become the number one challenge.

Among all business firms, small business employers have the most difficulty providing and affording health care coverage, based on the findings of the Kaiser Family Foundation’s 2009 survey of 3,188 randomly selected public and private firms with three or more employees. The research shows that when it comes to being able to provide insurance, size matters:

  • Small employers (with 3-9 employees) are the largest group of employers (59.5 percent), yet combined account for only 8.3 percent of all workers—and only 4.8 percent of all workers covered by some sort of health benefits.
  • Midsized employers (with 10-24 workers) represent 23.4 percent of employers, accounting for 9.5 percent of all employees and only 7.1 percent of insured workers.
  • For the largest of all employers (firms with 5,000 or more workers), it’s just the opposite: while only 0.2 percent of employers, the largest employers account for 34.2 percent of all workers and 37.7 percent of covered employers.

How are small employers dealing with health care coverage? Some 98 percent of large firms in the Kaiser survey (employers with more than 200 employees) offered health benefits, but for firms between 3 and 199 workers, only 59 percent provided health benefits (down from 68 percent in 2000); for firms with 10-24 workers, only 72 percent offered health benefits, and for 3-9 workers, only 46 percent (down from 57 percent in 2000).

The Cost and Coverage Challenges Facing Small Nonprofit Employers
Why do so many small employers—and increasing numbers of them—not offer health insurance coverage? No surprise, two-thirds of Kaiser survey respondents say it is the soaring cost of health insurance. Nonprofit employers suffering from constrained charitable and government revenues during a deepening recession are no less cost-challenged in providing benefits, and again, remember that the vast majority of nonprofits are small employers:

  • Less than three-fourths of executives of Illinois arts agencies surveyed in 2005 reported having access to a health insurance plan, though some one-fourth reported that those plans had no value for in their total compensation, presumably meaning that the employers did not contribute to the plans.
  • Only 58.1 percent of nonprofits surveyed in 2006 surveyed by the Idaho Nonprofit Development Center offered health insurance to their full-time employees.
  • Boston Foundation study of Massachusetts nonprofits published in 2009 found only a little over half of nonprofits with budgets of less than $250,000 offered employees health benefits, and they reported paying 20 percent more for single coverage and 22 percent more for family coverage compared to larger nonprofit institutions.

Only 46 percent of the small nonprofits (less than $500,000, apparently budget size) responding to the regular ”soundings” of the Johns Hopkins University Listening Post Project offered health benefits to their employees according to a September 2009 report. Just about all surveyed nonprofits that provided health coverage reported problems with cost. For one-third of the responding nonprofits, insurance costs appear to be rising twice as fast as the national average for all employers.

The Connecticut Association of Nonprofits characterizes the increase for its members’ insurance costs as “astronomical.” A Pittsburgh study of nonprofits revealed an average increase in employer premiums of 34 percent in 2004 alone. According to the Kaiser Family Foundation, average family health insurance premiums in employer-provided policies rose 27 percent between 2004 and 2008 and 119 percent between 1999 and 2008. Nonprofits are being slammed by soaring health insurance costs.

No one should be surprised, then, by the concerns of Listening Post Project survey respondents that they will have to reduce or drop health coverage or shift to part-time (uncovered) workers or, because of increasing insurance costs, limit other wages and benefits paid to employees. The proportion of nonprofit respondents offering no health insurance increased by 62 percent from the Listening Post Project’s 2004 health benefits survey. And those nonprofits continuing to provide health insurance reported passing along escalating health insurance costs to their employees: 46 percent of organizations reported increasing their employees’ share of drug costs in the previous year, 42 percent reported increasing their employees’ insurance premiums; and 41 percent reported increasing their employees’ share of medical services.

Omitting Charities in the Health Care Coverage Debates
Government cannot assume that nonprofits have access to non-governmental charitable revenues that will help them absorb health benefits’ rapidly increasing costs. Plummeting charitable donations and philanthropic grants last year, this year, and next year combined with state and local budget crises leave many nonprofits struggling to maintain their services and programs as they are, with no extra resources to keep up with soaring health insurance costs. Nonprofits will need targeted assistance to effectively participate in and benefit from national health insurance reform.

But the thinking on Capitol Hill and in the White House, addressing the health insurance needs of small businesses, quite often ignores the fact that nonprofits—1.8 million tax-exempt organizations, nearly 1.2 million of them 501(c)(3) public charities—are a significant piece of the nation’s small businesses, employing 10 percent of the workforce, though paying only 8 percent of total wages. In a recent report, the President’s Council of Economic Advisors identified the health insurance problem for small employers clearly: small businesses pay up to 18 percent more than larger firms for the same health insurance policies, a cost penalty that leads the majority of small businesses not to provide coverage for their employees.

But the CEA’s recommended solution? “Small businesses that provide health insurance for their employees would receive a small business tax credit to alleviate their disproportionately higher costs and encourage coverage. The tax credit would be targeted to those firms with employees whose average wages fall below a certain threshold.” It came as a surprise to the CEA when nonprofit leaders convened by the National Council of Nonprofits reminded them that (a) most nonprofits are small employers, and (b) nonprofits cannot benefit from proposals to apply tax credits against firms’ income taxes since nonprofits don’t pay income taxes.

It’s a bit of a head-slapper that after the years of debates about health insurance during the Clinton Administration and now the past year of intense discussion of health reform under the Obama Administration that nonprofits were not on policy-makers’ radar screens. Even Senate Finance Committee chair Max Baucus’s compromise health reform bill initially offered only a small business tax credit benefiting for-profit employers.

Putting Nonprofit Issues and Concerns into Health Reform Legislation
Thanks to the National Council of Nonprofits and a few other nonprofit leadership organizations, nonprofit employers are back in the mix of policy proposals on health coverage. Senators Kerry, Snowe, Cantwell, Lincoln, and Schumer introduced an amendment to the Baucus plan that addressed some of the concerns of nonprofits.

Chairman Baucus’s compromise version of health care reform limits eligibility for the small business tax credit in a way that will cut a large slice of all small employers out of the mix: “A qualified small employer for this purpose generally would be an employer with no more than 25 fulltime equivalent employees (FTEs) employed during the employer‘s taxable year, and whose employees have annual fulltime equivalent wages that average no more than $40,000. However, the full amount of the credit would be available only to an employer with ten or fewer FTEs and whose employees have average annual fulltime equivalent wages from the employer of less than $20,000.” That average FTE wage of $20,000 may be above the minimum wage, but below living wage standards in most places and likely to exclude nonprofits that have tried to offer their employees better compensation than fast food outlets.

The Chairman’s modified mark of September 22nd includes amendment ”C2” that would extend the small business tax credit to 501(c)(3) employers that meet the small business qualifications. Charitable organizations will be eligible to apply the tax credit against the organization’s liability as an employer for payroll taxes. According to a press release from Baucus, “In 2011 and 2012, eligible non-profits could receive a credit for up to 25 percent of their contribution. Once the exchanges are up and running in 2013, qualified non-profits purchasing insurance through the exchanges could receive a tax credit for two years that covers up to 35 percent of the employer’s contribution.” (The ”health insurance exchange” concept is basically a mechanism for employers and employees to do comparison shopping among private health insurance plans).

The actual amendment, however, reads like a limitation: “Phase I is limited to 25” and “Phase II is limited to 35.” What”s the limitation? The 25 percent and 35 percent tax credit levels for nonprofits are lower than the permitted tax credits for small businesses. The Baucus plan for small businesses in 2011 and 2012 is 35 percent and in 2013 as high as 50 percent.

Maybe the Senators justified the lower nonprofit benefit because all eligible nonprofits would benefit from their credit (against an employer’s liability for payroll taxes) unlike all for-profit small businesses (since tax credits are only worthwhile if the business is profitable enough to be paying taxes). But small for-profit businesses have access to the capital markets that nonprofits don’t and have access to low and even interest-free loans from the Small Business Administration that nonprofits do not qualify for. Moreover, because most nonprofits eschew wages like the minimum wage targets for the small business tax credit, a larger portion of small nonprofit employers will find themselves above the $20,000 average FTE wage level for the full credit.

So we’re back to the usual situation, policy development well short of parity for nonprofits. Nonprofit employers get treated like stepchildren of otherwise similarly situated for-profit employers. Given how many nonprofits will be cut out of eligibility because of their commitment to pay something closer to living wages for their staff unlike many minimum wage-oriented small businesses, the Senate has a lot of work to do to make sure that the millions of nonprofit workers working for small nonprofits in this country don’t get unintentionally added to the ranks of the uninsured once health care reform is enacted.

The conclusions for nonprofits are these:

  • As leaders like Tim Delaney of the National Council on Nonprofits, Peter Goldberg of the Alliance for Children and Families, Jon Pratt of the Minnesota Council of Nonprofits, and Lester Salamon of the JHU Listening Post Project consistently remind us, nonprofits have to get to the table to make their needs known to decision-makers. Nonprofits across America cannot wait for members of Congress to keep their interests in mind and to craft policies that work.
  • Nonprofits have to get engaged in the specifics of health care reform. Given skyrocketing costs, health care reform may be a big factor in the future financial health of the nonprofit sector. The current trajectory of cost escalation and coverage cutbacks in the sector is untenable for the health of public charities.
  • As employers without access to major parts of the capital markets for investment, nonprofits, especially smaller nonprofits, need subsidies for their health insurance costs at parity with small business employers. The distinctive value of smaller nonprofits, besides the services they provide throughout the nation, is their function of providing representation of and advocacy for diverse communities. We cannot let this majority part of the nonprofit sector wither because of insufficient, ill-informed, wrong-headed policy decisions by our nation’s leaders.