THANKS TO SKYROCKETING health insurance premiums, health-care reform is at center stage for small-business owners this election season.

“About two-thirds of our [350,000] members say this is the No. 1 issue in the election,” says Michelle Dimarob, manager of legislative affairs for the National Federation of Independent Business, a lobbying group in Washington, D.C.

According to the Menlo Park, Calif.-based Kaiser Family Foundation's 2007 employer benefits survey, the average small employer's portion of health insurance coverage rose 5.5% to $3,992 for single employees and $7,599 for employees with families. And New York human-resources consulting firm Mercer projects small businesses' health-care costs will escalate another 10% next year.

The problem for small-business owners is figuring out which candidate's plan will help provide coverage to employees while alleviating costs — a tough decision considering that John McCain (R., Ariz.) and Barack Obama's (D., Ill.) proposals are so diametrically opposed. “Relative to past campaigns, I don't think we've ever seen the candidates so far apart on the issue of health care,” says Sherry A. Glied, a health policy and management professor at Columbia University's Mailman School of Public Health.

Here's a breakdown of what each candidate proposes and what it could mean for small-business owners:

The Proposals

John McCain: To incite competition among insurance providers, McCain wants to deregulate the insurance market and allow Americans to access health-care plans across state lines. He also wants to eliminate the employer tax exclusion, which would shift more of the health-care burden to employees from employers. To ease these costs, a refundable tax credit ($2,500 for individuals and $5,000 for families per year) would be doled out to those who buy private insurance or buy into an employer-sponsored plan. McCain also wants to allow small employers and individuals to pool their coverage via associations. Lastly, he wants to expand access to high-risk pools, which are typically state-sponsored programs that require insurers to offer health coverage to those with pre-existing conditions or who can't get regular coverage.

Barack Obama: Obama proposes the creation of a national health “exchange” that allows all companies to pool their workers and spread out health risks – and thus, costs — among a wider group. He also backs a “pay or play” business mandate, which requires companies to either purchase health insurance for their full-time employees or pay 6% of their payroll into a national health insurance pool. While Obama says his plan would exclude small businesses from the mandate, he intends to offer a refundable tax credit of up to 50% on premiums paid for employees as an incentive for employers that do provide coverage. He also advocates stricter regulation of insurance companies in order to control costs.

Source: The Small Business & Entrepreneurship Council in Washington, D.C.

The Analysis

So which plan makes the most sense for small businesses? We check in with health-care policy experts from Columbia University, the Economic Policy Institute and the Brookings Institution, as well as small-business advocates.

Obama's plan places more responsibility on businesses to provide health-care coverage for full-time employees, says Jared Bernstein, senior economist at the Economic Policy Institute, a Washington, D.C., think tank. That alone could turn off small-business owners who may not be able to afford coverage for all of their employees or allocate 6% of their payroll into the national pool, he says.

To allay those concerns, Obama proposes to exclude small businesses from these obligations. However, the Illinois senator has yet to provide details and many business owners are unsure if it'll be a good idea even when he does. If the exclusion is limited to, say, companies with fewer than 10 employees, it could actually hinder small-business growth, says Dimarob from the National Federation of Independent Business. Business owners might stay small on purpose just to avoid offering health insurance, she says.

Obama's proposed tax credit, on the other hand, could incentivize employers to offer health insurance to their employees, says Bernstein. “The idea is that if you want to, you can buy into the national exchange or you can provide a private plan that meets the government's muster and you'll get a 50% discount,” he says.

Sen. McCain's proposal could lift a huge burden off small-business owners, says Kristie Darien, executive director of Dallas lobbying group the National Association for the Self-Employed. It would extract companies from the health benefits business and greatly reduce their human resources burden, she says.

But, as with any radical reform, there are hitches. If McCain's plan to eliminate employer tax exclusions goes through, employers would be required to declare what they pay in health benefits on employees' W-2 forms and the employees would start paying income, and possibly Medicare and Social Security taxes, on the employer-paid portion of their premiums.

Those tax hits would offset any benefits that families and individuals would gain from McCain's proposed tax credit, says Bernstein. And taking away the tax exclusion could deter employers from offering any coverage, says Henry J. Aaron, a senior fellow of health-care policy and taxation at the Brookings Institution, a nonprofit public policy organization in Washington, D.C. “Once that big tax break goes, you don't know what will happen,” he says.

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