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Flying A Gasoline in Orinda, Calif., photographed on Wednesday, May 15, 2013. The business was a honored at the 13th annual Contra Costa County Small Business Awards Luncheon. (Dan Honda/Bay Area News Group)

Ask any small-business owner about the challenges of operating a business and you'll hear that finding and retaining good employees is a struggle. Lacking the scale of much larger firms, competing on employee wages and benefits is frequently a losing proposition, especially when it comes to the increasing costs of health insurance.

One alternative available for decades to small firms is the ability to operate a self-funded employee health plan in which companies pay costs directly.

It requires a significant financial commitment and hands-on management, but small companies can find substantial advantages in building an employee plan that is more tailored to their employees' needs than traditional insurance.

Senate Bill 161, recently passed by California lawmakers and awaiting action by Gov. Jerry Brown, would effectively take this alternative -- and another glimmer of health care hope -- away from many small businesses.

By restricting the ability of small business with less than 50 employees to purchase a financial protection tool for their self-funded plans, known as "stop loss" insurance, this bill will make the risks of self-funding too great and cause workers to lose their health benefits.

To maintain a level playing field for small businesses, Brown should veto this bill.

For small businesses, being unable to offer employees health coverage is more than a question of doing the right thing. It's an important recruitment and retention tool.


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Almost two-thirds of workers say that health benefits are an important driver of their loyalty, and replacing an employee can be very expensive.

Between the cost and lost productivity of the recruitment, hiring and training process, it can cost up to three times the salary of an employee to bring a new worker on board.

If SB161 takes effect, small businesses that currently use self-funding to offer health coverage to their employees will be forced to make a choice that either way will hurt their competitiveness.

They can either stop offering their employees' health coverage, which will increase employee turnover, or they can enroll in a traditional insurance plan, which likely will be less flexible and potentially cost more.

Major backers of SB161 include some of California's largest health insurers, so it is easy to see why they would want to drive small companies into their products.

However, companies with less than 50 employees are not mandated or penalized for not offering health insurance, even under federal health reform. Thus the most likely outcome of the bill is fewer California workers who benefit from employer-provided health coverage.

Backers have also offered flimsy arguments about how self-funding could impact insurance premiums for small businesses under health reform but have offered no evidence that self-funding or stop-loss insurance will influence what others might pay for insurance.

In short, they have failed to articulate any positive benefit resulting from the bill.

What is certain is that SB161 will make it even harder for California's small businesses to offer health coverage to their employees, which in turn will make it difficult to attract and retain qualified employees.

This is exactly the type of law that makes operating a small business in California so difficult: one that offers no tangible benefit but places additional burdens on small businesses already under siege from state regulations, frivolous lawsuits, and red tape.

The last thing small businesses need is a bill such as SB161 that will further hurt their competitiveness. Gov. Brown should veto SB161.

John Kabateck is executive director for the Sacramento-based National Federation of Independent Business/California, which represents small and independent businesses.