Why Do People Care about Healthcare Reform?

Problems Small Businesses Have Getting Health Insurance

When it comes to health insurance, small businesses have an especially difficult situation compared to large businesses. Only 35% of the smallest businesses (those with less than 10 employees) offer health insurance to their employees, compared to 99% of large firms (those with more than 200 employees) (Kaiser Family Foundation and the Health Research and Educational Trust, 2008). Small businesses typically pay more for health insurance but get less coverage than their larger counterparts.

The definition of large and small businesses varies from study to study according to what the various researchers chose. These definitions used will be noted for each study.

 

Small Businesses Are Important Employers

Healthcare reform's effect on small businesses is important because about half the people in America work for small businesses or are self-employed (U.S. Census Bureau), and most new jobs are created in small businesses. In addition, almost 50% of uninsured working people either work in firms smaller than 25 employees or are self-employed (Gable and Pickreign, 2004). In the last 15 years, small businesses have created 21.9 million jobs, compared to only 1.8 million jobs created by big businesses. Small businesses provide 80% of inner city jobs and 66% of rural jobs (National Small Business Association).

 

Small Businesses Pay More and Get Less Coverage

Small businesses (1-9 employees) pay on average 18% more for their health insurance than large businesses (over 1,000 employees) for the same levels of coverage. To afford coverage for their employees, small businesses often choose plans with higher deductibles or plans that exclude more services. Their health insurance premium dollars buy less coverage than larger companies get for the same money (Gable, McDevitt, et al., 2006).

Health Insurance Costs and Increases by Size of Firm, 2002-2003

(Source: Gabel and Pickreign, 2004)

Small Businesses Get Larger and More Unpredictable Increases in Premiums

Insurance plans are built on the premise that those covered share the risk of illness and financial costs through the insurance plan. If a person needs covered services, those costs are shared among all people on the plan. More covered members means more people to share the costs. It also means that predictions about the costs will be more accurate. Businesses are charged for their insurance according to the prior healthcare used by their covered employees.

Take, for example, Company A with 7 employees and Company B with 600 employees. If one person covered by Company A gets a very expensive disease, there are only six other employees to share the costs. At the same time, if 1 person covered by Company B gets a very expensive disease, there are 599 other employees to share the costs.

As a result, small businesses can see dramatic changes in their premiums. Because these changes are often based on unforeseen illnesses among employees or their families, they are hard to predict. Insurance companies also re-evaluate the premiums of small firms more frequently than large ones (Harbage, 2009).

 

There Is Little Competition for Insurance Companies that Serve Small Businesses

The Government Accountability Office (GAO) surveyed 39 state insurance agencies in 2008-2009 about companies that insure small businesses. Across the 39 states, the largest insurer on average controlled 47% of the state's health insurance market. In 34 of the 39 states, the five largest insurance companies together controlled more than 75% of the market. In 23 states, the 5 largest companies controlled over 90% of the market. The insurance companies’ concentration of small business insurance into the hands of fewer insurers has increased since 2005 (Dicken, 2009). It is harder for small businesses to get better rates when the market is dominated by only a few companies. When competition is low, insurance companies have less of a reason to negotiate rates or control costs.

The GAO survey included Ohio and Kentucky, but not Indiana. In Ohio, 27 insurance companies sold health insurance to small businesses in 2008. The dominant company was Anthem Insurance Group, which had 35% of the market. The top 5 companies controlled 85% of the market. In Kentucky, 13 insurance companies sold health insurance to small businesses in 2008. The dominant company was Anthem Plans of Kentucky, which had 47% of the market. The top 5 companies controlled 96% of the market (Dicken, 2009).

 

Some Insurers Do Not Want to Insure Small Businesses

Wendell Potter, a former insurance company executive, testified to Congress about insurance company practices toward small businesses:

"They also dump small businesses whose employees' medical claims exceed what insurance underwriters expected. All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year's premiums so high that the employer has to cut benefits, shop for another carrier, or stop offering coverage altogether — leaving workers uninsured. The practice is known in the industry as "purging." The purging of less profitable accounts through intentionally unrealistic rate increases helps explain why the number of small businesses offering coverage to their employees has fallen from 61 percent to 38 percent since 1993, according to the National Small Business Association. Once an insurer purges a business, there are often no other viable choices in the health insurance market because of rampant industry consolidation.

"An account purge so eye-popping that it caught the attention of reporters occurred in October 2006 when CIGNA notified the Entertainment Industry Group Insurance Trust that many of the Trust's members in California and New Jersey would have to pay more than some of them earned in a year if they wanted to continue their coverage. The rate increase CIGNA planned to implement, according to USA Today, would have meant that some family-plan premiums would exceed $44,000 a year. CIGNA gave the enrollees less than three months to pay the new premiums or go elsewhere" (Potter, 2009).

 

Small Businesses Pay High Administrative Costs to Insure their Employees

For any health insurance, the expenses of broker commissions, underwriting analysis, setting up the plan’s paperwork, insurance company advertising, and administrative salaries, etc., are charged to the employer, who either pays these expenses or includes them in the cost of the employees’ policies. In small businesses, these expenses are shared among fewer employees. Small businesses (2-49 employees) pay administrative costs equal to 22-36% of their premiums. Large firms (over 500 employees) pay administrative costs equal to 5-10% of premiums (Commission on a High Performance Health System, 2009).

In addition, the small company has to spend its own resources finding and buying insurance, enrolling employees, and helping solve problems after the insurance is in place. This means usually that senior-level employees of small businesses are spending their time on these tasks, which takes away from the time they can spend making money and expanding their businesses.

 

Smaller Businesses Have More Low-Wage Employees

Health insurance is part of employee compensation (for more information, see “Who Really Pays for Employer-Based Insurance”). The cost of having health insurance is passed on to the employees either through lower wages or through premiums, co-pays, and deductibles. Small businesses provide a disproportionate number of jobs for low-wage workers (Looff, et al., 1999). Because low-wage workers have lower incomes, they often cannot afford to pay the higher premiums, co-pays, and deductibles that are part of health insurance through small businesses.

 

New Businesses Cannot Afford the Cost of Health Insurance

Start-up businesses, by their nature, tend to have few employees for the first few years, and have the same problems finding and buying health insurance as other small businesses do. In 2008, the average cost for health insurance for average new companies was $68,611 per year (Kaiser Family Foundation and the Health Research and Educational Trust, 2008). The average revenue for 3-year-old firms was $152,063 per year (Kauffman, the Foundation of Entrepreneurship, 2009). The high expense of health insurance combined with modest revenues of start-ups can be challenging for new companies, contributing to the lower rate of employer-based insurance in these companies.

 

Health insurance issues may reduce the formation of new companies

The U.S. has one of the world’s smallest small-business sectors, in spite of the idea that our low effective tax rates, comparatively lower regulation, and a spirit of entrepreneurship make the U.S. a great place to start a business. Out of the 22 developed countries in the Organization for Economic Cooperation and Development (OECD), the U.S. has:

1. the second lowest percentage (ahead of only Luxembourg) of self-employed workers
2. the third lowest percentage (ahead of Ireland and Luxembourg) of employment in small manufacturing businesses
3. the second lowest percentage (ahead of only Spain) of computer-related service employment in firms smaller than 100 employees
4. the third lowest percentage (ahead of Great Britain and the Netherlands) of research and development related employment in firms smaller than 100 (Schmitt & Lane, 2009).

 

The U.S. is the only country of the 22 in the OECD that does not have universal access to healthcare. Although there is not enough information to definitively say that our health insurance system is a reason for the low number of small businesses, some believe it is a factor (Schmitt & Lane, 2009). Several studies show that lack of health insurance appears to be a barrier to self-employment (Farlie, Kapur & Gates, 2008). For example, a person who has a family member with a chronic condition may not want to leave his or her current job to start a new company or take a small business job without health insurance. This is called "job lock." Similarly, most entrepreneurs go without health insurance to start a business unless they have a spouse with employer-based coverage (Wellington, 2001) or if they are eligible for and can afford COBRA.

 

Sources

Commission on a High Performance Health System (2009, February). The Path To a High Performance U.S. Health System: A 2020 Vision and the Policies to Pave the Way. The Commonwealth Fund. Available at: http://www.commonwealthfund.org/Content/Publications/Fund-Reports/2009/Feb/The-Path-to-a-High-Performance-US-Health-System.aspx

Dicken, J. E. (2009, February 27). Retrieved August 29, 2009, from U.S. Government Accountability Office: http://www.gao.gov/new.items/d09363r.pdf

Haycock, P. H. (2009). Primer on Post-Claims Underwriting. Princeton, NJ: Robert Wood Johnson Foundation. Available at: http://www.rwjf.org/pr/product.jsp?id=44169

Farlie, R.W., Kapur, K., & Gates, S. (2008, September). Is Employer-Based Health Insurance a Barrier to Entrepreneurship? unpublished manuscript, Economics Department, University of California, Santa Cruz. Available at: http://www.rand.org/pubs/working_papers/WR637/

Gabel, J., McDevitt, R., Gandolfo, L., Pickreign, J., Hawkins, S & Fahlman, C. (2006). Generosity and Adjusted Premiums in Job-Based Insurance: Hawaii Is Up, Wyoming Is Down. Health Affairs , 832-843. Also available at: http://content.healthaffairs.org/cgi/content/full/25/3/832?ijkey=fynN4VYQoKFmI&keytype=ref&siteid=healthaff
Gabel, J., and Pickreign, J. (2004, April). Risky Business: When Mom and Pop Buy Health Insurance for Their Employees. The Commonwealth Fund. Available at: http://www.commonwealthfund.org/Content/Publications/Issue-Briefs/2004/Apr/Risky-Business--When-Mom-and-Pop-Buy-Health-Insurance-for-Their-Employees.aspx

Kaiser Family Foundation and the Health Research and Educational Trust. (2008). Employer Health Benefits Survey, 2008. Menlo Park, CA : Kaiser Family Foundation. Available at: http://ehbs.kff.org/2008.html

Kauffman, the Foundation of Entrepreneurship. (2009). An Overview of the Kauffman Firm Survey: Results from the 2004-2007 Data. Kansas City, MO: Ewing Marion Kauffman Foundation. Available at: http://www.kauffman.org/uploadedFiles/kfs_fourth_040709.pdf

Looff, C. et al. (1999, December). Distribution of Low-Wage Workers by Firm Size in the United States. U.S. Small Business Administration. Available at: http://search.sba.gov/cs.html?url=http%3A//www.sba.gov/advo/research/rs196tot.pdf&charset=iso-8859-1&qt=looff+distribution&col=sbaweb&n=2&la=en

National Small Business Association. (n.d.). Small Business 70 million Strong and Voting. Retrieved August 30, 2009, from www.nsba.biz: http://www.nsba.biz/vote/70_MAV_Factsheet.pdf

Potter, W. (2009, June 24).http://commerce.senate.gov/public/?a=Files.Serve&File_id=6bbaf0e4-b8f2-497d-8a54-88f5be8c4cae Retrieved August 29, 2009, from U.S. Senate Web site: http://commerce.senate.gov

Schmitt, J. & Lane, N. (2009, August). An International Comparison of Small Business Employment. Washington, DC: Center for Economic and Policy Research. Available at: http://www.cepr.net/documents/publications/small-business-2009-08.pdf

Shane, S.A. (2009, July 27). How the Health Care Mess Affects Entrepreneurship. Economix: Explaining the Science of Everyday Life, The New York Times. Available at: http://economix.blogs.nytimes.com/2009/07/27/how-the-health-care-mess-affects-entrepreneurship/

U.S. Census Bureau, S. o. (n.d.). Table 2a. Employment Size of Employer and Nonemployer Firms, 2004. Retrieved August 30, 2009, from www.censusbureau.biz: http://www.censusbureau.biz/epcd/www/smallbus.html

Wellington, N J.,( 2001, October). Health Insurance Coverage and Entrepreneurship(October 2001). Contemporary Economic Policy, Vol. 19, Issue 4, pp. 465-478, 2001. Available at SSRN: http://ssrn.com/abstract=904703

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