The results of an April 2004 Commonwealth Fund white paper* show that the economics of small business group insurance makes offering health benefits to employees is risky. The current lack of health insurance for individuals in Texas, as well as the rest of the country, is closely associated with the inadequacies of the small employer market. Of the approximately 44 million individual Americans without health insurance, over 80 percent come from working families. Nearly 50 percent of uninsured workers are either self-employed or work for firms with fewer than 25 employees.

Small and Large Companies Benefits and Premiums

Surveys of employers from 1989 to 2003 reveal that more rapid premium increases are forcing small firms to impose higher cost sharing. In 2003, premiums for small firms (3,199 workers) increased 15.5 percent, outpacing the 13.2 percent increase for large firms (200+ workers). From 2000 to 2003, deductibles among small firms increased 100 percent in PPO plans when employees use in-network providers and 131 percent when they use out-of-network providers. For large firms, deductibles in PPO plans increased 33 percent and 44 percent, respectively. Also in 2003, 40.3 percent of employees in the smallest firms contributed 41 percent or more of the total family premium, compared with only 11.2 percent of employees in large firms.

Share of Premium Contribution

In addition to paying higher deductibles, employees in small firms contribute a greater share of the premiums. In 2003, 40.3 percent of employees in the smallest firms contributed 41 percent or more of the total compared with only 11.2 percent of employees in large firms. Among all small firms, 38.2 percent of employees contributed 41 percent or more of the family premium. For single coverage, 7.6 percent of employees in the smallest firms contributed 41 percent or more of the premium, compared with 3 percent of employees in the largest firms. However, employees of the smallest companies were more likely to contribute none of the premium (61.6% vs. 14.0%).

This increased cost sharing, especially of family plans, in small firms is consistent with the finding that small employers get less value for their premium dollar than large employers.

Small Equals Less, Plus More Risk

Small employers not only get less value than large employers when they provide health benefits, but they face greater financial risk in doing so. Lower value is a natural consequence of small size and the failure to join together in pooled purchasing groups with a long-term commitment to shared risk.

In any given year, premium increases, the cost of single coverage, and employee contributions vary more from firm to firm for small than large firms. Small firms lack purchasing power in the insurance market and unlike larger companies, are unable to reduce insurance costs by bearing the risk themselves and self-insuring.

This means a fundamental change in the small employer market is necessary. This change requires new options for helping small firms gain access to the advantages larger firms have in purchasing health benefits. Burdened with inherently higher administrative costs, having fewer lives over which to spread the risk of catastrophic costs, and lacking the purchasing power of large firms to negotiate with insurers, small employers are doomed under current practices to separate but unequal status.

What nobody knows is how many individuals decide not to start a business because of the greater risk in the small employer market when purchasing health insurance. Yet if small employers are the principal source of innovation, as well as economic and job growth in the American economy, then this greater risk costs, not only small employers and their workers, but the overall American economy.