Study: SMBs Bear Heavier Health Care Burden

Two years ago Cathey Sandman joined the ranks of 27 million other people who own or work for a small business, yet have no health insurance. After consecutive annual premium increases (up 100 percent in six years), she and her husband made the painful decision to give up their coverage. "It was not an easy choice, but after the last few premium increases the monthly cost for our health insurance was the same as the cost of our monthly mortgage payment," she said.

You may recall her name because I featured Sandman in my January column, Putting a Human Face on the Nation's Health Care Crisis. The piece focused on small business owners from various professions who appeared before a congressional committee to talk about their personal experiences. The testimony, though compelling, was largely anecdotal. But now a new study quantifies health insurance costs that have forced people like Sandman to go without coverage.

The study, conducted by the prestigious Kaiser Family Foundation, which specializes in health care issues, sticks to the numbers, but the story it tells is just as compelling. It dissects how the increase in costs has hit various businesses by size and profession and shows definitively why small businesses are being hurt disproportionately.

It also raises questions about various state and local efforts to provide coverage for the uninsured through taxes or fees on businesses. An example is San Francisco's Health Care Security Ordinance. The city enacted the law in 2006, and requires all private employers with more than 20 employees to pay an assigned amount toward employee health care, or pay the city a fee based on the number of employees and hours worked. The National Federation of Independent Business (NFIB) and other small business groups are challenging the law in court. While NFIB's effort challenges the legal basis for the law, the Kaiser Foundation study provides an economic basis to question its wisdom.

Health insurance premiums, of course, have increased rapidly in this decade, growing a cumulative 78 percent between 2001 and 2007. The increase far outpaces the nation's cumulative wage growth of 19 percent over the same period. The study found that costs for health insurance not only increased significantly, but "varied meaningfully across the workforce when viewed as cost per hour worked or as a percentage of payroll."

When calculated as a share of payroll, small businesses have been hit hard by the skyrocketing increases. From 1999 to 2005, small businesses with 25 or fewer employees saw costs increase by 42 percent; firms with 26 to 50 employees saw a 33 percent increas; and firms with 51 to 100 employees saw a 37 percent rise. On a per-employee basis, the study found that costs for employers providing health care benefits to employees rose by nearly a dollar to an average of $2.59 per hour.

The increase is particularly burdensome for businesses that pay lower wages, because health insurance costs make up a larger percentage of payroll due to the lower average earnings of workers. In contrast, technical, executive/managerial, and professional occupations had some of the highest health costs per hour, but as a share of payroll their costs were relatively low, reflecting the relatively higher wages in these jobs, according to the study.

Because employer costs as a percentage of payroll vary significantly across workers and businesses, trying to establish payroll requirements or fees that are equitable presents a challenge to policymakers, the study said. In other words, a program like San Francisco's may be inherently unfair to small businesses because their health insurances costs are higher as a percentage of payroll compared with larger corporations, even if the bigger companies pay more for coverage per employee.

As the study makes clear, coming up with an equitable way to provide coverage to the uninsured will be far more complex than imposing flat fees or taxes. That's why this presidential election may well be the most important in history for small businesses. All of the current candidates recognize that the system is broken, but how to fix it is the question.

Meanwhile, the NFIB recently launched an aggressive health care reform campaign: Solutions Start Here. The campaign challenges policymakers to deliver real and meaningful reform for small businesses. As the federation notes, when health care is fixed for small business, it will be fixed for America as a whole.