Study finds economic burden of health insurance increasing for small employers

April 04, 2008

The economic burden of providing health insurance for workers increased more for small businesses than for large ones from 2000 to 2005, but the spike did not cause a significant number of small employers to abandon the benefit, according to a study issued today by the RAND Corporation.

Small businesses (those with 25 or fewer employees) saw the expense of providing health insurance rise by nearly 30 percent during the study period -- significantly more than the hikes experienced by medium and large businesses examined by the study.

Researchers found no evidence that small businesses were more likely than large employers to quit providing health insurance for their workers, although small employers did remain less likely to provide health benefits to workers.

"Perhaps these small businesses -- and ultimately, their employees -- were willing to accept the burden of rising health insurance costs, even if it meant giving up wage increases," said Christine Eibner, author of the study and an associate economist at RAND, a nonprofit research organization. "What we don't know is whether small companies and their employees will continue to make this tradeoff."

The study from the Kauffman-RAND Institute for Entrepreneurship Public Policy explores trends in the economic burden of providing health insurance, the distribution of the burden for small and large businesses, and the quality of the health plans businesses offered.

Eibner examined more than 2,500 small, medium and large companies surveyed from 2000 to 2005 by the Employment Cost Index, a quarterly summary of businesses, and the Employee Benefits Survey, a periodic survey of employer health plans. Both surveys are conducted by the U.S. Bureau of Labor Statistics.

Eibner found that typical businesses offering health insurance spent between 7 percent and 10 percent of their payroll on health insurance. But small companies saw their share grow from an average of 8.4 percent in 2000 to 10.8 percent of payroll by 2005, an increase of nearly 30 percent.

In contrast, companies with 25 to 49 workers saw health insurance costs grow by 16 percent, and businesses with 50 to 99 workers saw costs grow by 25 percent. Overall, more than half of the small companies spent more than 10 percent of payroll on health insurance costs during 2005, according to the study.

One unexpected finding was that both small businesses and large businesses (those with more than 100 employees) have higher health insurance burdens than medium-sized businesses (companies with 25 to 99 employees).

Eibner said this may be because many small firms require all employees to participate in the health insurance plan, or because small companies that offer health insurance may have workers with an unusually high demand for health care and the companies don't have the economies of scale to spread out the expense. Medium-sized businesses, on the other hand, may not require all employees to participate, which would help cut costs.

The study also found that small businesses tended to offer plans that were of slightly lower quality than those offered by larger companies. Larger businesses were more likely to offer drug and dental coverage, and non-HMO plans offered by large companies also tend to have lower deductibles and coinsurance rates.

An average worker at a small firm would expect to spend 1.9 percent of his or her annual earnings on out-of-pocket health expenses, while an average worker at a firm with more than 100 employees would expect to pay 1.3 percent of annual earnings on medical expenses, according to the RAND report.
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The study, "The Economic Burden of Providing Health Insurance: How Much Worse Off Are Small Firms," can be found at www.rand.org.

The purpose of the Kauffman-RAND Institute for Entrepreneurship Public Policy is to evaluate legal and regulatory policymaking related to businesses and entrepreneurship. The Kauffman-RAND Institute for Entrepreneurship Public Policy falls within the RAND Institute for Civil Justice, a research program within the RAND that is dedicated to improving private and public decision making on civil legal issues by supplying policymakers and the public with the results of objective, empirically based, analytic research.

The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that works with partners to advance entrepreneurship in America and improve the education of children and youth. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo. More information is available at www.kauffman.orgThe RAND Corporation is a nonprofit research organization providing objective analysis and effective solutions that address the challenges facing the public and private sectors around the world. To sign up for RAND e-mail alerts: http://www.rand.org/publications/email.html

RAND Corporation

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