Chapter 8: Health and Human Services
Increase the Availability of
Insurance to Small Businesses
and Individuals
Summary
Many small businesses cannot afford to provide health insurance to their
employees. Their premiums are higher than those for large businesses, and a few
sick employees can force a business out of the health insurance market entirely.
Individuals trying to purchase insurance for themselves also face high premiums.
Federal law makes it difficult for states to encourage small businesses to
provide insurance and to help individuals to obtain it. Texas should appoint a
task force to identify changes in federal laws and regulations that could help
more small businesses and individuals obtain health coverage.
Background
Small businesses, defined by the Texas Department of Insurance (TDI) as those
with between two and 50 employees, are less likely to offer insurance to their
employees than larger companies.[1] In 1998, only
29 percent of employees in American firms with fewer than 25 employees received
coverage from their employers. By contrast, about two-thirds of employees in
firms with more than 500 employees had
coverage.[2]
Texas employers have made some improvements in employee coverage. In 1993,
only 10.6 percent of Texas’ small businesses purchased employee health
insurance, but by 1998, that share had risen to 23.5 percent. Even so, more than
three-fourths of Texas small employers still do not buy employee health
insurance.[3]
Unsurprisingly, small businesses report cost as the single most important
factor preventing them from offering coverage.[4]
In a 2000 national survey by the National Federation of Independent Business
(NFIB), small businesses reported rising health insurance costs as their top
problem.[5] In 1999, some commercial health
insurance companies anticipated 20 percent increases in premiums for many small
firms and increases of 30 percent or more for small firms with chronically ill
employees.[6]
Employers also report that high costs prevent many employees from purchasing
coverage for their dependents.[7]
One Small Business’s Dilemma
To understand the problems small businesses face, consider a
hypothetical—but all too plausible—case. George, the owner of a
Texas business with five employees, wants to buy health insurance for his
employees and himself. He can afford to spend no more than $300 per employee,
per month for this coverage.
Unfortunately, one of his employees, Stan, has had a heart attack and
continues to need treatment. When George attempts to buy a policy, every
insurance firm he talks to gives him a premium quote far above $300. George also
finds out that state and federal laws require him to cover all of his employees
or none; he can’t insure only his healthy employees, even if he wanted to.
George decides that health insurance for his employees is simply
unaffordable.
George considers raising his employees’ salaries by $300 a month to
help them purchase individual health insurance. However, to receive the federal
corporate income tax break offered to companies offering insurance, he has to
deduct the funds used to pay for the insurance directly from his payroll. If he
gives the $300 directly to his employees, the money becomes part of their
salaries and thereby subject to income tax. The $300 drops to as little as $200
for some employees because of their tax rates. And then, these employees
wouldn’t be able to afford comparable individual insurance. Stan could try
to purchase health insurance from the Texas Health Insurance Risk Pool, an
insurance program for persons who find it difficult to obtain insurance because
of their medical histories. But the premium in his area for his sex and age
group is above $500, so he remains uninsured.
Real Texas Examples
A six-employee print shop in San Antonio recently anticipated that its health
insurance premiums would shoot up by 30 percent, to $400 a month for each
employee, due to potential health risks among the small
group.[8]
Small governments face similar problems. After a few of its 2,400 employees
encountered catastrophic claims, the cost for Nueces County, Texas to provide
coverage increased by $1.5 million. The county used tax revenues to pay for
about $1 million of the increase, and increased employee premiums for the rest.
Under the new plan, employees paid $5 more per doctor visit and a $350
deductible per hospital admission.[9]
Why Premiums are Higher For Small Businesses
Small businesses face higher premiums because they can’t negotiate
discounts for a large group; because a few sick employees can drive up their
premiums, since they cannot spread the risk over a large employee pool; because
they cannot self-insure; and because the costs of administering the policies is
high, with no chance to achieve economies of
scale.[10]
Insurance premiums are based in part on a firm’s medical costs in the
previous year. With a small group, the insurer’s profits are slim, and
profits can disappear if even one person has a medical emergency. Consequently,
a single large claim can increase premiums to the point where a company is
priced out of the market.[11]
If the employer looks for another carrier, the pre-existing medical condition
of one or a few workers can make it hard to obtain good
rates.[12] Small firms are subject to state
regulations and health-benefit mandates such as the federal Health Insurance
Portability and Accountability Act of 1996 (HIPAA), which obligates employers to
offer health insurance either to all employees or none, a practice called
“guaranteed issue.”
Texas has passed laws on guaranteed issue and the renewability of
small-business health benefit plans, in part to meet HIPAA
requirements.[13] State law not only requires
insurers selling to small businesses to guarantee coverage to every employee in
the business, but specifies how insurers may screen applicants. TDI has stated
that “Health status may be screened, but only to determine the appropriate
premium rates for the group.”[14] Another
state law limits rate increases.[15]
If an employer has even one high-risk employee, however, an insurer may place
premiums too high for the business to provide insurance for anyone. In 16
states, not including Texas, that have aggressively implemented reforms
concerning insurance for small employers and individual citizens, the average
annual growth in uninsured populations has been eight times higher than the
average for the other 34.[16]
Large companies have more power in the marketplace and can increase their
product prices to cover increased costs, passing the expense to consumers.
Smaller firms generally have little power to do this, making them more sensitive
to premium increases. Small firms, moreover, often lack the expertise or
knowledge to take advantage of what options they do have to control their costs.
A study by the Blue Cross and Blue Shield Association and the Employee Benefit
Research Institute found that 57 percent of small employers were not aware they
could deduct health insurance premiums they pay for employees from the corporate
income tax.[17]
Impact on Individual Insurance
The current insurance regulatory system often has the unintended consequence
of making it more difficult for individuals to purchase insurance on their own
when they cannot obtain it through their employer.
Federal tax law only rewards the employers’ purchase of health
insurance, not individual purchases. And again, small businesses and their
employees are not always aware of the alternatives available to them. Recent
changes in federal and state laws and a lack of resources for small businesses
have produced a good deal of confusion.
The Texas Health Insurance Risk Pool, for instance, can help employees who
cannot find employer-based or individual insurance, but many employers and
employees are not even aware of the pool.
High-Risk Pools
Twenty-eight states, including Texas, have high-risk pools or similar
programs that guarantee access for some portion of the uninsurable
population.[18] A recent report cited the Texas
Health Insurance Risk Pool as a successful example of a program that provides
insurance to people who cannot otherwise obtain it because of their medical
histories.[19] It notes that about 1 percent of
the population suffer from pre-existing medical conditions that make it likely
that their future medical expenses will be extremely
high.[20]
The Texas Health Insurance Risk Pool charges premiums for the policies it
issues. If claims and expenses for the health pool’s operation are higher
than the premiums collected, the pool can collect additional funds from health
insurance companies through assessments. The pool charges premiums to its
participants that initially may not exceed 150 percent of the standard premium
rate (the amount usually charged by commercial carriers for similar
coverage).[21]
Recommendation
State law should be amended to create a task force
to review the issue of small business health insurance and individual insurance
in Texas. The task force should be charged with identifying changes in federal
law and regulations and any related problems with state laws that would help
more Texans working for small businesses to obtain health insurance.
The task force should consist of two members appointed by the governor, two
by the speaker of the House, and two by the lieutenant governor. The appointees
should be experts in the area of insurance and should work under the guidance of
the Texas Department of Insurance.
Fiscal Impact
The Texas Department of Insurance should be authorized to expend up to $5,000
of its existing resources to cover the costs of the task force. Any increase in
health insurance coverage of the uninsured would reduce federal, state, and
local expenditures on public programs such as Medicaid and on public hospitals.
These savings, however, cannot be estimated.
[1] Texas Insurance Code,
Chapter 26, Subchapter A, §26.02 (28)
(http://www.capitol.state.tx.us/statutes/in/in002600.html#in01.26.01).
(Internet document.)
[2] US Census Bureau, Health
Insurance Historical Tables, “Table 4, Workers Covered by Their Own
Employment-Based Health Insurance, By Firm Size:1998”
(http://www.census.gov/hhes/hlthins/hlthin98/hi98t4.html).
(Internet document.)
[3 ] Texas Department of
Insurance, “Texas Small Employer Health Insurance Enrollment
Statistics,” 1993-1998 (Austin, Texas). (Handout.)
[4 ] Gail A. Jensen and Michael
A. Morrisey, “Small Group Reform and Insurance Provision by Small Firms,
1989-1995,” Inquiry (Summer 1999), pp. 176-187.
[5 ] Marcus Gleisser,
“Top Worries: Insurance, Workers,” The Cleveland Plain Dealer
(August 18, 2000), p. 2C.
[6 ] National Coalition on
Health Care, “Déjà Vu All Over Again: The Soaring Cost of
Private Health Insurance and Its Impact on Consumers and Employers,” by
Joel E. Miller (Washington, DC, May 2000)
(http://www.nchc.org/survey.html).
(Internet document.)
[7 ] Kent Hoover,
“Deduction of Health Premiums Would Aid Uninsured,” Business
Journal-Portland (September 8, 2000), p. 12.
[8 ] Travis E. Poling,
“Without a Net, Small Businesses Struggle With the High Costs of Health
Insurance,” San Antonio Express–News (August 2, 1998), Part
K, p. 1.
[9 ] Marshall
Anderson,“Rising Health Care Costs, a Bitter Pill: Employees, Employers
Face Double Digit Percentage Increases the Next Few Years,” The Corpus
Christi Caller-Times (February 12, 2000), p. L4.
[10] Todd Pack,
“District Health Alliance Executive Says CHPAs Need Changes,” The
Orlando Sentinel (November 30, 1998); and Henry C. GrosJean, “Health
Care Coverage Needs Attention,” Phoenix Business Journal (May 26,
2000), p. 87.
[11 ] Texas Association of
Business and Chambers of Commerce, Report on the Cost of Health Care System
Mandates, by J. Allen Seward and James W. Henderson, Baylor University
(Waco, Texas, January 1999), pp. 63-64.
[12 ] Travis E. Poling,
“ Without a Net, Small Businesses Struggle With the High Costs of Health
Insurance.”
[13] Texas Insurance Code,
Chapter 26, Subchapter C, §26.21(a).
[14 ] Texas Department of
Insurance, “Your Health Insurance Coverage,” Question 3
(http://www.tdi.state.tx.us/consumer/cbo05.html). (Internet
document.)
[15 ] Texas Insurance Code,
Chapter 26, Subchapter D, §26.31(a)
(http://www.capitol.state.tx.us/statutes/in/in002600.html#in01.26.01).
(Internet document.)
[16 ] The Heritage
Foundation, “Uninsured Rates Rise Dramatically in States with Strictest
Health Insurance Regulations,” by Melinda L. Schriver and Grace-Marie
Arnett, Backgrounder (August 14, 1998), p. 1.
[17 ] Kent Hoover,
“Deduction of Health Premiums Would Aid Uninsured.”
[18] US Department of
Agriculture, Comprehensive Health Insurance for High-Risk Individuals
(Washington, DC, 1999), p. 5.
[19 ] The Heartland
Institute, Extending Affordable Health Insurance to the Uninsurable, by
Conrad. F. Meier (August 27, 1999), p. 1
(http://www.heartland.org/studies/meier-ps.htm). (Internet
document.)
[20] The Heartland
Institute, Extending Affordable Health Insurance to the Uninsurable,
Executive Summary, point 5.
[21 ] Texas Health Pool,
“Frequently Asked Questions,” numbers 9 and 10
(http://www.txhealthpool.com/faq.html). (Internet document.)
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