e-Texas e-Texassmaller smarter faster governmentDecember, 2000
Carole Keeton Rylander
Texas Comptroller of Public Accounts

Recommendations of the Texas Comptroller

Chapter 8: Health and Human Services

Increase the Availability of
Insurance to Small Businesses

and Individuals


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.


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]


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.)

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

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