Health Insurance
Background
Coverage for the Owner
Group Health Insurance Coverage
a. Reasons for Offering Coverage
b. Reasons for Not Offering Coverage
Type of Coverage Provided
Cost of Coverage
Special Coverage Arrangements
Employee Participation in Health Plans
Final Comments
Background
Employer-sponsored health insurance has changed dramatically over the last decade. Managed care plans, once seen as the cost-control answer, have experienced a strong backlash against their cost control efforts. Premium increases, which were virtually non-existent in the mid-1990s, have re-emerged with a vengeance. Two thousand three (2003) has seen premium increases in the neighborhood of 12 to 15 percent. Small employers have always been particularly vulnerable to premium increases and few have the human resources capacity to thoroughly investigate the coverage options available. Yet, a health insurance benefit is often key to the recruitment and retention of good employees. It also is often a critical element in the owner’s personal ability to operate a small business. This survey reports on the current status of employer-sponsored health insurance offered by small businesses. It identifies the extent of coverage, the types of coverage offered, and the out-of-pocket premiums set by employers. It also examines the reasons why some small businesses offer coverage and why others do not. In particular, it focuses on the owner’s role in the decision to provide coverage, the relationship between the owner’s personal coverage and that offered employees. Hence, this issue of the National Small Business Poll is titled Health Insurance.
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Coverage for the Owner
Ninety-one (91) percent of small-business owners have health insurance for themselves (Q#1). Owners of larger firms were much more likely to have coverage; less than 2 percent of those with firms of 20 or more employees lacked coverage. Approximately one-third (37 percent) had coverage through their business; another third (31 percent) had coverage through their spouse or from another source such as a former employer, and nearly 23 percent bought non-group coverage. The owner’s dependents were typically covered in the same way as the owner (Q#1a).
Among those owners without coverage (n=41), the average spell without health insurance was nearly 35 months. However, this average masks important differences. By far, most of the uninsured owners operate firms with fewer then 10 employees. Among this group, 30 percent have been uninsured for only six months or less. Another 13 percent lacked coverage for seven to 12 months. However, 28 percent of this group of owners had not had coverage for over four years. For many small-business owners, the lack of personal health insurance appears to be a transitory phenomenon. However, for more than a quarter of owners it is of ongoing concern.
Some owners provide health insurance for their employees, but obtain coverage for themselves from another source. The survey asked these owners about the reasons for their choice. Sixty-eight (68) percent indicated that a major reason was that insurance was less costly from another source (Q#4A). Sixteen (16) percent indicated that a major factor was their preference for a plan with different coverage than that offered to employees (Q#4B). Eighteen (18) percent said a major reason was that a particular health condition made another plan more desirable (Q#4C).
As part of the analysis of the survey data, the owner’s own insurance status was compared with whether or not the business provided coverage to its employees. Clearly, if the owner did not have coverage, the business almost never offered coverage; less than 2 percent of businesses offered health insurance when the owner did not have coverage. In contrast, if the owner did have coverage from some source, 49 percent of their small businesses offered coverage, 52 percent did not.
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Group Health Insurance Coverage
In May of 2003, 48 percent of small businesses provided health insurance for their employees (Q#3). Responses differed widely by firm size. Forty-one (41) percent of businesses with fewer than 10 employees provided coverage while over 79 percent of those with 20 or more employees did so.
On average, 29 percent of employees in small businesses earned $10 per hour or less (Q#16). Coincidentally, on average 29 percent of employees earned $20 or more per hour (Q#17). These responses were compared to provision of employer-sponsored health insurance coverage. The probability that a small business provided coverage decreased when it had a larger proportion of lower-income employees. It increased with the percentage of employees earning $20 per hour or more. If one-quarter or less of employees earned $20 or more per hour, 42 percent of the firms offered coverage. If 75 percent to 100 percent of employees earned $20 or more per hour, 70 percent of small firms offered coverage.
The proportion of small businesses offering health insurance was larger when firms employed more, older employees (Q#15). Younger employees often do not value health insurance as highly. Firms that employed a larger proportion of women were less likely to offer health insurance (Q#14). Women continue to be more likely to work part-time or to have coverage from another source.
The average owner responding to the survey had been in business for 15 years (Q#D5). The probability of a firm offering health insurance increases with the age of the business. Of those in business for less than two years, 35 percent offered coverage; 45 percent of those in business for two to five years offered coverage, 41 percent of those operating for six to 10 years and 52 percent of those in business for 11 or more years provided health insurance coverage to their employees.
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a. Reasons for Offering Coverage
Respondents who provided health insurance coverage were asked about the importance of various potential reasons for offering coverage. Three categories of responses stand out as key factors. First, the vast majority (78 %) of those offering coverage believed it was “the right thing to do” (Q#5H).
Second, businesses offered coverage to attract and retain employees. Sixty-three (63) percent of those offering coverage said recruitment of employees is a major reason (Q#5A). Forty-eight (48) percent said reducing turnover was a major reason (Q#5E); and 41 percent said employee demand was a major factor (Q#5C). All these responses relate to employee expectations for coverage from their employer.
The third major factor was the ability of the owner to get coverage through the business. Forty-nine (49) percent of respondents indicated that this was a major reason for offering coverage (Q#5I). Other reasons, such as increasing employee productivity (Q#5D), responding to competitors’ offers of insurance (Q#5G), providing tax-sheltered income (Q#5B), and providing for employees or their dependents with medical problems (Q#5F), were identified as major reasons by some respondents but were not mentioned as frequently as others.
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b. Reasons for Not Offering Coverage
The survey asked small-business owners who did not offer coverage why they did not. Not surprisingly, the principal reason given was that the business could not afford the coverage. Sixty-five (65) percent of those respondents not offering coverage indicated this was a major reason (Q#13F). Fifty (50) percent also said that the uncertainty of future revenue was a major reason (Q#13E).
A second category of responses related to high turnover and employee preferences. Forty (40) percent of respondents said high employee turnover or a large number of part-time or seasonal employees was a major factor in the decision not to provide coverage (Q#13D). Nearly 40 percent of respondents said major reasons were that employees already had coverage from other sources (Q#13B), that employees preferred wages to insurance coverage (Q#13A), and that employees couldn’t afford their share of the premium (Q#13G). Twenty-four (24) percent said it was not needed to retain good employees (Q#13H).
A third key factor again appears to be the owner’s ability to get coverage elsewhere; 37 percent of respondents said this was a major reason for not offering coverage (Q#13C). Seventeen (17) percent said that a plan that would appeal to their employees did not fit their own needs (Q#13J). Finally, 31 percent indicated that setting up and funding a health insurance plan was too complicated (Q#13I).
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Type of Coverage Provided
Among those small firms providing health insurance, 83 percent offered a single plan (Q#6). There is little variation in this across firm sizes, although larger businesses were slightly more likely to offer more than one plan.
Some type of managed care was the dominant form of health insurance offered by small employers. Forty-six (46) percent of firms that offered a single plan provided coverage through a PPO or preferred provider organization (Q#8). A PPO allows employees to use a wide array of physicians, but they will pay less if they use providers from an approved list. Nearly one in four small businesses (23 percent) offer an HMO, or health maintenance organization. This type of insurance plan covers medical care only if a specific panel of doctors and hospitals provides it. A third type of managed care plan, a POS or point-of-service plan, was seldom offered by small businesses.
A POS plan is like an HMO in that the employee has a primary care physician, but unlike an HMO, the employee can use other providers without a referral – for a higher co-pay. Less than 2 percent of respondents said they offered a POS plan. There was little difference in the prevalence of plan types across firm sizes. However, larger, small businesses were somewhat more likely to offer an HMO or a POS plan.
Traditional health insurance continues to be relatively popular among small businesses. Overall, 24 percent of small firms providing coverage offered a traditional plan that allows employees to receive covered medical care from any licensed provider. In contrast, some recent surveys of all private sector firms suggest that only about 5 percent of covered employees have traditional health insurance coverage. The smallest businesses were the most likely to offer this type of plan; nearly 26 percent did so. Larger businesses were less likely to do so; only 17 percent of firms with 20 or more employees offered a traditional health insurance plan.
Among small businesses that offer more than one health plan, over half (57 percent) offered a traditional plan along with a managed care option (Q#7A). Nearly 80 percent offered a PPO (Q#7B), 62 percent offered an HMO (Q#7C) and nearly 30 percent offered a POS plan (Q#7D).
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Cost of Coverage
Single coverage costs the typical small business $402 per employee per month (Q#9). Firms with less than 10 employees paid somewhat less, $393 on average, and those with more than 20 employees paid somewhat more, $439 per employee per month.
The difference in premiums reflects differences in the content of coverage, among other things. Larger firms tend to offer more generous benefit packages. It is also the case that small businesses can pay a wide range of premiums. Over 40 percent, for example, paid $300 or less per employee per month for single coverage. Slightly more than 2 percent paid more than $600. [Care should be taken in relying on these premium reports, however, because nearly one-third (32 percent) of respondents offering coverage did not report a monthly premium.]
Over half (55 %) of small employers who offer health insurance covered the entire premium for single coverage (Q#9). They did not require an out-of-pocket premium contribution on the part of their employees. This was much more likely among the smallest businesses.
Nearly 61 percent of firms with less than 10 employees paid the entire premium while only 37 percent of the largest small firms did so. Among those that do require an out-of-pocket contribution, 41 to 50 percent of the premium was the most common range of employee contributions (Q#9a).
The survey asked those small-business owners who paid 90 percent or more of the premium why they paid such a large proportion. Fifty-eight (58) percent indicated that they did so to offer a competitive health insurance program (Q#9aC1). A little more than one-third (37 %) indicated that they did it to insure that employees participate (Q#9aA1). Less than a quarter (23 %) of respondents said they paid a high proportion to give employees the benefits of tax-sheltered compensation (Q#9aB1). [As with all the opinion questions, respondents were asked to respond to more than one potential reason.]
The average family insurance premium was $732 per employee per month (Q#10). As with single coverage, the smallest businesses paid the lowest premiums. Overall, the average employee contribution for family coverage, among those who faced a contribution, was 39 percent (Q#10a). As is typically the case, the percentage of employee contribution for family coverage was higher than that for single coverage. The smallest firms tended to require the smallest out-of-pocket contribution and 40 percent of the smallest firms paid the entire family premium. Larger firms were much less likely to pay the entire premium and the average out-of-pocket share for employees in firms with 20 or more employees was 45 percent.
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Special Coverage Arrangements
In addition to standard health insurance plans, employers may provide a number of other health insurance arrangements. One approach is to offer a “flexible spending account.” These accounts, set up by an employer, allow employees to set aside wages or salary to pay for out-of-pocket medical expenses with tax-sheltered dollars. An employee could use these dollars to pay for a physician visit, for example. They could use them to buy non-group health insurance or to pay for the employee premium contribution on the coverage provided by the business. Overall, 9 percent of small businesses offer flexible spending accounts (Q#2A). However, nearly one-quarter (24 %) of small businesses with 20 or more employees offer them.
“Medical savings accounts” combine catastrophic health insurance coverage and a tax-sheltered health spending account. Employees can pay for routine medical expenses from the spending account. However, medical expenses above a reasonably high deductible would be paid for by the catastrophic insurance plan. Five (5) percent of small businesses offered medical savings accounts (Q#2B). Larger, small firms were more than twice as likely as the smallest businesses to do so.
Some small employers agree to reimburse employees for some or all of the cost of a health insurance policy that the employee has obtained elsewhere. This may be purchased non-group coverage or it may be the premium contribution on a spouse’s health plan, for example. Thirteen (13) percent of small businesses did this, with the percentage rising from 11 to over 17 percent as firm size increased (Q#2C).
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Employee Participation in Health Plans
Some recent studies have noted that while employers have continued to offer health insurance even during the recession, more employees have been declining to take the coverage offered. The NFIB National Small Business Poll asked the extent to which employees participate in the plan(s) offered.
On average, nearly 77 percent of eligible employees participated in the offered employee health plan(s) (Q#11). For half of the respondents, 90 percent or more of employees participated. Participation rates were very stable across firm sizes.
Many insurers in the small group market require firms to enroll a large proportion of their employees in the health plan before they will agree to accept the insurance contract. The survey asked small employers whether their insurance carrier requires a minimum percentage of employees to participate (Q#12). Approximately one-third (36 %) indicated that they did. Business owners with fewer than 10 employees reported being less likely to face this requirement. Sometimes this minimum participation requirement can be satisfied if eligible employees have coverage from another source, such as a spouse’s health plan. Twenty-three (23) percent of small businesses indicated that their carrier allowed alternative coverage (Q#12a).
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Final Comments
This update on the health insurance offerings of small businesses reinforces trends that have been common throughout the 1990s. Nearly half of small employers offer health insurance and the proportion providing coverage increases with both the size and age of the firm. The reasons both for offering coverage and for declining to offer coverage reflect sound business decisions, involving issues of cost, turnover and employee expectations. Two issues stand out in the survey, however.
First, owner/operators of small businesses almost always have health insurance. However, they tend to get their coverage from a variety of sources. Only about one-third obtain it through their businesses; the rest have coverage through a spouse or another source such as a former employer. Surprisingly, nearly 23 percent purchase non-group coverage. This variety of personal purchasing arrangements explains why the owner having coverage is not a good predictor of the business providing coverage.
When the owner has coverage, there is essentially only a 50/50 chance that the business offers coverage. However, if the owner does not have coverage, there is virtually no chance that the firm provides insurance for its employees.
The second point may be related. Many small-business owners do not appear to fully appreciate the special tax treatment accorded to employer-sponsored health insurance for themselves or their employees. Employer-sponsored coverage is typically fully tax deductible as a business expense to the firm. In addition, it is not treated as taxable income to employees. Therefore, it is usually not subject to federal or state income taxes or to FICA taxes. This has many implications that an insurance specialist can describe. First, it says that if employees value health insurance, a firm can lower its compensation costs by providing health insurance and lower wages rather than higher wages alone. It says that there may be better ways to provide insurance benefits than by reimbursing employees for non-group purchased plans. It also says that small employers can help their employees pay for medical expenses, even if they are unable to provide health insurance. They can do this by setting up low cost flexible spending accounts that allow employees to set aside wages to pay for medical expenses and avoid taxes on the money they set aside. More careful consideration of the tax issues may allow small businesses to better provide for their employees and obtain insurance coverage more cheaply for themselves.