Statement on the Small Business Health Care Crisis: Possible Solutions

Statement of the U.S. Chamber of Commerce before the Senate Committee on Small Business and Entrepreneurship on Possible Solutions to the Small Business Health Care Crisis

February 5, 2003

The Small Business Health Care Crisis: Possible Solutions

The U.S. Chamber of Commerce is pleased to submit the following statement at today's hearing on the issue of small business and health coverage. The Chamber is the world's largest business organization representing employers of every size, sector and region.

Small Business's Place in the Economy

It is important to understand why public policy that affects small business must be a high priority for lawmakers — and that is because small business is the engine that drives our nation's economy. According to 2000 U.S. Census Bureau records, just over 89 percent of the firms in this country are businesses that employ less than 20 people. Nearly one out of five employees in this country (18 percent) works for a company with fewer than 20 people, and 36 percent work for a firm with fewer than 100 people. When lawmakers in Washington pass legislation that impacts small business owners, those laws and regulations affect a lot of working American families.

Why Small Employers Offer Health Coverage

Small employers who offer health coverage do so because it is good business practice and because doing so helps them compete for workers. The fact that the tax code favors employer-provided coverage is also important. According to a 2002 survey by the Employee Benefits Research Institute/Consumer Health Education Campaign and the Blue Cross Blue Shield Association ("EBRI/CHEC?BCBSA"), 92 percent of employers said they offered coverage because it is the right thing to do.

Other important reasons for offering coverage are increased productivity because employees are healthy (64 percent) and reduced absenteeism (58 percent). Seventy-five percent of small employers said offering health coverage helps with employee recruitment as well as increasing loyalty and decreasing turnover (78 percent). More than half (57 percent) say they offer coverage because their competitors offer it or because employees demand or expect it (62 percent). However, employers do step up to the plate when required: nearly one-third of employers (30 percent) cited employee medical need for coverage as the reason why they offered benefits.

Why Small Employers DON'T Offer Coverage

Cost is clearly a barrier to small businesses being able to offer health coverage to their employees. In a separate study of small employers (Kaiser Family Foundation-Health Research Education Trust 2002 Employer Survey, "KFF-HRET"), 84 percent of employers cited high premiums as an important reason why they did not offer coverage. Not being able to qualify for group rates (45 percent) and administrative hassles (39 percent) were also cited as important reasons.

Similarly, the EBRI/CHEC-BCBSA 2002 survey found that 79 percent of employers stated that their business could not afford coverage as the reason they did not offer coverage. Finally, concern about revenue being too uncertain to be able to commit to a plan was also a reason (68 percent) for not offering coverage. This is an important factor to keep in mind as the economy continues to struggle and as health plans' own commitment to the small business marketplace wavers.

Just because an employer doesn't offer coverage to its workers doesn't mean those employees — or the business owner — goes uninsured. Many (61 percent) employers said that because their employees were covered elsewhere, they did not need to offer coverage. When those circumstances change, or when the business owner himself needs coverage, small employers will seek out a group policy.

Small Business Employees and the Uninsured

During the late 1990s, more and more small businesses offered health coverage. From 1998 through 2000 — a time of strong economic growth — small employers (3 through 199 employees) increasingly offered coverage, from about 54 percent in 1998 to 67 percent in 2000 (KFF-HRET 2000). This trend reversed, however, over the last three years, declining to 65 percent in 2001 and 61 percent in 2002 (KFF-HRET 2002).

Uninsured individuals are overwhelmingly concentrated in smaller companies. More than one-third (34 percent) of employees at firms with less than 10 employees were uninsured in 2001, and 27 percent of employees in firms with 10 to 24 employees were uninsured. Along with coverage being harder to access and to afford, employees at small firms tend to earn less than their peers at larger companies, and larger employers often are able to pay a larger share of health plan premiums.

An alarming recent trend is the practice of employees electing to be uninsured — that is, declining their employer's offer of health benefits while not having another source of health coverage (through a spouse or parent or through a public program such as Medicare, Medicaid or the State Children's Health Insurance Program "SCHIP"). About one in six employees turn down the coverage offered them at work, mostly (61 percent) because they were covered by another plan. However, 20 percent said the coverage was too expensive to participate in the plan. Unfortunately, nearly one out of four (26 percent) of those employees who decline coverage go uninsured (EBRI). This is a missed opportunity to improve the health and well-being of American working families, and one the Congress can easily remedy.

Small Businesses and Health Plan Costs

Health coverage also tends to more expensive on a per capita basis for smaller firms. Last year the average cost for employee-only health coverage was $3,060 but for small businesses (3 to 9 employees), the cost of employee-only coverage was $3,522 (KFF-HRET 2002) — a difference of 15 percent.

Some of the reasons for this cost difference include more state mandates and regulatory requirements on insured health plans (which most small businesses purchase because they cannot self-insure); a smaller pool over which to spread risk; and higher per capita administrative and marketing costs. And not surprisingly, recent cost increases are hitting smaller enterprises harder, too. Premiums increased an average of 12.5 percent in 2002 for employers with more than 200 employees, but 13.2 percent for employers with less than 200 employees. Being able to self-insure health care costs helps to moderate those rate increases: rates increased 14.2 percent for fully insured health plans with conventional plan designs, but only 12.0 percent among self-insured conventional plans.

When asked how they would respond to a rate increase of 15 percent, 54 percent of small employers said they would change their coverage, and an additional 15 percent said they would drop their plans. If costs were to increase 25 percent, three out of five (59 percent) said they would change their health coverage but nearly one-quarter — 22 percent — said they would drop coverage (EBRI/CHEC-BCBSA). This is significant because health plan costs are expected to rise 18 to 20 percent for small businesses over the coming year.

Furthermore, well-intentioned but costly proposals mandating coverage for mental health services, contraception, cancer screenings and a long list of requirements on health plans that has been offered in recent years as part of so-called "patients' rights" legislation will further drive up the cost of health coverage and put many small businesses within the danger zone of ceasing coverage altogether.

Recommendations

In some cases, small employers have been forced to get a new health plan because their insurer has left the marketplace, or employers have found that they have no other plan in their area to call for a rate quote when their current plan premiums skyrocket. State mandates on health plans have taken away health plans' ability to differentiate themselves in the marketplace and compete for customers by offering benefits tailored to meet their needs. When they leave the market, they leave businesses with one less place to go.

Unlike large businesses, small employers do not have the resources to self-insure under federal ERISA laws. Furthermore, more and more small businesses have employees in two or more states, and they have to arrange health coverage for their employees in each of those states. Under legislation like the "Small Business Health Care Fairness Act," small businesses could purchase coverage through associations and other organizations that meet federal requirements. No longer would small businesses be subject to state mandates and regulatory requirements that drive up costs, and small multi-state employers would enjoy a much simplified health care benefits program by being able to offer the same coverage to all their employees — just like larger businesses with whom they compete.

In addition to legislation permitting association health plans under ERISA, some other ways Congress can help small businesses and working families with their health plan costs include:

• Permitting insurance carriers to offer health plans free of state benefit mandates;
• Modifying the medical savings account program to allow both policyholders and employers to make contributions, lower the deductible thresholds, and permit full Medical Savings Account funding of the deductible;
• Modifying S-CHIP to make it easier for states to allow workers to use public program funds to cover dependent children in employer health plans instead of forcing them into a public program that is different from that of their parent(s);
• Permitting individuals who pay their health insurance premiums without employer assistance to take a full tax deduction for those costs; and
• Establishing a refundable tax credit for low-to-moderate-income individuals and families for the purchase of private health coverage, including a partial tax credit that can be applied to workplace coverage.

Cautions

What Congress should NOT do is:

• NOT expand medical liability to include employers who sponsor health plans;
• NOT impose even higher costs on those with health coverage by mandating coverage for costly services and benefits;
• NOT establish small business tax incentives for health coverage that are restricted to employers who previously had not offered a health plan (which penalizes employers who have struggled to offer coverage);
• NOT bias small business tax incentives to certain health plan purchasing arrangements.

Conclusion

Small business is the backbone of our nation and has driven much of the economic boom of the 1990s and suffered its share of the "bust." When small employers are confronted with health plan rate increases of first 20 percent and then 30 percent, they need to make adjustments to their overall business plan to compensate. Most small business's bottom lines just aren't growing at the same rate as their health plan increases.

Health coverage helps ensure access to care when you need it, and economic security for working families. Congress needs to make access to affordable health coverage for small business a priority for the health of working families, and for the health of our economy.