Mandated Employer Health Insurance Is Biased Against Small Business (in the US)

This morning’s story about the problems small business owners face in complying with the ACA doesn’t surprise me.  My first gig as an economist, way back in 1979, was a summer internship at the Small Business Administration, where, among other things, I prepared an analysis of the impact of health insurance mandates on small firms.  It was a pretty rudimentary piece of work: I was just a grad student and had not yet studied how to do applied micro analysis.  Still, I was able to see the main story line.

Actually, I got two out of the three pieces of the story.  First, I saw that there are economies of scale in group health insurance, and without some form of organization above the firm level, small employers will pay a higher unit cost.  Second, and quantitatively more important, small firms in the US are substantially more labor-intensive on average, so an increase in labor costs hits them harder.  The third piece, which I missed at the time, is that wages are lower in the small business sector, so a mandated benefit of given cost will constitute a larger share of the wage bill.

I concluded that, from a small business advocacy standpoint, a national health insurance program like Canada’s would be preferable to a system of employer mandates.

Since then I’ve learned that some European countries, like Germany, have employer mandates, but they don’t have the size-bias effect that ACA is likely to have in the US.  To take Germany, for instance, there are two reasons for this.  First, the Germans do have publicly-organized insurance pools above the employer level, which deals with the economy of scale problem, and SME’s are neither more labor-intensive nor lower-wage than larger firms in the same industries.  In other words, Germany doesn’t have (in this respect) a dual economy problem that mandated health insurance intensifies.

But the US suffers tremendously from duality*—the division in the economy between larger, better-capitalized, more productive, higher-paying operations and smaller, less productive sectors that offer crummy jobs.  (It isn’t entirely a division between firms because some large firms have established their own internal “secondary” sectors.)  ACA should be examined in this context, especially since the administration hasn’t proposed any measures at all to reverse the trend toward greater duality, which is one of the underlying factors behind the growth in inequality.

Just to be clear, I think it is a big step forward for workers in the secondary labor market to be able to get health insurance; this will lessen, for them, the impact of duality.  At the same time, however, we should not be surprised if ACA puts a differential burden on small business.  In the US context this might be a good thing in some respects, since jobs in small enterprises are generally pretty bad, but there are other aspects of size-bias to consider.

Ultimately, however, this is a dual economy problem, not a health policy problem.

*Duality should not be taken literally.  It is not about discrete separation but rather the tendency for size to covary with productivity and other related indicators.  Despite its moniker, it refers to a continuum.