Saturday, December 1, 2012

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.


Unknown said...

Very interesting thoughts on the subject. I'm especially curious about the duality you describe and its impact on inequality. Do you have suggestions for further reading on that matter, either your own work or others?

workingwithfibro said...

Brilliant and concise. All the talk about small business growth in this country but no one brings up the fact that minimum wage doesn't cut it especially if you also want access to basic preventative care and treatment. Let's not forget dentistry as well. People need affordable options and affordable or free basic health care, depending on their situation, and they need to budget for health care costs not covered due to co-pays or deductible, etc.

Business also needs to give and not make employees feel like leeches for taking time off for preventative care and treatment.

Health care providers also have to be flexible.

I'm very concerned about the devastating shortage of practitioners for basic care. I have one doctor and she is a dermatologist. No coincidence that this is the doctor that I've for paid out-of-pocket for years. All of my other practitioners, including gynecological, are Nurse Practitioners and I have to say I have been pleased with the level of care an experienced CNP is able to provide.

Considering our national resources and wealth, our government has done a terrible job organizing healthcare for its citizens.

Irene Jennings said...

This will make it more expensive for firms to hire workers in the future. Consequently, it will destroy jobs, and many firms are likely to slow down on hiring in anticipation of its implementation.

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herbert said...

Yeah, I agree. It will surely make it difficult to hire workers for the small business firms. The cost to be paid will be more and the profit will be still same so it will not be possible to afford that much cost. Firms must think twice before hiring any worker after this news and will not be easy to go with this.

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Unknown said...

Having health insurance will give you access to a primary care provider who is a more appropriate provider of regular care than the emergency room. get health insurance

Unknown said...

I personally think that everyone should have an equal right to healthcare. People working under small scale businesses are likely to have less benefits and insurance coverage than the others. I think, the one who truly suffers are the workers who only receive a number of benefits and minimum wage and unfortunately -- this won't do it for them at all.

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Irene Jennings said...

Most employers, even small businesses, already offer health insurance, and the federal law is not expected to have a significant impact on what they do over the next year or so. But businesses that rely heavily on low-income workers, many of whom do not make enough to afford their share of the cost of the insurance premiums, are being forced to rethink their business models.

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Unknown said...

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.

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Unknown said...

It is true that a mandated employer health insurance is biased against small businesses in the United states. Health care providers shoul be very flexible on this. To be fair with small businesses, insurance business firms should be very creative as well. everything should be fair to everyone involved.

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