Health Insurance for Small Business

Every health care reform proposal attempts to offer some relief for small businesses.  According to the National Federation of Independent Businesses (NFIB), small businesses create 2/3 of American jobs, yet half of the uninsured are in small businesses.

Look at President-elect Obama’s health care proposal on his campaign’s web site.  The first two items:  

  • Require health insurance companies to cover pre-existing conditions so all Americans regardless of the health status or history can get comprehensive benefits at fair and stable premiums.
  • Create a new Small Business Health Tax Credit to help small businesses provide affordable health insurance to their employees.

What’s remarkable about these proposals is that we are still discussing them.

Let’s look at the second item – a tax credit for small businesses.  In my opinion, it is a mistake to separate the small business market from the individual market.  Almost every small business starts out as a solo enterprise.  How many creative ideas never come to market because the would be entrepreneur is afraid to go without health insurance?

Yet we don’t make it easy.  Anyone who has ever itemized deductions has experienced the limits on the deductibility of health insurance costs.  There is also something called a section 105 deduction that you can learn about elsewhere.  Yet business owners can deduct the full cost of their medical insurance.  I would welcome an explanation that justifies this disparity, or at least explains the politics to me.

The real nut is the first item.  That we allow insurance companies to only insure healthy people is the greatest tragedy of American health care.  This is called medical underwriting.   Jonathan Cohn in his book, Sick, has a wonderful chapter on this stain on American health care.  

That there is a logic to this is further example of the Alice in Wonderland character of American health care.  Unlike home or auto insurance, there is no requirement that people have health insurance.  So insurers will naturally expect those in the market for health insurance to need it more than others.  The best way to protect their profits – and they are in business to make a profit – is to not insure sick people.

The way around this is a combination of mandates and risk pooling.  If everyone is required to have health insurance, there is a greater likelihood that healthy and sick people will be spread evenly among all insurance companies.  Some sort of risk pooling could serve as a backstop for insurers with a disproportionate share of sick people.  Unfortunately most risk pooling proposals act as a dumping ground for severely ill people.

Small business groups also see salvation in Association Health Plans.  This is little more than an effort to gain some advantage to the programs they are already marketing.

One reason why little progress has been made on this issue is that the interest groups are conflicted.  The NFIB and the Chambers of Commerce represent small businesses.  They also augment member dues by selling health insurance to their members.  In addition, they represent insurance companies and insurance agencies.  

What may be in the interest of the entire small business community is undermined by these narrower interests.  The narrower interests are able to prevail because they all share a myopic knee jerk loyalty to a free market ideology.  Ideology trumps practicality.

Again simple is better.  A single plan for each geographic region can enroll both individuals and small businesses.  It would spread the risk evenly, reducing costs for all.  Health care dollars could be spent on health care, not marketing and medical underwriting.  

Linking premiums to income is a radical idea to some, but there are businesses who charge their employees for health insurance based on their income.  Why can’t it work in the public space?  A tax credit only makes sense for someone who is making money.  It does little to help the small business who has yet to show a profit.

If there is to be a solution for small businesses, policy makers will need to listen directly to those small businesses without insurance and not those who purport to represent them.  And certainly not Joe the Plumber!

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2 Responses to Health Insurance for Small Business

  1. Ken Ehrenthal says:

    Why are we still in the health Insurance paradigm? It makes no rational sense to insure the uninsurable. From birth to death we need health care. Probably we can insure against catistrphic events, but the larger the pool the more cost sharing. Of course all the population is the largest pool. A national health plan could obviate the need for any business large or small to incur employee health insurance costs. It cedrtainly would make our economy more competitive since most other developed nations have a system of national health care.

  2. jimmy1920 says:

    Ken
    I am not sure that I fully understand your question.
    Equating the current health insurance status quo as a model for health insurance is like using Hurricane Katrina as a model for disaster relief.
    There is very little “insurance” in today’s health insurance space. Most groups of any size are either self-insured or experienced rated. That is even more true with the (Republican} emphasis on high deductible plans and Health Savings Accounts. The only risk sharing is within the group and not across all groups.
    I think we are in agreement that what is really needed is a system that spreads the costs of health care across the entire population on some equitable basis.
    But I can see a viable health care reform proposal that has a role for the insurance companies. But they would need to be invisible, as they are today in their roles as Medicare intermediaries.

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