September 23, 2014

One Frightening Statistic on Small Business Health Insurance

The other day a reporter asked me what one statistic I thought best showed small business’s problems with the U.S. health care system. After thinking about it for a while, I decided that it’s this one: Since 1999 the average cost of employee health insurance premiums (for family coverage) has risen 84 percent in inflation adjusted terms (148 percent in nominal terms).


Source: Created from data from the Kaiser Family Foundation’s Employer Health Benefits 2011 Annual Survey

In the figure above, I chart the trend in the cost of premiums for family coverage at small businesses, using data from the Kaiser Family Foundation’s annual survey on employer health benefits. Statistically, an upward sloping straight line (included in the chart) fits the data pretty well.

To understand why this is a problem, consider what has happened to the average business’s revenues since 1999. The Internal Revenue Service (IRS) only provides data on business revenues through 2008.

But between 1999 and 2008, the revenues at the average American company fell 5 percent in inflation-adjusted terms. Over the same period, employee health care premiums went up 64 percent when measured similarly.

The rapidly rising cost of employee health insurance means that the cost of health insurance has increased from 5.4 percent of total worker compensation in 1999 (PDF) to 7.7 percent in 2012 (PDF), according to Bureau of Labor Statistics data.

You don’t need an economics Ph.D. to see why for why these numbers are frightening to small business.

12 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

12 Reactions

  1. Shane,

    I totally agree. We have to something about the rising cost of healthcare. it’s a very complex issue, and I never know who to believe.

    Any ideas?

    The Franchise King®,

  2. Very interesting analysis here. We are a small small business and offer medical and dental. Our cost is almost 7% of compensation, but when I did the math on what would cost us to have individual insurance the cost would be much higher and coverage lower, especially for women under 40. In some cases double the group insurance. So it became an issue of conscious capitalism in our case. The cost of losing our highly trained employees would be much higher. So I consider this a retention investment. I wish it was lower, of course, but not getting insurance was not going to solve the problem…

    • Where do you get the idea that individual would be higher? We are a small business that can’t get private for our family as I have been denied twice. We are two 31 year olds with a 3 year old. For private, we can have an HSA, $5400 a year deductible, and no co insurance after deductible for $300.00 if I could get approved.

      The same $5400 deductible a year on group insurance costs 600-700 a month and has me paying 20% coinsurance after I meet the huge deductible AND has me paying $1000 per hospitalization! I am appalled at the choices we have for health insurance. This is the biggest road block we face yet in working for ourselves. I can’t afford to pay for health insurance that costs as much as my mortgage a month!

  3. Great point. The aspect you bring up is definitely the less appealing, “unsexy” side of starting your own business. I agree that being self-critical could go a long way. Many times, it seems, the individual with the entrepreneurial attitude overlooks these details so it is definitely a good idea to have someone on your team that won’t miss these key points.

    We appreciate the insight!

  4. How will ACA impact this?

  5. The rising cost of health care expressed as a percentage of overall business expenses is very troubling for all small business owners. The key word is “all”. I think too many of us look at “my” business costs are rising which squeezes my bottom line. The reality is that the increase in health care costs are passed on to all consumers by all business just like the cost of fuel. For the Obamacare plan to work it has to push down the total cost of healthcare. Many people say that the math indicates costs to business owners will not go down and will probably go up. That measurement misses the point. The question is will health care costs for ALL of the citizens of the U.S. go up or down? I can lower my business health care cost by simply reducing my employer contribution to the company heath insurance plan – heck, I could even stop paying for health care at all. And then I could charge less and beat my competition. That would work for my business until an un-insured employee (maybe me) has a debilitating illness which wipes out ones personal wealth. Um, maybe that wasn’t such a good idea.

  6. Scott, these are alarming statistics. Another similar one is how the cost of healthcare is outpacing inflation 3 to 1 each year. After a few years of compounding , people can’t afford health insurance anymore. I’m dissapointed that the Affordable Care Act didn’t do much to control the real cost drivers of healthcare (and in turn health insurance). Keep the statistics coming. The more people are educated about how serious the problem is, the sooner we will head toward an effective solution.

    Jared Balis

  7. As a full service insurance agent in Maine, I can say that we really have only two companies up here that can serve the individual, small business owner and family markets. We find the best solution is packaging supplements around the basic health care plan to solve the deductibles issue and put money into the consumer’s pocket in a variety of circumstances.

  8. I think one should even look for the plan which Covers Some Preventive Services To Maintain there health in the first place !

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