How Small Businesses Deal with Rising Health Insurance Premiums

rising health insurance premiums

A few months ago, I reported that premiums on employee health insurance rose faster than inflation once again this year, with single coverage going up 5 percent and family coverage increasing 4 percent. In that post, I explained how the rising cost of employee health insurance has led to a declining fraction of small businesses offering coverage.

But dropping coverage isn’t the only way that small businesses react to the rising price of employee health insurance. A recent survey of a stratified random sample of 921 small businesses conducted for the National Federation of Independent Business by Mason Dixon Polling and Research identifies several other ways that small businesses respond.

In the table below, I show the fraction of small businesses that told the surveyors that they took different actions in response to premium increases. (Each business could report having taken more than one action; in fact, the average was 2.7.)

Source: Created from data from the National Federation of Independent Business ACA Report

The survey shows several important patterns:

1. The most common way small business owners respond to health insurance premium increases is to take less profit. That’s telling because, as I have written here before, health insurance premiums have risen faster than inflation for many years, while small business profits have been declining in real terms. While I can’t show a causal effect of rising health insurance premiums on the decline in small business profits, the negative correlation between the two is alarming.

2. The next most common response to the rising cost of employee health insurance is to boost business productivity. It’s important for policy makers to recognize that more small businesses react to rising health insurance costs by becoming more efficient than by passing the higher costs on to workers or by cutting headcount.

3. More small businesses respond to rising health insurance costs by cutting investment (40 percent) than by cutting wages (37 percent) or increasing the share of health insurance that employees pay (30 percent). That’s surprising for two reasons. First, many economists argue that higher health care costs should get passed on to employees in the form of lower wages and lesser benefits. Second, many economists expect small businesses to respond to higher employee health care costs by investing in labor saving technologies because machines don’t need health insurance.

4. Less than a third of small businesses raise prices in response to increases in their health insurance premiums. The inability to pass on increased benefits costs may be the reason why many small business owners have seen their profits squeezed in recent years.

5. Two of the least common actions that small business owners take in response to the increased cost of employee health insurance are to cut head count and reduce employee hours or to take the health insurance tax credit. As the survey found, these actions were only undertaken by 17 percent of small businesses. That’s ironic because supporters of the Affordable Care Act frequently argue that small business owners will take the health insurance tax credit, while opponents often claim that small business owners will cut head count and reduce employee hours in response to the new law.

Health Care Photo via Shutterstock

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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.

5 Reactions
  1. Sadly, I only feel that one of those is a positive (becoming more efficient). All the other options are less than optimal responses that will continue to stress small businesses and won’t help get more employees insured.

    • You’re right. It is like choosing between preserving your business and rewarding your employees. Either way, you will still end up hurting your business.

  2. There’s no question we have a huge problem here in the US with health care costs, and insuring against them. Obama care will only exacerbate the problems and make it much worse. One of the things that would help is to allow insurance companies to sell across states lines and eliminate the dummy companies that have to be created to do so. This would introduce some competition in the market place. One only needs to look at the unbelievable waste and fraud in the medicare system to realize the government is really bad at operating the system. Health care cost is going to get a lot worse before it gets better.

  3. I guess this health insurance thing is really taking its toll on small businesses. It is quite unfortunate that they have to resort to all these strategies just to cut costs. In the end, it still does not benefit the employees which defeats the purpose.