Entrepreneurship and Public Policy Lecture 8: The Implications of the U.S. Health Insurance System for Entrepreneurship

EPP – Lecture 8 -2 Spring 2009 This Lecture Examines The implications of the employer-based health insurance system that exists in the U.S. for entrepreneurship and small business growth Evidence on the success of policies to improve access to health insurance for small firms

EPP – Lecture 8 -3 Spring 2009 Lecture Overview Role of employers in providing health insurance Small firms and health insurance coverage Policy responses directed towards small businesses Student Presentations

EPP – Lecture 8 -4 Spring 2009 Employers Play Major Role in Providing Health Insurance Historically employers are major providers of health insurance –System started during WWII 60 percent of non-elderly Americans get health coverage from employers either as policy holders or dependents Concern that this system may contribute to job lock

EPP – Lecture 8 -5 Spring 2009 Why Do We Worry about Health Insurance? Health insurance provides protection from financial losses that accompany unexpected health shocks –Risk averse individuals would prefer to have health insurance Little evidence that health insurance affects health outcomes

EPP – Lecture 8 -6 Spring 2009 Lecture Overview Role of employers in providing health insurance Small firms and health insurance coverage Policy responses directed towards small businesses Student Presentations

EPP – Lecture 8 -7 Spring 2009 Rising Health Care Costs Are Particularly Worrisome for Small Firms –Small firms are less likely than large firms to offer health insurance –Cost of health insurance has been the top concern of small business owners since 1986 (NFIB, 2004) 66% of business owners surveyed identified health insurance cost as a “critical” problem –Small firms may have difficulty containing costs for a variety of reasons Limited bargaining power Unable to hire experts to negotiate with insurers Limited opportunities for risk pooling

EPP – Lecture 8 -8 Spring 2009 In 2005, Small Firms Were Less Likely Than Large Firms to Offer Health Insurance < Number of Employees Predicted Rate of Firms Offering Health Insurance (2005) 47% 78% 84% 91%

EPP – Lecture 8 -9 Spring 2009 However, There Were No Statistically Significant Trends Toward Dropping Coverage ( ) Predicted Share of Firms Offering Insurance by Number of Employees <

EPP – Lecture Spring 2009 In 2005, More than Half of Small Offering Firms Had Health Insurance Costs > 10% of Payroll < Number of Employees Median Health Care Spending Relative to Payroll for Offering Firms (2005) 10.1% 6.8% 8.6% 9.5%

EPP – Lecture Spring 2009 From , Median Health Insurance Spending at Small Firms Increased by 44 Percent Median Health Insurance Spending at Offering Firms with <25 Employees (as a % of payroll) 7.0% 7.7% 8.6% 9.3% 10.1% % 2005

EPP – Lecture Spring 2009 Why Are Small Firms So Much Less Likely to Offer Health Insurance? Three major factors may contribute to lower coverage by small firms –Higher administrative costs of providing health insurance –Lower demand by workers –Unwillingness of insurers to take on small firm risks Partly driven by adverse selection problem

EPP – Lecture Spring 2009 Small Firms Face Higher Administrative Costs of Providing Health Insurance than Large Firms Administrative costs are large part of premiums in small firms –20 to 25 percent of employee premiums in small firms –10 percent of employee premiums in large firms If the amount of premiums are the same across firms, quality of coverage may suffer –Plans offered by small firms have lower actuarial values than those offered by large firms

EPP – Lecture Spring 2009 Workers in Small Firms May Have Lower Demand for Health Insurance Fewer workers are eligible for health insurance –More likely to have part time jobs Workers in small firms may have lower demand for health insurance –Lower wages –More workers under 25 –More workers over 65 –More likely to receive public assistance

EPP – Lecture Spring 2009 Insurers May Be Less Likely to Offer Health Insurance to Small Firms Small firms have a small pool of workers to share risk –Insurance companies simply have problem predicting health expenditures if the pool of workers is too small, and one person may affect the risk of the pool Adverse selection and “death spiral” Insurers may change their tactics: –Provide limited coverage for preexisting conditions –Exit the market by not providing HI to small firms

EPP – Lecture Spring 2009 Lower Health Insurance Coverage May Raise Important Concerns for Entrepreneurship New, small firms may find it hard to compete for workers who value health insurance –Empirical evidence of job lock is mixed Potential entrepreneurs may be unwilling to leave their jobs that provide health insurance (entrepreneurship lock) –Those who have poor health or possible genetic health conditions will be less likely to start a business –Empirical evidence suggests that entrepreneruship lock may be substantial

EPP – Lecture Spring 2009 Lower Health Insurance Coverage May Raise Important Concerns for Entrepreneurship New, small firms may find it hard to compete for workers who value health insurance Potential entrepreneurs may be unwilling to leave their jobs that provide health insurance (job lock) –Those who have poor health or possible genetic health conditions will be less likely to start a business –Some researchers find no evidence of job lock, while other find reduction in job mobility of people with health insurance

EPP – Lecture Spring 2009 Lecture Overview Role of employers in providing health insurance Small firms and health insurance coverage Policy responses directed towards small businesses Student Presentations

EPP – Lecture Spring 2009 There are Two Key Policy Approaches for Increasing Health Insurance Access for Small Firms Regulations –Market for health insurance is already subject to much regulation –Specific rules designed to make health insurance more accessible and affordable for small-firm employees Market-oriented mechanisms that may improve access to health care –Create incentives for people and firms to make better choices about health insurance –Extend the preferred tax treatment for health insurance to cover a broader range of options –Association health plans as a way to extend economies of scale to small firms and provide an avenue for risk pooling

EPP – Lecture Spring 2009 State Regulatory Mandates Included Three Types of Reform –Restricts rate variation –Restricts characteristics that can be used to determine premium –May allow rates to vary by group size –Requires policy to be issued and/or renewed –Guaranteed renewal is more common –Limits time for which pre-existing conditions can be excluded from coverage –Exempts individuals covered by previous health insurance plan from pre-existing condition exclusions Rating reform Guaranteed issue/renewal Portability and limits on pre- existing condition restrictions

EPP – Lecture Spring 2009 Effects of Health Insurance Regulation on Small Business Little effect on small firm’s propensity to offer health insurance Little effects of the health Insurance regulations on premiums Some evidence of shifts in workforce composition as a results of health insurance regulations and costs Little evidence of effect of health insurance regulations on job mobility, although continuation mandates might have increased job mobility

EPP – Lecture Spring 2009 Market Oriented Mechanisms for Improving Health Insurance Access Consumer directed health plans –Aim to control costs by increasing consumer’s financial responsibility and involvement in their health care choices –Change incentives by making individuals financially responsible when choosing costly options Often combine high deductible plans with Health Savings Accounts (HSA) or Health Reimbursement Accounts (HRA) –Favored tax treatment for money spend on health care Purchasing pools

EPP – Lecture Spring 2009 CDHPs Have Not Expanded Access to HI for Small Business Small firms are still much less likely to offer HI Conditional on offering HI, small firms are equally likely to offer HD and either HRA/HSA Smaller firms that offer HD insurance are much less likely to offer HSAs –Firms with 500+ employees were... More than 8 times more likely than firms with employees to offer HSAs along with HD insurance 2.5 times more likely than firms with 3-24 employees to offer HSAs along with HD insurance Little is know about the success of purchasing pools, but there are theoretical arguments that suggest their effect will be limited

EPP – Lecture Spring 2009 Lecture Overview Role of employers in providing health insurance Small firms and health insurance coverage Policy responses directed towards small businesses Student Presentations

EPP – Lecture Spring 2009 Discussion Questions Suppose you start a new businesses… –Would you provide a health insurance? –What are the pros and cons of providing health insurance? –Suppose your businesses competes with firms in China and Canada. How would health insurance decision change? –How would you feel about specific health reform proposals such as employer mandates or universal health insurance? Suppose you are a politician… –What health insurance reforms would you favor?

EPP – Lecture Spring 2009 Discussion Questions Do health shocks affect selection into entrepreneurship? –How would you research this question? What would you expect policymakers to do with the answers? What are the pros and cons of an employer health insurance mandate as part of a universal health care plan? –If NFIB asked you to do research and advise them as to whether to support such a plan, how would you approach the question? Even though self-employed are less likely to have health insurance, they are relatively as healthy as wage earners. What does this mean for our today’s discussion? How might the health insurance system limit opportunities for entrepreneurs with disabiities or chronic health conditions?