Consequences
In the United States, health insurance plays an important role in managing health care costs, and most people-54.5%-get coverage through employer-sponsored plans (Keisler-Starkey, Bunch, and Lindstrom 2023). Small employers looking to offer health benefits to their employees may face a more onerous task than their larger counterparts. As policymakers and decision makers consider how to make health benefits affordable and accessible to the more than 9 million self-employed workers and 66 million workers in small businesses, we offer the following conclusions from our results:
Health insurance premiums are just one component of the total cost of health care.
In this report, we analyzed health insurance premiums in comparison to operating expenses and wages, which are important indicators of the burden faced by small businesses. For many small businesses and their employees, insurance premiums may be the largest component of health care costs. However, premium payments do not tell us about plan deductibles or employee contributions, which are also part of the overall health care costs faced by small businesses and their employees, especially if some businesses manage their costs by shifting them to their employees.
Cost is only one aspect of the health insurance burden faced by small businesses.
Health insurance premiums are a material cost for both non-employer and employer businesses. However, the cost of these insurance premiums, such as the quality of health care received, can be opaque. In addition, small businesses must navigate a complex health insurance marketplace to find the right health insurance plans, as well as a complex tax system that includes tax credits and potential penalties. Large companies may have the staff to handle these issues, but it can be difficult for small businesses to sort through all the options. A combination of policy and product solutions can address these issues.
The cost and availability of health insurance can affect entrepreneurship and economic growth.
Lack of health insurance can discourage potential entrepreneurs from starting businesses that could foster innovation and economic growth. For employer companies, health insurance benefits are part of the total compensation necessary to attract and retain the talent needed to grow the business. Moreover, both payroll and health insurance premiums have increased significantly in recent years. Although most small businesses cannot grow large enough to affect economic growth, start-ups, growth and exits play an important role in reallocating the economy's resources. An economy devoid of this dynamism risks stagnation.
Appendix
Our study sample included de-identified firms with Chase Business Banking deposit accounts that made regular health insurance premium payments and met our activity criteria. The activity criteria-at least $500 in outflows and 10 transactions in each month-ensured that our analysis of health insurance payments versus business expenses and payroll excluded non-performing firms while allowing for variation in business activity.
To ensure that we capture regular health insurance premium payments, we examined firms' activities using rolling three-month windows. A firm was included in the sample in the focal month if it made at least three health insurance premium payments in the last three months, and the payment amount was the average of all payments. This allowed for variation in terms that still remained relatively consistent. For example, payments made at the end of a short month such as February were sometimes published at the beginning of the following month, giving the impression that the health insurance payment was double in March and zero in February.
We divided our sample into non-employers and employers based on evidence of electronic payroll and estimated annual expenditures. We again used rolling three-month periods to determine whether a firm had a regular payroll. Firms in our sample of employers showed evidence of payroll averaging at least $500 per month on at least three transactions during the three-month period. This relatively low threshold allowed us to account for wage fluctuations across employers. Non-employer firms had no payroll in any of the three months and their annual expenditures were less than $500,000. Firms with relatively large expenditures are more likely to be employers even if we do not observe their payrolls.
For non-employer and employer firms, we created a cross-sectional sample and a longitudinal panel of firms. Firms included in the cross-sectional sample in any given month met the criteria described above for the three months ending in the reference month. Firms entered and exited the sample as circumstances changed. For example, a firm could exit the sample without an employer if the firm began making payroll, if the business owner stopped making health insurance payments, or if the firm closed its deposit accounts. Consequently, the composition of the cross-sectional sample changes over time, although all included firms meet the established criteria.
Each longitudinal panel is balanced: the sample consists of eligible firms in each month of the sample. These firms pay health insurance premiums steadily and do not change from "non-employer" to "employer" status. The advantage of these longitudinal panels is that their composition does not change over time; changes in typical experience in these samples are unrelated to changes in the sample composition. Each firm, however, may have undergone a change, such as increasing revenue or adding more employees, but it continued to meet the criteria for paying health insurance premiums and remained either a nonemployer or an employer. Only a small fraction of nonemployers become employers (Farrell, Wheat, and Mac 2018).
The disadvantage of such panels is that relatively fewer firms can meet the criteria for each month over several years. Our panel without employers included 1,655 firms and our panel with employers included 1,863 firms. About half of new businesses last five to six years, so the five-year panel consists of firms that have lasted longer than many of their peers. However, since businesses with fewer than 50 employees are not penalized if they do not offer health insurance, it is possible that those that do offer this benefit are also more stable.