Small-Business Health Insurance

MORE than 30 million Americans don't have health insurance. Many may have to deal with high medical costs and illnesses that can harm their economic security. Most of the uninsured are not poor or jobless. The American Medical Association estimates that 70 percent of the uninsured are employees or their dependents.

Data from the US Small Business Administration indicate that three of every four working uninsured are employed by small businesses. That makes health coverage a major small-business issue.

President Bush has asked Health and Human Services Secretary Louis Sullivan to develop recommendations for federal approaches toward the uninsured. But state governments hold the key to one part of the solution. They should take action to help small businesses make coverage available to many more people.

Small businesses employ half the nation's work force. Most small companies (about two-thirds) provide health coverage for their workers.

The biggest gap in coverage exists for workers in companies with fewer than 25 employees. Nearly half of all uninsured workers are employed by those firms.

A number of economic factors conspire to make health benefits difficult for small companies:

Small companies generally have smaller profit margins, and less financial flexibility.

The composition of the small-business work force makes insurance more costly and difficult. Small firms employ 1.5 million more workers above age 55. Their health needs are often more expensive. They also employ more temporary and seasonal workers, driving up the costs of creating coverage.

Small business can't benefit from economies of scale. For example, while many larger companies create their own health coverage by self-insuring, small companies generally don't have enough workers and profits to make self-insurance economical. And when big companies self-insure, they reduce the number of workers in the overall national pool, raising costs for others.

Health costs are climbing rapidly (20 percent a year), making insurance tougher to get.

Such factors mean health costs for small businesses are as much as 40 percent higher than premiums for larger companies.

Some members of Congress have proposed a deceptively simple solution: a new federal mandate requiring all businesses to provide health insurance.

But that doesn't address the economic factors underlying the problem. In fact, a federal mandate would require small firms to buy what they can't afford, and would force many to close.

Most small companies would provide health insurance, if they could. One survey found that 64 percent of small businesses want to provide some or better health insurance for their workers.

They are under increasing pressure to do so. In the '90s, the labor force will grow more slowly than the number of new jobs. Competition to attract and retain qualified workers will become intense. Small businesses know they can't compete for those workers without benefit packages.

The question is not whether small businesses are willing to provide health insurance: The question is whether they're able to. A key question facing federal and state policymakers is how to help small companies do the job.

One part of the solution is now in the power of state government.

In recent years, there has been a trend among state legislatures to require that health-insurance policies include such extras as chiropractic coverage, drug and alcohol therapy, and psychiatric care. While these benefits are desirable, they raise premium costs 20 to 30 percent and aren't essential to basic health insurance.

By one count, there are now more than 800 such mandates nationwide. The Health Insurance Association of America estimates that, other factors aside, 16 percent of small businesses that do not now offer health coverage would do so if the nonessential coverage mandates were repealed.

In recent months, some states - including Virginia, Washington, Illinois, Kentucky, Missouri, Rhode Island, and Florida - have passed mandate-waiver laws allowing ``bare bones'' coverage. Early predictions are that these plans will prove far less expensive for small businesses.

A number of organizations are recommending a different approach: federal preemption of state mandates. As a former state legislator, I prefer intelligent state action to federal mandates. States that haven't enacted waivers to mandated coverage should do so, particularly for small companies with fewer than 25 workers.

Concern about the uninsured is building. Justifiably so. Unless states act, the federal government will likely act on their behalf.