Small Businesses’
Decisions to Offer
Health Insurance
to Employees
Catherine McLaughlin and Adam Swinburn, June 2014
Employer-sponsored health insurance (ESI) is the dominant source of coverage for nonelderly adults in the United States. Virtually all businesses with 200 or more workers offer coverage to at least some of their employees, whereas many small businesses do not offer it to any. An important reason employers say they offer coverage is so they can recruit and retain workers with the desired skills and experience; the most common reason for not offering it is the cost. Some small businesses also do not offer coverage because they think their employees do not need or want it, perhaps because the employees obtain better (or less expensive) ESI through their spouses or do not feel compelled to carry health insurance at all, especially at the going price.
The Affordable Care Act (ACA) exempts businesses with 50 or fewer full-time-equivalent (FTE) employees from the employer mandate, and those with 50 to 99 FTEs are exempt until 2016. Nonetheless, several provisions in the ACA, such as the small business tax credit and the Small Business Health Options Program (SHOP), may reduce small business premiums and prompt these employers to offer insurance despite the exemption. Moreover, small businesses may feel greater pressure to offer coverage than they did before the ACA in view of the requirement that all individuals obtain it. On the other hand, Medicaid expansion and the availability of community-rated individual plans and subsidized coverage through the new health insurance exchanges may reduce the demand for ESI, especially among low-income and part-time workers, leading businesses exempt from the employer mandate to drop coverage.
Mathematica Policy Research conducted the Small Business Health Insurance Survey, an online and telephone survey that took place from November 2012 to September 2013, in order to gain insight into small businesses’ decisions whether to offer health insurance and the likely effects on that decision brought about by the ACA. The survey was administered in five of the 11 states in the Robert Wood Johnson Foundation’s State Health Reform Assistance Network: Alabama, Colorado, Minnesota, New York, and Oregon.
Data
For our survey, we randomly selected small businesses with 3 to 100 employees in each state from a sample provided by Dun & Bradstreet. We weighted the responses in each state to reflect the population of businesses in each size category and to account for potential nonrandom responses to the survey. The response rate was 46 percent.
Why Do Some Small Businesses Offer Health Insurance?
The percentage of businesses with 3 to 100 employees that offer health insurance ranged from 56 percent in Oregon to 67 percent in Minnesota. We asked businesses that offered coverage why they did so and which reason was most important. In all five states, the most common reason mentioned was that offering coverage helps retain employees; the second most common was that it helps employees stay healthy and productive; third was that it helps them recruit employees; and fourth, that the company has a responsibility to provide this benefit to employees. When asked to choose the most important reason, however, the greatest proportion of employers in all states except Colorado (from 30 percent in Alabama to 45 percent in Oregon) said
Although retention, recruitment, and industry norms were, on average, cited less frequently than a sense of company responsibility as the main reason to offer coverage, these reasons are likely to be interconnected. That is, if most businesses in an industry offer coverage, every employer in that industry will feel competitive pressure to offer coverage to help them recruit and retain workers with the desired skills and experience.
We asked small businesses that offered insurance how many of their employees were eligible for that coverage. Responses varied across the states, ranging from an average of 57 percent in New York to 84 percent in Alabama (Table 2). We also asked what proportion of those who were eligible enrolled in (or “took up”) the coverage offered. That average also varied, from 68 percent in Alabama to 84 percent in Oregon (Table 2).
The out-of-pocket premium cost relative to workers’ earnings appeared to influence whether or not the workers enrolled in insurance. Small businesses in Alabama, which had the lowest average take-up rate, were the most likely to cover less than 25 percent of the premium and also had the highest percentage of full-time workers earning less than $50,000 per year (Table 2). In each state, businesses where most full-time workers earned more than $50,000 per year had higher take-up rates than those where most earned less. In Alabama, Colorado, and New York, the average take-up rates were higher in businesses that paid at least 50 percent of the premium than in those that paid less than 25 percent.
Percentage Saying Most Important Reason They Offer Health Insurance is: State Company’s It’s the
Responsibilitya Retention To Keep Employees Healthy and Productiveb It’s a Standard Benefit in My Industryc Recruitmentd Alabama 30% 24% 23% 9% 12% Colorado 20% 17% 30% 21% 4% Minnesota 41% 27% 10% 12% 11% New York 35% 30% 20% 3% 6% Oregon 45% 27% 20% 4% 3%
Source: Mathematica calculations based on data from the Small Business Health Insurance Survey.
Note: Respondents were also able to indicate “other” reason: the most common reason written in was, “We have been offering health insurance for a long time.”
a Percentage for Colorado is significantly lower than for Minnesota at, p < 0.1, and Oregon, at p < 0.05. b Percentage for Minnesota is significantly lower than for Colorado, at p < 0.1.
c Percentage for Minnesota is significantly higher than for New York and Oregon, at p < 0.05.
d Percentage for Oregon is significantly lower than for Alabama and Minnesota, at p < 0.05. Percentage for Colorado is significantly lower
than for Alabama, at p < 0.1.
Table 1. Most Important Reason Cited for Offering Health Insurance
State
Average Percentage of
Employees Eligible for Health
Insurancea Average Percentage of Eligible Employees Enrolledb Average Percentage of Full-Time Employees Earning <$50,000c Percentage of Employers Covering Less Than 25 Percent of Premiums Alabama 84% 68% 80% 12% Colorado 77% 83% 66% 4% Minnesota 70% 79% 64% 2% New York 57% 83% 58% 7% Oregon 83% 84% 70% 9%
Source: Mathematica calculations based on data from the Small Business Health Insurance Survey.
a Percentage for New York is significantly lower than for Alabama, Colorado, and Oregon, at p < 0.01 and for Minnesota, at p < 0.1. Percentage
for Minnesota is significantly lower than for Alabama and Oregon, at p < 0.05.
b Percentage for Alabama is significantly lower than for Colorado, New York and Oregon, at p < 0.05. c Percentage for Alabama is significantly higher than for Colorado and New York, at p < 0.05.
Table 2. Eligibility, Take-up Rates, Employee Earnings, and Premium Costs in Businesses That Offer Coverage
The majority of small businesses with part-time workers offered health insurance (Table 3). We asked these employers whether they offered coverage to their part-time employees; the proportion that did ranged from 11 percent in Alabama to 38 percent in New York and Oregon (Table 3). The likelihood of offering coverage to part-time workers was not correlated with the percentage of employees who worked part time.
How Likely Are Small Businesses to Drop Coverage? We asked employers who offered insurance whether they had
shopped for it in the previous year, and whether they recently had considered dropping employee health insurance benefits altogether. In all states but Alabama, most businesses that offered coverage had shopped for insurance (Table 4), indicating a willingness to look for lower premiums and/or different cost sharing or coverage of preferred services or providers.
A substantial proportion of employers, from 21 to 31 percent, had recently considered dropping coverage (Table 4). In general, businesses with a higher proportion of their employees covered by their ESI were less likely to consider dropping health insurance. Employers in Minnesota and New York who said the most important reason they offered coverage was that it was the company’s responsibility were less likely than other employers in those states to have considered dropping coverage. In Colorado and Oregon, employers who said the most important reason was that it is a standard benefit in their industry were less likely to have considered dropping coverage.
We asked employers whether availability of individual coverage in the new health insurance exchanges would influence their decision to offer insurance. Most said the exchanges would have no impact on their decisions, but 5 to 20 percent said the exchanges would make them less likely to offer ESI.
Percentage of Businesses With Part-Time Employees State Health InsuranceThat Offer That Offered Insurance to Part-Time Employeesa
Alabama 51% 11%
Colorado 55% 34%
Minnesota 66% 15%
New York 58% 38%
Oregon 61% 38%
Source: Mathematica calculations based on data from the Small Business Health Insurance Survey.
a Percentage for Alabama is significantly lower than for Oregon, at p < 0.05 and New York, at p < 0.1.
Percentage for Minnesota is significantly lower than for Oregon, at p < 0.1.
Table 3. Availability of Employer-Sponsored Health Insurance to Part-Time Workers
Percentage of Businesses That
Average Percentage of Employees
Coveredb State Insurance in Shopped for
Previous Yeara Considered Dropping Health Insurance Alabama 36% 31% 56% Colorado 56% 23% 64% Minnesota 64% 25% 54% New York 55% 27% 45% Oregon 75% 21% 71%
Source: Mathematica calculations based on data from the Small Business Health Insurance Survey.
a Percentage for Alabama is significantly lower than percentages for Minnesota and Oregon, at p < 0.05.
b Percentage for Oregon is significantly higher than percentages for Minnesota and New York, at p < 0.01, and for
Alabama, at p < 0.1. Percentage for Colorado is significantly higher than percentage for New York, at p < 0.05.
Table 4. Shopping for Insurance and the Decision to Drop Coverage Among Businesses That Offer It
Why Do Some Small Businesses Not Offer Health Insurance?
We asked businesses that did not offer health insurance about their reasons for not doing so and which reason was most important. In all five states, the most common reason cited was that the business could not currently afford to offer coverage. In Alabama, Minnesota, and Oregon, the second most commonly cited reason was, “It’s not my responsibility to provide this benefit.” In Colorado and New York, the second most commonly cited reason was, “My employees do not want or need it.”
When asked which of these reasons was most important, the most frequently chosen was the business’s inability to afford coverage (Table 5). In Colorado, the perception that employees did not want or need ESI was mentioned almost as often as the employer’s inability to afford coverage (43 percent and 49 percent respectively), and more than a quarter of employers in New York indicated this perception as their most important reason for not offering it. Employers in Alabama were more likely to say offering insurance was not their responsibility (17 percent) than to say employees did not want or need it (6 percent).
Although relatively few employers in Colorado and Minnesota that did not currently offer health insurance had offered it within the previous five years, 23 percent had offered it in New York and 20 percent in Oregon (Table 6). In Colorado, New York, and Oregon, 32 to 44 percent of businesses that did not currently offer coverage had shopped for insurance in the previous year, reflecting a recent interest in offering coverage (Table 6).
What Would Influence a Small Business to Start Offering Coverage? Several provisions of the ACA are designed to
make it easier for small businesses to provide health insurance to their employees by reducing premium costs and the costs of searching for insurance. Other provisions (such as the individual exchanges with premium subsidies and Medicaid expansion) may affect whether small-business employees want or need insurance through their employers. Employers were asked whether they were familiar with these provisions and were presented with follow-up questions about two in particular: the small business tax credit and the SHOP exchange. In all five states, most businesses said the tax credit would make them more likely to start
Percentage Saying Most Important Reason They Do Not Offer Health Insurance Is: State Cannot Currently Business
Afford It Employees Do Not Want or Need Ita It’s Not My Responsibility to Provide This Benefit Other Alabama 74% 6% 17% 3% Colorado 49% 43% 5% 3% Minnesota 59% 9% 6% 25% New York 71% 26% 0% 3% Oregon 70% 16% 1% 14%
Source: Mathematica calculations based on data from the Small Business Health Insurance Survey.
a Percentage for Colorado is significantly higher than for Minnesota or Alabama, at p < 0.1.
Table 5. Most Important Reason Cited for Not Offering Health Insurance
Percentage of Businesses That Do Not Offer That State Offered Insurance Within Previous Five Years Shopped for Insurance in Last Yeara
Alabama 15% 8%
Colorado 5% 38%
Minnesota 9% 5%
New York 23% 44%
Oregon 20% 32%
Source: Mathematica calculations based on data from the Small Business Health Insurance Survey.
a Percentage for Minnesota is significantly lower than for Colorado and Oregon, at p < 0.1.
Table 6. Previous Offers of Health Insurance and Shopping Behavior for Businesses That Do Not Offer It
Conclusions
Many small businesses reconsider their decisions to offer insurance, and what insurance to offer, with some frequency. A significant minority of small businesses in New York and Oregon not currently offering insurance had offered it within the previous five years. In all states except Alabama, most businesses that offered insurance (and a smaller proportion of those that did not) had shopped for it in the previous year. It is reasonable to expect the changes in the health insurance market stemming from various provisions in the ACA will influence those decisions.
In four of the five states, the reason given most often as most important for offering health insurance was that it is the company’s responsibility. Although businesses with fewer than 50 FTE employees will remain exempt from the employer mandate, many felt they should offer coverage and, by inference, probably will continue. Among the sizeable minority that cited the ability to recruit and retain workers as the most important reason for offering health insurance, however, the availability of coverage in the individual exchanges may influence whether they continue to do so.
Among businesses that did not offer ESI, the main reason given was that they could not afford it. Some said the small business tax credit and the SHOP exchanges would encourage them to offer insurance by making it more affordable. Employers in Colorado and New York, however, frequently said their workers did not need or want ESI. This sentiment may become more prevalent as the exchanges make individual coverage accessible to and more affordable for some of their workers.
Part-time workers are generally less likely than full-time workers to be eligible to participate in a business’s health insurance plan. The greater availability of individual coverage under the ACA has led some analysts to predict an increase in part-time work among those who had worked full time mainly to obtain ESI. It may also influence workers who previously worked for large businesses primarily to obtain ESI to go to work for small businesses in jobs that might better suit their education and skills. The results of our survey suggest greater job mobility due to the ACA could change the landscape of ESI in ways small employers may not yet anticipate and alter their incentives and reasons for either offering or not offering coverage.
Percentage of Businesses That Said the Following Would Make Them More Likely to Start Offering: State Small Business Tax Credita SHOPb
Alabama 72% 32%
Colorado 89% 78%
Minnesota 55% 18%
New York 54% 70%
Oregon 72% 22%
Source: Mathematica calculations based on data from the Small Business Health Insurance Survey.
a Percentage significantly higher in Colorado than in Minnesota, at p < 0.1.
b Percentage significantly higher in Colorado than in Alabama, Minnesota, and Oregon, at p < 0.01.
Table 7. Key ACA Provisions That Would Make Businesses More Likely to Start Offering Coverage
About Mathematica Policy Research
Mathematica Policy Research is dedicated to improving public well-being by bringing the highest standards of quality, objectivity, and excellence to bear on information collection and analysis for our partners and clients. The company has been at the forefront of assessing the effectiveness of policies and programs since 1968.
This study was funded by the Robert Wood Johnson Foundation.
About the Robert Wood Johnson Foundation
For more than 40 years the Robert Wood Johnson Foundation has worked to improve the health and health care of all Americans. We are striving to build a national Culture of Health that will enable all Americans to live longer, healthier lives now and for generations to come. For more information, visit www.rwjf.org. Follow the Foundation on Twitter at www.rwjf.org/twitter or on Facebook at www.rwjf.org/facebook
