Access to Health Insurance at Small Establishments: What Can We Learn from Analyzing Other Fringe Benefits?

Article excerpt

Workers employed at small establishments are less likely to be offered health insurance than workers in larger establishments. They are also paid less and are less likely to be offered pensions, paid sick leave, and paid vacations. Using the Medical Expenditure Panel Survey, we examine the relationship between health insurance and other components of workers' compensation. We also propose an approach for identifying and prioritizing the reasons why workers in small establishments are less likely to be offered employer health insurance by comparing the provision of health insurance and how it changes with establishment size to the provision of these other fringe benefits and how they change with establishment size. We find that workers in larger establishments are not only more likely to be offered health insurance by their employer, but also are more likely to be offered retirement and paid vacation benefits. The results of our benefits comparison analysis suggest an important role for administrative costs as an obstacle to offering health insurance.

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Workers employed at small establishments are substantially less likely to be offered health insurance than those at larger establishments. Policymakers and researchers have long sought ways to increase access to employer insurance for workers at small establishments but have had little success. Many policy proposals and reforms--for example, the small group insurance reforms enacted by many states in the 1990s--were motivated by the belief that the fundamental reason for the establishment-size "offer gap" in health insurance was insurance market failures or other problems unique to health insurance.

However, other explanations--differences in administrative costs or in worker preferences for benefits--may play an even larger role. At small establishments, wages are lower, and workers are less likely than those at large establishments to be offered retirement plans, paid sick leave, paid vacations, paid holidays, and life insurance. In fact, they are less likely to be offered every benefit on the extensive list for which the National Compensation Survey collects data except year-end or holiday bonuses (U.S. Bureau of Labor Statistics 2006). It is difficult to explain these gaps in the offering of other benefits as the result of insurance market failure. Therefore, to more fully understand the offer gap in health insurance, it is important to consider health insurance in the broader context of benefits available to workers in small establishments.

In this paper, we provide that context. We show how establishment size affects the provision of three components of compensation: health insurance, retirement plans, and paid vacations. This analysis demonstrates how unique health insurance access is for workers at small establishments and to what extent it is part of more general compensation issues. We develop a conceptual framework to compare health insurance with these other two benefits to help identify what drives the disparities in health insurance offering by establishment size.

There are three commonly cited explanations for why small establishments might be less likely to provide health insurance. First, employers may incur human resources costs in shopping for benefits, coordinating the benefits with employees, integrating the benefits with payroll, and administering the plan in general. If the per-worker administrative costs of a benefit decrease with establishment size, larger establishments will be more likely to provide that benefit (the "administrative cost" story). Second, if benefits are demanded relatively elastically and if workers in smaller establishments tend to receive lower total compensation, those workers will prefer a smaller share of that compensation in the form of benefits (the "worker demand" story). (1) Third, smaller employers might be more susceptible to failures in insurance markets. For example, concerns about adverse selection might result in especially costly insurance premiums for the group (the "insurance market failure" story). …