An Empirical Investigation of Health Care Coverage and Costs in U.S. Small Businesses

By Kathawala, Yunus; Elmuti, Dean | Journal of Small Business Management, October 1994 | Go to article overview
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An Empirical Investigation of Health Care Coverage and Costs in U.S. Small Businesses

Kathawala, Yunus, Elmuti, Dean, Journal of Small Business Management

The United States government provides no comprehensive health care system for its citizens. Although the federal Medicare and Medicaid programs have made health insurance available to the elderly and poor, the majority of working Americans depend on their employers to provide health insurance to defray the costs of medical care. However, Merlis (1993) indicates that nearly one-third of the U.S. work force is employed by firms that do not offer health care benefits to employees.

The rapid changes in the medical field have placed small businesses in the center of public policy discussions. According to Wilcox (1992), most of the 35 million people who lacked health insurance coverage in 1992 were small business employees or their dependents. Although small businesses traditionally have offered fewer benefits to employees, health care benefits have become increasingly important because of the increasing costs of medical care. Bernstein (1990) believes that small businesses are not likely to increase their health benefits coverage under current conditions because of the costs associated with providing the benefits. Fuchs (1993) indicates that the cost containment strategies used by many employers may not be feasible for small businesses because they face higher per worker premiums, have relatively greater worker turnover rates, and tend to have narrower profit margins from which to pay higher premiums.

The purpose of this article is to extend and refine the research that has been directed toward investigating the availability and extent of health care coverage and to investigate the relationships between the demographic characteristics of small businesses such as size, industry, and type of ownership on the provision of health insurance and the owners' attitudes toward this benefit.


A number of studies have dealt with various aspects of health care benefits in the United States. Robertson (1992) contends that technology and new medical procedures have contributed to the high costs of medical services. Eastaugh (1991) claims that medical malpractice litigation has further contributed to the rising costs of health care. Thompson (1990) indicates that health insurance is expensive because individual states have mandated that companies offer certain types of insurance. Policies that dictate coverage for chemical dependency, psychiatry, and length of hospital stay drive up the cost of insurance. Yearly increases in health insurance premiums of up to 20 percent a year have become an established pattern for purchasers of health care. For small business owners, however, these increases range even higher, from 30 to 40 percent (U.S. Small Business Administration 1991).

There has been limited effort to identify factors that significantly influence a small business owner's decision to provide health coverage to employees. Fuchs (1993) indicates that cost and availability are two factors that significantly influence this decision. The small business owner must find an insurer willing to provide coverage at a price that is attractive to his own business. Kathawala, Elmuti, and Roszkowski (1993) conducted an exploratory study among small firms largely headquartered in Illinois and found insufficient profits, high insurance costs, and unavailability of group coverage as the primary reasons for not offering health benefits. According to a 1989 survey of employers by the Health Insurance Association of America, firms with 25 or fewer employees are far less likely to offer health insurance than firms with more than 25 employees (Merlis 1993).

The U.S. Congress is considering a range of proposals with regard to health care provisions and spending. One receiving wide attention is "managed competition," under which consumers would choose from among competing health plans and would be given financial incentives to select the most cost-effective (Steinmetz 1993). Managed competition played a part in President Clinton's proposed health reform package.

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An Empirical Investigation of Health Care Coverage and Costs in U.S. Small Businesses


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