Small Firm Size and Health Insurance: A Private Enterprise Perspective
Cebula, Richard J., Journal of Private Enterprise
This study has two objectives. First, it proffers and then empirically investigates what is being identified as the "small firm hypothesis," i.e., a hypothesis that the greater the percentage of firms in the U.S. that are "small," the greater the percentage of the population that can be expected to be without health insurance. The study adopts the percentage of private firms with 20 or fewer employees as the measure/definition of "small firms." The empirical analysis adopts state-level data and finds, after controlling for a variety of other factors, strong empirical support for the small firm hypothesis. Second, with this as the backdrop, this study seeks to critique public policies in the forms of (1) mandated universal health insurance coverage (mandating) and (2) tax-credit incentive policies intended to reduce the percent of the population without health insurance. The study then compares said policies to a private enterprise perspective and finds no compelling evidence of a market failure in the health insurance market. Mandating and tax-credit policies are not only unnecessary but also would create myriad negative economic effects for the economy and jeopardize the private enterprise system.
JEL Codes: I11, I18, H62
Keywords: Health insurance, Small firms, Mandated insurance, Tax-credit incentives, Private enterprise
In addition to the extensive attention they receive in the media, health economics issues, in their myriad dimensions, continue to attract increasing attention in the scholarly literature. Indeed, a broad literature addresses numerous diverse aspects of health care in the United States.1 Arguably, however, the U.S. healthcare issue that has received the greatest attention in the scholarly literature in recent years is that of health insurance coverage (Cebula, 2006; Dushi and Honig, 2003; Frick and Bopp, 2005; Newhouse, 1994; Swartz, 2001, 2003; Thurston, 1997, 1999).2 In point of fact, this issue has increasingly captured the interest of the popular press, political pundits, and politicians, as well as scholars across a variety of academic disciplines. Dushi and Honig (2003, p.252) argue that at least part of this increased attention can be attributed to the decline in health insurance coverage over the last quarter of a century. Interestingly, in 1990, 13.9 percent of the population was without health insurance (U.S. Census Bureau, 2007, Table 144), whereas for the year 1993, Cutler (1994, p.20) observes that "About 15 percent of the population... are uninsured." That percentage increased to 15.4 percent by 1995 (U.S. Census Bureau, 2007, Table 144). More recendy, Frick and Bopp (2005) express concern that between 15 and 17 percent of the population was without health insurance in 2000. Even more recendy, Bharmal and Thomas (2005, p.643) observe that the number of uninsured reached 43.6 million in 2003. Indeed, there are indications of a continuing upswing in the numbers of the medically uninsured in the U.S. For example, as of January 24, 2007, it was estimated that 47 million Americans were without health insurance (Owings, 2007).
This study first seeks to provide insights into this issue by empirically investigating what is proffered here as the "small firm hypothesis," namely, that the greater the percentage of private sector firms that is "small," measured here as firms with 20 or fewer employees, the greater the aggregate percentage of the population without health insurance benefits, ceteris paribus. This specific dimension of the health insurance coverage issue has generally been ignored in the scholarly literature; since roughly 89 percent of all private firms in the U.S. in 2004 had fewer than 20 employees, a significant oversight appears to have occurred. Given (a) the limited ability of small firms to reap the financial benefits of scale economies that larger firms can, (b) the commonly more limited financial capacities of smaller firms (vis-à-vis larger ones) to afford to pay the employer-responsibility component of group health insurance benefits for their employees, and (c) that larger firms, because they do have more employees, may have access to a greater variety of more cost-effective health insurance plans than do firms with relatively few employees, it is expected that on average the ability of smaller firms to provide group health insurance benefits for employees will be limited relative to larger firms that tend to have financially "deeper pockets" and potentially cheaper options. …