The voluntary employment-based system of health benefit provision evolved over the course of the twentieth century to become a strong social institution.  While the employer-based system works well for a large portion of Americans, there are many on the periphery of the system that are unable to benefit from the arrangement.

Small Businesses

Of small business in the United States, almost 50 percent do not offer health benefit coverage to their workers.  In fact, about 40 percent of the uninsured work for firms with 25 employees or less.  The major barrier for small employers to offer health insurance is the cost.[1]  Other reasons may be that their employees have alternative sources of health insurance, their employees prefer to receive their compensation in higher wages than in the form of benefits, and sometimes the employer does not believe that health benefits provision is the responsibility of an employer.[2]

Surveys of the National Federation of Independent Business (NFIB) showed that small business owners overwhelmingly support a government-based single-payer system (greater than 90 percent of NFIB members) as opposed to an employer mandate.  Compare that to a survey of Fortune 1000 executives showing only four percent support a single-payer system.[3]

Health insurance is actually more expensive for small companies.  One reason for this is the inefficiencies in the administration for smaller groups, in terms of both marketing and servicing costs.[4]  Companies with fewer than 50 employees see 25 to 40 percent of dollars spent on health insurance go to administrative costs, compared to companies with greater than 500 employees for whom the administrative costs can be as low as five percent.[5]  Administrative costs for individual, non-group insurance can be as high as 50 percent of the premium.   Administrative fees also increase because of higher policy turnover associated with small businesses, which change their coverage from one insurer to another more frequently in an effort to keep premiums prices down.[6]

The system of experience rating also disproportionately favors large firms: premiums for small firms tend to be about 30 percent higher because of their increased risk.[7]  Large companies are far more capable at risk pooling, in which younger, healthier employees subsidize the older or sicker population of a company.  Adverse selection says that people who are more likely to need medical care are therefore more likely to purchase insurance; when a small employer seeks coverage, there is a better than average chance that they are doing so because of specific needs of an employee, or because the company is in a high-risk industry.  In experience rated models, this “group size factor” increases the risk of the group.[8]

When commercial insurers used experience rating to market to desirable employee groups, the higher-cost, higher-risk companies or individuals saw their premiums rise.  The loss of the low-risk customers onto whom costs can be shifted resulted in largely unaffordable insurance premiums for those outside of the low-risk large employee groups.[9]  It is perhaps not surprising that only one-third of those employed by companies with fewer than 25 employees receive health insurance coverage through their employer.  In fact, of those Americans without health insurance, 85 percent are in families headed by an employed individual working for a company with less than 100 employees, and more than half of these workers are full time employees.[10]

Case Study: Employer Mandate and Hawaii

In 1974, the state of Hawaii passed the Prepaid Health Care Act—and received a special exemption from ERISA to allow for the state legislation in 1983—requiring employers to provide health insurance benefits for their employees. After the mandate was enacted, coverage within Hawaii did not increase significantly.  The rate of uninsured in Hawaii is remarkably similar to rates in the entire United States; several states without mandates have lower rates of uninsured.[11]  One reason for the minimal impact of the employer mandate may be that the model must create new solutions for individuals outside of the workforce.  There are also substantial workforce exemptions: the Hawaiian system does not require coverage for new hires, part-time employees, low-wage workers, the self-employed, contract workers, or commission-only workers.[12]


[1] Seifert et al., 17.

[2] Institute of Medicine, 94.

[3] Gottschalk, 60-62, and Seifert et al., 10.

[4] Institute of Medicine, 8, 108.

[5] Gottschalk, 60.

[6] Pauly, Mark, Allison Percy, and Bradley Herring, “Individual Versus Job-Based Health Insurance: Weighing the Pros and Cons,” Health Affairs (November 1999-December 1999), and Seifert et al., 17.

[7] Gottschalk, 60.

[8] Claxton, 6.

[9] Gottschalk, 60, and Seifert et al., 10.

[10] Statistics are from 1993.  Institute of Medicine, 4-5.

[11] Norman K Thurston, “Labor Market Effects of Hawaii’s Mandatory Employer-Provided Health Insurance,” Industrial and Labor Relations Review Vol 51, No. 1 (October 1997), 117-118

[12] Thurston, 120, 133.

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