June 1, 2007
Jean Marie Abraham, Thomas DeLeire, and Annne Beeson Royalty
Workers employed at small firms are substantially less likely to be offered health insurance than those at larger firms. Policymakers and researchers have long sought ways to increase access to employer insurance for workers at small firms but with little success. Most policy proposals and reforms—for example, the small group insurance reforms enacted by many states in the 1990s—have been directed specifically toward health insurance and based on the assumption that the firm-size “offer gap” in health insurance is caused by problems unique to such insurance. Yet there may be an even more fundamental issue. At small firms wages are lower and workers are less likely than those at large firms 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 of benefits on which the National Compensation Survey collects data except year-end or holiday bonuses (U.S. Bureau of Labor Statistics, 2006). Therefore, it is important to consider health insurance in the broader context of benefits offered by small firms.
In this paper, we provide that context. We show how employer size affects the provision of several components of compensation—health insurance, retirement plan, and paid vacation. This analysis demonstrates the extent to which health insurance access represents a unique challenge for workers at small firms and to what extent it is part of more general compensation issues. We compare health insurance with these other two benefits to help identify what drives the disparities in health insurance by firm size.
There are three commonly cited explanations for variations in the provision of benefits according to firm size. First, if the per-worker administrative costs of a benefit decrease with firm size, larger firms will be more likely to provide that benefit. Second, if benefits are demanded relatively elastically and if workers in smaller firms tend to receive lower total compensation, those workers will prefer a smaller share of that compensation in the form of benefits. Third, smaller firms 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. Small firms might be less likely to provide health insurance for any one of these reasons.
We find evidence that differences in offer rates for the three benefits persist even when we control for wages and household income, and that the gap between offer rates at smaller and larger firms is at least as large for retirement plans as for health insurance. We also find gaps—though somewhat smaller—in the offer rates of paid vacations between workers at smaller and larger firms. These findings, taken together, suggest that of the three aforementioned reasons, per capita administrative costs may be a significant driver of the disparities in offer rates across firm size, though it is also possible that workers in smaller firms differ from those in larger firms in their preferences for receiving compensation in the form of benefits. We argue that incremental reforms targeted at reducing administrative costs should be explored as a potentially effective strategy for improving small-firm workers’ access to health insurance. In our conclusion, we discuss current policy proposals—such as Association Health Plans or plans that allow small private-sector firms to buy in to the Federal Employee Health Benefits Program—and the likelihood that such plans could reduce administrative costs.