Rising Health-Care Costs Hurt Small Biz

A survey of some 4,000 self-employed individuals and business owners with 10 or fewer employees finds most can't afford to offer health insurance to employees

By Karen E. Klein

A majority of microbusiness owners (those with 10 or fewer employees) agree that it is their responsibility to provide health insurance for their employees, but high costs mean very few offer it, according to the 2008 Health Care Survey conducted by the National Association for the Self Employed.

When it comes to the election-year reforms currently being discussed, entrepreneurs strongly believe that every U.S. citizen should have health coverage, but they are deeply divided about the best way to achieve that goal—and worried about tax increases that might result. Kristie Darien, executive director of the NASE, parsed the survey results recently with Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

This survey of nearly 4,000 self-employed individuals and business owners with 10 or fewer employees is a follow-up to similar surveys your organization conducted in 2002 and 2005. What are the biggest changes from those earlier studies?

The good news is that more respondents—67%—reported having health insurance for themselves, as compared with 54.9% in 2005. However, there was a shocking drop in the percentage that said they're providing coverage for their full-time employees. In 2005, 46.2% said they were offering employee coverage; in 2008 the number went down to 18.6%. That's one of the most massive drops we saw in terms of all the questions we asked across both surveys, and the sole reason is cost, which was cited by 65% as the top barrier to providing coverage.

How much are small employers and the self-employed spending for health coverage?

Health expenditures ranged from $1,000 to $60,000, with a median cost of $5,520 annually. The median costs for health insurance rose from 3.7% of total revenue in 2005 to 5.5% in 2008. The survey showed that single-person businesses spend a larger percentage of their total sales on insurance than do companies with six or more employees and those making the greatest revenue.

More than three-quarters of respondents said their health insurance costs have increased in the past 12 months, with the average increase at 14.7%. That was slightly lower than the 20.7% who reported their costs had gone up over the 12 months prior to the 2005 survey.

Health-care costs have been one of the top concerns for small business owners for years. What do they think of the U.S. health-care system right now?

A large majority of respondents, 84.8%, said all U.S. citizens should have health coverage, with 79.7% of those saying that covered individuals should have to pay some portion of their costs, whether coverage is provided through private insurance or the government. That's pretty indicative of the entrepreneurial mindset. They're working hard, and they want everyone to have a stake in their health care by paying for it.

When asked what most affects high health-care costs, most entrepreneurs across all demographics and company sizes answered, "Insurance companies making too much profit" (28.8%) or "Doctors/hospitals charging too much for services" (21.7%). Medical malpractice lawsuits was third, with 13.2%. I was surprised that the cost of prescription drugs wasn't higher on the list, along with things like unhealthy lifestyles and the aging U.S. population.

What do the entrepreneurs who answered your survey think about the proposals being circulated in the Presidential campaign?

When asked about preferred health-care options, there was no clear consensus. The leading response was a government-run, universal health-care system, with every American required to purchase some type of coverage. But that had only a narrow margin, with just over 25% choosing it. The second-most popular plan was a universal health-care system paid for by taxes. That got 24.5% of the responses. The third group, with 22.9%, favored keeping the health-care system we have now. So basically, the three options were tied.