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Article Excerpt
Abstract
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
I. Introduction
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 recently, Frick and Bopp (2005) express concern that between 15 and 17 percent of the population was without health insurance in 2000. Even more recently, 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-a-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. The full exposition of this hypothesis is provided in the text.
This study provides a framework that considers the impact that small firm size exercises on the availability of group health insurance to employees and hence on the percentage of the population without health insurance. Furthermore, the study also empirically investigates the impact on the percentage of the population without health insurance of such factors as median family income, average household size, unions, the percentage of the population age 65 and older, the cost of housing, and smoking. To test the strength of the small firm hypothesis, several alternative estimates are provided. In all cases, it is found that the greater the percentage of firms with 20 or fewer employees, the greater the percentage of the population without health insurance. Once the small firm hypothesis has been investigated, attention turns to an assessment of two alternative perspectives on the health insurance issue. In particular, the study seeks first to critique public policies in the forms of (1) mandated universal health insurance coverage or simply "mandating" and (2) tax-credit incentive policies intended to reduce the percent of the population without health insurance. The study then considers a private-enterprise perspective that no compelling evidence exists of a market failure in the U.S. health insurance arena and that mandating and tax-credit policies are not only unnecessary but also would create myriad negative economic effects for the economy and the private enterprise system.
II. A Brief Review of Pertinent Recent Literature
Before providing the framework for and empirical results of the present study, it is relevant to review some recently published literature on health insurance coverage. We begin with a very pertinent observation by Swartz (2003, p.283), who observes that a majority of those without health insurance "... cannot afford to purchase ... [it] ... unless it is heavily subsidized." Swartz (2003, p.283) elaborates that "Most [such people] do not have access to employer-sponsored coverage and so must purchase ... insurance in the non-group market ... ," where it is usually twice as costly as employer-provided group health insurance. Swartz (2003, p.283) also argues that to an extensive degree the higher health insurance premiums charged in the non-group market, as well as denial of health insurance coverage, both "... reflect market failure due to asymmetric information." For example, health insurance companies clearly cannot know so much about an individual's health status, his or her propensity to seek medical care, or his or her family health history as the individual does. According to Swartz (2003, p.283) due to "... this asymmetry, it is impossible ... to set premiums that accurately reflect the nonrandom portion of health-care costs for different individuals." Swartz (2003, p.286) argues that "The non-group health-insurance markets ... need ... government to spread the costs of extremely high-cost people." Swartz (2003, p.286) contends that the "... rationale for government covering the worst risks exists: it will permit ... non-group markets to operate more efficiently and reduce the lack of affordable coverage for many people."
In a study by Dushi and Honig (2003), the focus is somewhat different. In particular, in Table 1 of their study, Dushi and Honig (2003, p.253) provide evidence on gender differences in the propensity to purchase group health insurance when it is available through their employers. Their data reveal that females in the labor force tend to have a lower overall "take-up" rate than males in terms of health insurance purchases: 73 percent of the time for females versus 88 percent of the time for males. Dushi and Honig (2003) argue that some portion (approximately 60 percent) of this male-female take-up disparity is attributable to married women opting to rely on a spouse's health insurance plan. This male-female take-up disparity notwithstanding, when an employer-provided group health insurance plan is available, nearly three-fourths of the time women do nevertheless take advantage of the option. On the other hand, it appears that when group health insurance is available through the employer, 12 percent of males choose not to take the health insurance opportunity. According to Dushi and Honig (2003, p.255), most of this 12 percent is not attributable to spouses' having health insurance.
In a study by Thurston (1999, p.683), the focus is on the finding that the proportion "... of Americans who are insured through employment-based health plans has experienced a steady decline for ... years." Thurston (1999, p.683-4) expands the conventional labor supply model to integrate the "realities" of health insurance benefits. Within the context of this model, Thurston (1999, p.685-6) finds that "... when the relative price of the health benefit is rising, a decrease in employment-based health insurance is consistent with rational worker and employer behavior and is to be expected." Workers simply opt...
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