Utah’s House Bill 122 – Health Care for Small Businesses

What is Utah House Bill 122? It has to do with the idea of allowing private businesses with 2 to 50 employees sign up for the state government’s health care program, the idea being that this would save small businesses money, allowing them to put that money to other uses. This issue gives me the opportunity to talk about some questions I believe are relevant to the matter:

1. Why do employers provide health benefits in the first place?
2. What is the situation of small business owners with regards to providing health benefits?
3. Would a program such as HB 122 promotes be a form of government subsidized health care?
4. Would HB122 give small businesses an unfair advantage over their larger competitors?
5. Why not allow all employers, regardless of the number of employees, buy into the plan?

1. Why do employers provide health benefits in the first place?

My theory is that health care sales reps figured out that the work involved in signing up 500 employees in one business was much less work than signing up 500 unrelated individuals at the same time that the health care insurance companies themselves figured out that by signing up a group of individuals they could spread out the risk amongst the individuals, making it more palletable for higher risk individuals to sign up while not making it all that much worse for the rest, such that the rest wouldn’t really notice. Therefore the idea that employers could be more competitive in their hiring by offering health benefits was diseminated until it became a matter of course.

Another way to view it is as a natural question of economics. Nobody acted maliciously, but it is natural for someone who sells something to provide discounts to those who buy in bulk, especially in the insurance industry where bulk = less risk.

2. What is the situation of small business owners with regards to providing health benefits?

The problem is that small businesses aren’t buying health insurance in bulk. Bulk means at least 50, if not hundreds of employees. And so small businesses are getting hammered by health insurance rates unless they get lucky. Here’s an example:

Company A starts up and hires five employees. As part of the hiring process it is illegal to ask questions concerning the health status of employees. However, it is not illegal for the health insurance company to ask questions concerning the health of the employees when calculating rates. It turns out that Company A, in the five employees it has hired, has happened to hire a diabetic, an employee with serious back problems, and all five employees are married and are capable of having children at any given time (it’s also illegal to ask questions regarding marital status when hiring).

How much would Company A pay per employee per month for health benefits? Most likely somewhere between $800-900 per month. That’s just for the first year. Health insurance companies are allowed to raise rates by as much as 85% per year. During the first year, Company A will spend around $51,000 on health insurance premiums for its employees, assuming that they pay 100% of the premiums (which is not uncommon, at least in MWI‘s industry). Remember, we’re talking about a company that only has 5 employees.

What would these employees pay if they were to go get health plans on their own, outside of their employer? A couple with children can get a plan equivalent to that offered by most employers for around $350 per month. So why is Company A’s rates as high as $800-900 per month? Because $350 is what a healthy couple will pay on an individual plan. A diabetic might pay $1,000 per month, and someone with serious back injuries might be completely uninsurable on their own, and their only option is to be hired by a company with a health plan. In this scenario, the healthy employees are subsidizing the unhealthy ones to the tune of around $500 per month, or $30K per year. That’s almost enough to hire another employee, or enough to give each employee a healthy raise.

Small businesses are at a disadvantage because if they hire just one employee with a health problem, their percentage of employees with serious health problems can fluctuate dramatically which can cause their health plan rates to flucuate as well. Larger companies can spread the risk among many more employees, and so hiring one employee with problems won’t affect rates much, if at all.

What’s a small business to do? They can try to be more profitable so they can afford the premiums, they can pass on part or most of the premiums to their employees, or they can refuse to offer benefits. Sometimes it’s not a choice because the company simply can’t afford to pay the health care premiums. No matter the case, the small business faces one more challenge when competing against larger companies.

The idea behind HB122 is to allow small businesses to purchase benefits for their employees through the same program as the state government. For most, if not all small businesses this would dramatically reduce the cost of offering benefits, since it would allow them to pool their employees with the largest employer in the state.

3. Would a program such as HB 122 promotes be a form of government subsidized health care?

As far as I know, it would not, because the government wouldn’t be paying out anything. If anything, it seems that the program might save the government money, since by adding more members to the health care program they might be able to negotiate even lower rates than they already have. But the premiums would be paid by the employers, not the government.

4. Would HB122 give small businesses an unfair advantage over their larger competitors?

As I see it, larger businesses have an advantage (I don’t think it’s unfair, it’s a natural advantage) right now, and this would merely level the playing field a bit.

5. Why not allow all employers, regardless of the number of employees, buy into the plan?

I’ll have to defer on this question, because I don’t know the answer.

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Closing remarks

One thing that concerns me here is that it seems we are coming one step closer to government controlled health care. I know there are some things only the government can do. I know sometimes government programs are better than nothing. But I would prefer that a reason for HB122 did not exist. Something at the back of my brain is nagging me, telling me that 1) there should be an opportunity for a private company to step in and solve this problem, creating a win-win-win for employers, employees, and the insurance companies, and 2) my brain is also telling me that if this is not possible, it’s probably because the government is standing in the way, mucking things up.