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Small Businesses & Health Insurance

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Submitted By laurelmegan
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This week’s case study involves issues related to health insurance that small businesses can face. John and Liza are small business owners who need to hire a new mechanic to work at their boat repair business. However, they are faced with a dilemma when it comes to hiring Robert, their best applicant; because his wife is ill and their already increasing insurance premiums will increase again. Their other employees have also contributed to the increasing premiums due to factors including age, gender and smoking. In order to hire Robert, John and Liza must weigh out their options and decide how to handle their premiums. John and Liza’s solutions could include giving incentives to those who quit smoking, asking the smokers to pay a larger portion of their health insurance costs or simply do nothing and incur the costs themselves. Another option is to divide the costs equally among all of the employees.
Each option that John and Liza have as business owners has pros and cons associated with it. Their first option, to do nothing and incur the costs, will only make their financial situation worse. By hiring Robert, their premiums will rise again. With the couple absorbing the already increasing cost, hiring Robert will only put them in the hole more than they already are. In order to make the financial situation better, their best bet is to offer a small incentive to those mechanics that quit smoking. For the mechanics that choose to continue smoking, John and Liza could ask them to pay a larger portion of their health insurance costs. This is the fairer option due to the fact that smoking is a serious health risk and can be avoided.
As for the other employees, age and gender are the issues that have caused their costs to increase. Unlike smoking, these issues cannot be changed and no incentives may be offered. The two employees that are lumped into this group include a mechanic, who has turned thirty, which puts him into a new risk category, and Mary, the new office girl, who has turned twenty-five, which puts her into the potential pregnancy category. Although Mary may not find it to be fair to be charged more than the men, women typically consume health care more and they also have longer lifespans. Other than pregnancy related health care costs, women also tend to have more preventative care done (Heath, 2013).
One of the options that John and Liza are considering, which is having the employees absorb some of the costs, could lead to the employees dropping their insurance altogether, which they stated they do not want. The consequence of this option could be that the employees could quit and find other jobs in which their insurance rates are lower. Folland, Goodman, and Stano (2013) state that, “health insurance may inhibit worker mobility between firms, thus locking employees into jobs.” Making it to where employees would keep their health insurance could potentially stop them from seeking employment elsewhere.
Although it might seem like small businesses would have an easier time providing health insurance to employees simply because there are less employees, it is not the case. According to the White House:
U.S. health care system imposes a heavy "tax" on small businesses and their employees. Due to high broker fees, fixed administrative costs, and adverse selection, small businesses pay up to 18 percent more per worker than large firms for the same health insurance policy. Some of these higher costs are passed on to small firm employees in the form of lower wages, and some eat into the profits of small businesses that could otherwise be used for research and development and for much-needed investments. This implicit tax disadvantages small firms in both the market for the best workers and the market for their products.
One solution that would help tremendously is for John and Liza to seek coverage through the Small Business Health Options Program (SHOP) under the Affordable Care Act. The SHOP marketplace is for small businesses with less than fifty employees. With these insurance plans, you can’t be turned down based on the health status of your employees or their dependents, even if they have pre-existing conditions. Also, they can’t charge you higher premiums for women, or increase your group's premium for employees with high medical costs (“What do small businesses”, n.d.). By obtaining this type of insurance, the employees and the owners would benefit. Robert could be hired without fear of further increasing premiums. John and Liza could also receive incentives including tax breaks and tax credits which would help pay for employee premiums, assuming that their employee annual wages are less than $50,000 (“ObamaCare”, n.d.). In conclusion, John and Liza should hire Robert despite his wife’s illness. They should also consider changing their insurance provider and apply for SHOP. Doing so would financially benefit all stakeholders in their small boat repair business and hopefully give employees an incentive to remain with the company.

References
The Economic Effects of Health Care Reform on Small Businesses and their Employees | The White House. (n.d.). Retrieved April 27, 2014, from http://www.whitehouse.gov/administration/eop/cea/Health-Care-Reform-and-Small-Businesses
Folland, S., Goodman, A., & Stano, M. (2013). The Economics of Health and Health Care (7th ed.). Upper Saddle River, NJ, USA: Pearson.
Heath, H. (2013). Women Should Pay More for Health Care | TIME.com. Retrieved April 26, 2014, from http://ideas.time.com/2013/08/23/women-should-pay-more-for-health-care/
ObamaCare Small Business Facts. (n.d.). Retrieved April 27, 2014, from http://obamacarefacts.com/obamacare-smallbusiness.php
What do small business owners need to know about health coverage | HealthCare.gov. (n.d.). Retrieved April 26, 2014, from https://www.healthcare.gov/what-do-small-businesses-need-to-know/

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