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Small Business Health Insurance

To make health insurance more affordable to small business owners, premiums are 100 percent deductible.

Health insurance is a big expenditure for the small business owner. [©Jupiter Images, 2010]
©Jupiter Images, 2010
Health insurance is a big expenditure for the small business owner.

Small Business Health Insurance

Small business health insurance is a matter of great concern to the federal government, individual states and small businesses. According to the U.S. Chamber of Commerce, 60 percent of uninsured workers in the United States work for small businesses that cannot afford insurance costs.

Many proposals to increase small business health insurance take place at the state level rather than the federal level. In some states, health care costs for small businesses are subsidized, which allows small businesses to offer health insurance and to purchase better health insurance. Since individual states seek to close the insurance gap that exists within small businesses, small business owners may discover incentives to offer health insurance to employees.

There is one major federal incentive for small businesses to offer health insurance: small businesses can deduct the cost of health insurance, according to the U.S. Small Business Administration. Employer contributions are usually 100 percent deductible.

Pros and Cons of Individual State Efforts

The efforts by individual states to expand health insurance coverage have had both positive and negative effects. In some cases, small businesses have been able to offer more health insurance to employees. State efforts have even enacted reforms to improve small business health insurance, such as assistance with purchasing alliances.

On the other hand, some state efforts have led to additional costs. In Rhode Island, small business employees receive additional tax deductions from their health insurance if they maintain a healthy lifestyle. Small businesses in Massachusetts are also encountering health insurance mandates.

State Incentives

Incentives for small businesses that offer health care vary by state. For example, the state of Washington offers a Health Insurance Partnership (HIP), which provides health insurance coverage to small businesses at lower contribution rates. The HIP program also offers subsidizing to employees depending on their income.

According to the National Conference of State Legislatures (NCSL), premium assistance, flexible spending health accounts and purchasing pools are some common state incentives offered to small businesses.

Flexible spending accounts (FSA), implemented in 2003, allow people to save for future medical costs tax free. FSAs allow small business employees to obtain health insurance. These accounts are not substitutes for health insurance; they help small business employees save for unexpected medical expenses.

Though trade groups or local health care coalitions can also reduce costs for small businesses, guaranteed issue laws require insurers to offer employees health care despite their medical conditions. Most states have guaranteed issue laws. In addition, most states have regulations that limit pre-existing condition exclusions for small businesses.

Other state strategies include:

  • Consumer-driven health insurance strategies
  • Exemptions from state mandates
  • State tax credits or deductions
  • Multiple employer welfare arrangements
  • Association health plans
  • State high-risk pools
  • Public-private partnerships offering subsidizing
  • Universal health care plans with a special focus on assisting small employers


State Examples

Other state incentives offered by the National Conference of State Legislatures may include:

  • A public-private partnership seeks to increase health insurance coverage by lowering costs for small employers in Arkansas.
  • A health insurance premium discount program allows small businesses to obtain cost-efficient health insurance in Arizona.
  • Employees of specially defined small businesses receive $60 per person if they remain insured in Kentucky.
  • Some small business employees are offered Medicaid coverage in Maryland.
  • Montana has a state health insurance purchasing pool that reduces costs for small businesses by grouping them together to share costs. The insurance cost is subsidized in part by state tobacco taxes.
  • The state of New York will subsidize a portion of claims for certain small businesses.
  • Oklahoma pays part of the insurance premiums for eligible small businesses.
  • Pennsylvania uses the states tobacco settlement to provide health care to some individuals between the ages of 19 and 64. The program also covers children.
  • Rhode Island offers cost-sharing initiatives that reduce premium insurance costs.
  • In West Virginia, small businesses may use the buying power of the Public Employees Insurance Agency to subsidize costs.


Future Proposals

Many health care reform efforts for small businesses are underway at the national level. For example, the U.S. Chamber of Commerce implemented federal legislation to allow small businesses to form associations for the sole purpose of purchasing health insurance.

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