The average firm in both samples of nonemployers and employers was sensitive to changes in the health insurance burden. Figure 3 shows the impact of a 10 percent increase in the health insurance burden on the probability that a firm discontinues health insurance payments, relative to its mean. The left panel of Figure 3 shows estimates for nonemployer firms, while the right panel of Figure 3 shows estimates for employer firms. While the baseline average probability of nonemployer firms to discontinue health insurance premiums was 26.1 percent, we found that a 10 percent increase in the health insurance burden for the average nonemployer firm increases this probability by 2.6 percentage points and this result was statistically significant.
We illustrate this result with an example. Assume that for the hypothetical average nonemployer firm, the annual health insurance premium is $500, and the average probability of discontinuing the health insurance premiums, under typical circumstances, is 26.1 percent. An increase in the health insurance premium by 10 percent would raise the payment to $550. For simplicity, assume that the operational expenses remain the same across years. If the operational expenses stay constant, the health insurance burden will reflect the increase in health insurance premium by the same magnitude. This means that the results from the regression analysis suggest that this additional $50 would increase the probability of the firm discontinuing health insurance coverage next year by 2.6 percentage points, raising the probability to 28.7 percent. While this example is purposefully simple, it underscores how even modest increases in premium costs can significantly influence a firm’s decision-making process regarding health insurance coverage, highlighting the financial pressures faced by small businesses.
We found similar results for the average employer firm. The average probability of employer firms discontinuing health insurance premiums was 26.8 percent. An increase in health insurance burden by 10 percent would increase this probability by 1.3 percentage points, raising it to 28.1 percent. Similar to the average nonemployer firm, this increased probability is statistically significant.
Overall, these results were consistent with and formalize previous findings on the association between higher health insurance burden and increased rates of firms discontinuing health insurance premiums (Farrell, Wheat, and Mac 2017) and were in line with qualitative evidence from surveys revealing that rising costs were one of the reasons to discontinue health coverage (Small Business Majority 2024). These findings highlighted the risk that rising health insurance burdens pose, potentially leading small businesses to discontinue coverage.
There are significant differences across industries in how sensitive firms are to changes in health insurance costs. Beyond the impact on the average firm discussed earlier, we found that there are industry-specific factors that influenced a company’s decision to stop paying health insurance premiums. Some industries are particularly sensitive to changes in the health insurance burden.
For nonemployer firms, we found that an increase in health insurance burden significantly increased the probability of discontinuing premiums in three industries: health care services, other professional services, and retail. For instance, in the case of health care services, a 10 percent increase in the burden was associated with an increase in the probability of discontinuing health insurance premiums by 4.7 percentage points, raising the probability from 26.1 percent to 30.8 percent. For other professional services, a 10 percent increase in the burden was associated with an increase in the probability of discontinuing health insurance premiums by 4.5 percentage points, raising the probability to 30.6 percent. For retail, a 10 percent increase in the burden resulted in an increased probability to 29.3 percent. Note that for these industries the results are statistically significant. Firms in these industries may be especially vulnerable to rising health insurance costs because they tend to face narrower profit margins, more unpredictable revenue streams, and higher overhead or administrative burdens. For instance, small retail firms often operate on slim margins, while other professional service providers (e.g., independent lawyers, accountants, or consultants) often rely heavily on billable hours that can fluctuate. Similarly, small healthcare practices can face high equipment and licensing costs. Because these small business owners usually have limited bargaining power in the insurance market, premiums can be disproportionately high. They may opt to discontinue coverage if they can secure more affordable options elsewhere (e.g., spouse’s employer-sponsored plan) or if their personal risk tolerance reduces the perceived necessity of continuous coverage.
Industries such as metal and machinery, personal services, and real estate also showed an increased probability of discontinuing health insurance premiums with rising burdens. However, these results were not statistically significant. In contrast, in industries such as restaurants, wholesalers, and repair and maintenance, an increased burden was associated with a decreased probability of discontinuing payments, though these findings were also not statistically significant.
Similarly, for employer firms, we found that the impact of an increase in health insurance burden significantly raised the probability of discontinuing premiums in some industries, with the largest effect experienced by the personal service industry, followed by restaurants, other professional services, and retail. For instance, for personal services, a 10 percent increase in the burden was associated with an increase in the probability of discontinuing health insurance premiums by 5.7 percentage points, raising the probability from 26.8 percent to 32.5 percent. For restaurants, a 10 percent increase in the burden was associated with an increase in the probability of discontinuing health insurance premiums by 5.5 percentage points, raising the probability from 26.8 percent to 32.3 percent. For other professional services, a 10 percent increase in the burden raised the probability to 28.9 percent and for retail to 27.7 percent.
This significant sensitivity in these particular industries could be attributed to several factors. Firms in the industries may be more likely to discontinue health insurance coverage in response to rising health insurance costs because they frequently face low profit, high labor turnover, and a workforce that often includes part-time or seasonal staff. For instance, employer firms in the restaurant industry often operate with thin profit margins and face high labor costs, especially post-pandemic, making any increase in health insurance premiums a significant financial strain (My NewMarkets 2024). Additionally, the industry experiences high employee turnover, which complicates the management of consistent health insurance offerings due to the administrative burden and costs associated with frequent changes in coverage. Many restaurant employees work part-time, and while some employers offer health insurance to part-time staff, rising premiums can disproportionately affect their financial stability. Furthermore, intense competitive pressures limit the ability of restaurants to pass on increased costs to customers through higher prices. According to Porter’s five forces framework, when customers can easily find substitutes, restaurants are pressured to keep prices competitive to retain customer loyalty (Porter 1979). As a result, restaurants may have to absorb increased costs rather than raising prices. The industry’s revenue is also highly variable, influenced by factors such as seasonality and general economic conditions, making it challenging to commit to fixed costs such as health insurance premiums. Last, changes in regulations or local laws regarding employee benefits can further impact how restaurants manage health insurance offerings, contributing to their increased sensitivity to cost changes. Employer firms in the retail industry may also face intense competition, narrow margins, and fluctuating consumer demand, further constraining their ability to absorb premium hikes. Employer firms in other professional service industry, although they sometimes operate with higher-margins, may nevertheless face overhead pressures, such as billable-hour structure or project-based revenue, which may increase their sensitivity to rising health insurance costs. Firms in the personal services industry tend to have a higher proportion of part-time and lower-wage employees, factors strongly correlated with lower rates of employer-sponsored coverage. These factors combined may have made employer firms in these industries particularly vulnerable to fluctuations in health insurance costs, leading to a higher and significant likelihood of discontinuing coverage when premiums rise.
Other industries, such as real estate, health care services and wholesalers, also showed an increased probability of discontinuing health insurance premiums as burdens rose, but the results were not statistically significant. In contrast, metal and machinery and repair and maintenance were the two industries where an increase in the health insurance burden was associated with a decreased probability of firms discontinuing health insurance payments, though these results were also not statistically significant.
Overall, our analysis indicated that small businesses, both nonemployer and employer firms, were highly sensitive to increases in health insurance burdens. A 10 percent rise in the burden significantly increased the likelihood of these firms discontinuing health insurance coverage. This trend underscored the financial challenges small businesses face in maintaining health benefits. Moreover, industry-specific factors played a crucial role, with some sectors showing higher sensitivity. Among nonemployer firms, these sectors included health care services, other professional services, and retail. For employer firms, personal services, restaurants, other professional services, and retail demonstrated higher sensitivity. For these industries, this heightened sensitivity might have been due to factors such as thin profit margins, high labor costs, high employee turnover, unpredictable revenue streams, and higher overhead or administrative burdens, all of which made it challenging for firms in these industries to absorb rising premiums. These combined factors could have led to a higher likelihood of discontinuing coverage when premiums rose, highlighting the unique challenges faced by firms in these industry in managing health insurance costs.
Moreover, this analysis suggested that relying on statistics from a repeated cross-sectional sample, such as the median premium burden over time, might be misleading, as the composition of firms in the sample may have changed as some dropped coverage, obscuring the changes experienced by those that continued paying health insurance premiums. This may explain the puzzling differences in median burden trends observed when comparing the longitudinal panel to the cross-sectional sample, as highlighted in the previous report (Wheat and Mac 2024).
