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Love Obamacare? Get Ready for More Health-Care Legislation Most Americans don't like the 'market solution' to the problem of escalating health-insurance costs. The best option for employers and employees alike is to push for government policies that lower the cost of care.

By Scott Shane Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Since 1986, the biggest problem facing small-business owners has consistently been the cost of employee health insurance, the National Federation of Independent Business said in an August report entitled Small Business Problems and Priorities. While policy makers, pundits and advocacy groups have called on Washington to address the issue, the market has quietly worked out a solution.

The catch is that many Americans don't like the market's answer. In response to escalating health-care costs and insurance premiums, small businesses have trimmed employment, fewer small companies offer employees health insurance, and those that do pass more of the costs on to workers.

The cost of health insurance has outpaced inflation in recent years and is expected to continue to do so. The Kaiser Family Foundation reports that over the past decade, employee health insurance premiums have risen at three times the rate of employee compensation, and more than three times the inflation rate. Based on its survey of businesses, consulting firm Mercer expects the per employee cost of health insurance to rise 6.5 percent next year. And the Centers for Medicare and Medicaid Services projects that spending per worker for employer-based private health insurance will increase faster than inflation through 2020.

Related: What's the Best Outcome for Small Business on the Fiscal Cliff? (Opinion)

Over the past decade, many small-business owners have transferred insurance costs to their workers by adopting higher-deductible plans and by increasing the employee share of premiums, trends that experts expect to continue. Some small businesses have dropped health insurance entirely. The Kaiser Family Foundation found that 61 percent of businesses with between three and 199 employees provided their employees with health insurance in 2012, compared to 68 percent in 2000.

What's more, the cost of health insurance has likely contributed to decisions to cut back employment. The Bureau of Labor Statistics reports that the average establishment shrank from 17.5 employees in 2000 to 15.7 in 2011, a pattern confirmed by Census Bureau data. While we don't know how much of this decline stems from rising insurance costs, economic theory suggests they have played a role. In recent years, there was clearly a strong incentive to trim employment as revenues failed to keep pace with insurance cost increases. Internal Revenue Service data show that revenues at the average business declined 5 percent in real terms between 1999 and 2008, while the Kaiser Family Foundation says the cost of employee health insurance grew an inflation-adjusted 64 percent over the same period.

Related: Shelly Sun on the Burden of Health Care (Opinion)

Health insurance premiums rise when health care becomes more expensive because insurers need to charge more to cover larger payments to doctors and hospitals. And the cost of health care has more than tripled in inflation-adjusted terms since the mid-1980s.

Thus far, policy makers have failed to provide an alternative to the market's solution. The Affordable Care and Patient Protection Act, passed by Congress in 2010 and upheld by the Supreme Court in 2012, extended health-care coverage to more people, but it's expected to do little to reduce health-care costs. Even the advocates of the law say it will only slow the rate of increase, not cut health-care costs. After taking the effects of the law into account, the Centers for Medicare and Medicaid Services projects that health-care costs will increase to 20 percent of GDP in 2020 from 17 percent in 2010.

If Americans don't like losing insurance coverage or paying a bigger share of the premium, they need to push for government policies that lower the cost of health care. In the absence of cost containment, the market's solution to small business's problem will prevail.

Related: How 'Obamacare' Impacts Young Entrepreneurs

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

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