11/28/2009 05:12 am ET Updated May 25, 2011

Health Care's True Cost to Small Business

Consistent with their mission and values, most socially conscious businesses try to treat their employees well. For me, this means offering health care to all full-time employees. We all know that the health care system needs reforming, but I was shocked to learn this year that our health care premiums went up almost 40%. Why? The addition of one healthy employee in her forties to a pool of employees under the age of thirty, combined with health care cost inflation.

It should be clear that this rise in cost to the company is an unsustainable trend, but its consequences are equally strong arguments for reform that often escape the notice of political pundits:

1. If insuring older workers is so much more expensive, why would any small business hire them over younger workers? The status quo encourages discrimination in the hiring process. In the specific, this can ruin an older individual's chance of finding work -- and these people are more likely to have families to provide for. In the general, it encourages market inefficiencies, because the most qualified person might not be selected.

2. It advantages the largest businesses over small businesses, because large companies spread risk across a much greater number of employees. They also have the overall cash flow to absorb rises in health care costs. Not only can the larger competitor then achieve more favorable margins than a small business (and, perhaps, undercut its prices), but it can attract more qualified workers by offering better benefits.

3. It advantages small companies that do not offer health insurance over small companies that do. As my health care costs rise, those competitors' constraints remain the same; their margins become even more favorable relative to mine. The competition's competitive advantage is strengthened over time.

4. These huge, unanticipated rises in costs throw off any financial forecasting a small business does, leaving it subject to the whim of some insurance company's (proprietary) algorithm. Accurate forecasts have always been important for managing a small business -- for doing inventory, budgeting, and dealing with investors -- but they're even more necessary in this economic environment.

5. It pits employer against employee, and reduces the income of both. Even if a given business tries to absorb as much of the cost as possible, it likely will have to pass on some percentage to employees -- and this amounts to a cut in wages.

Reversing these perverse incentives in the system -- a system which prevents small businesses, the backbone of our economy, from growing, providing jobs with health care, and creating wealth -- is integral to any economic recovery. In many ways, with an employment-based health
care system, the two issues are one and the same.