Uninsurance is overwhelmingly a problem of the small-business sector. Almost half of America's uninsured workers are either self-employed or in firms with fewer than 25 workers. Moreover, the rate of uninsurance is highest among such workers and their families. Over 30 percent of workers in small firms lack insurance.

This high level of uninsurance underscores the inherent limitation of traditional employer-sponsored insurance for workers in small firms. While it usually does make sense for large, sophisticated employers to sponsor insurance--in other words, to arrange coverage--it is administratively costly and inefficient for small employers to try to sponsor health plans. Small firms also can rarely offer plan choices to their employees and tailor coverage to worker needs, and owners of small firms are more reluctant to undertake the hassle of organizing insurance. Subsidizing these small employers would not overcome these drawbacks.

Addressing Uninsurance in the Small-Business Sector
What is needed is a variant of employment-based coverage for certain groups of workers, especially employees of small firms. Such a variant should enshrine three key goals:

• Financial assistance to families for health insurance coverage should be based on need.
• The available choices of health insurance should not depend on the place of employment.
• While workers would continue to sign up for coverage in the workplace and obtain tax subsidies through the workplace, employers should not necessarily sponsor health insurance.

Increasing Coverage for the Employees of Small Firms
Crafting such a variant of employer-based insurance for workers in small firms requires lawmakers to take the following steps:

1. Create a refundable tax credit for workers in small firms in order to eliminate the bias against employees choosing their own coverage and to subsidize those who need the most help. Today, the tax treatment of health insurance favors those with higher incomes and requires workers to hand over control of their coverage to their employers. A refundable health credit would give the most help to those in need and would enable these workers and their families to obtain insurance outside the workplace if that makes more sense.
2. Create alternative pools for the employees of small firms--including plans offered through churches, unions, and other intermediaries--so that these workers and their families can access a wide range of affordable plans. Making it easier for workers to obtain coverage through groups other than employer-sponsored organizations would enable many families to pick plans offered through large organizations, including those where they already have a membership, such as unions and churches. In addition, Congress needs to take steps to structure a reinsurance market to manage and spread the insurance risk among such groups. This would make it easier for workers in small firms to obtain affordable insurance through organizations they trust.
3. Make it easier for employees to sign up for insurance in the workplace--even when the employer does not sponsor insurance--by removing tax and regulatory obstacles. Rather than sponsoring insurance themselves, it would make more sense for many small employers to make it easy for their employees to enroll in plans available in the area through payroll deductions, automatic enrollment, adjusting tax withholdings to reflect available tax credits, and facilitating payments. Many employers would also prefer to make a cash payment toward the cost of coverage rather than organizing that coverage. Federal tax and insurance rules need to be clarified to make this easier for small employers.

Conclusion
The high rates of uninsurance among working families in small firms are a testament to the limitations of the employment-based health system in the small-business sector. Yet the tax system and government insurance rules discourage other insurance arrangements for these uninsured working families.

Proposals for individual tax credits for health coverage would help to remove this barrier to alternative insurance arrangements. In addition, taking steps to build an insurance infrastructure with affordable choices would enable these families to have coverage that is similar to--or even better than--the insurance available to employees of large firms.

With these reforms in place, new forms of coverage would become available to working Americans in the small-business sector. For this to occur, however, Congress must recognize that an important distinction exists between using the place of employment as the convenient place to obtain insurance and making tax relief to families contingent upon employer sponsorship of their health insurance.

Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.