APRIL 2008 HOT TOPIC

Better Understanding the Health Insurance Issues Small Firms Face

For generations, Americans have relied on their employers to provide them with health insurance. But as health care costs have escalated over the years, providing health insurance has become more of a concern for employers. These concerns are particularly acute for small businesses, which are less likely than larger firms to offer health insurance and which may have difficulty containing costs, because they have limited bargaining power and are unable to hire experts skilled in negotiating with insurance companies.

RAND Corporation researchers in the Kauffman-RAND Institute for Entrepreneurship Public Policy (KRI) have examined how much of a burden it is for small firms, relative to large ones, to provide health insurance and how some of the solutions for trying to help small firms provide access to affordable health care are working.

What's the Economic Burden for Small Firms?

To better understand how much of an economic burden small firms face in providing health insurance relative to large firms, KRI researchers explored trends in the economic burden associated with health insurance provision, as well as the distribution of this burden, for small and large businesses. They also considered the quality of plans offered.

The study found that from 2000 to 2005, the economic burden of providing insurance increased for all employers, though particularly for the smallest firms (<25 employees). Researchers found that, by 2005, a typical firm offering health insurance spent between 7 and 10 percent of its payroll on health insurance; however, firms with fewer than 25 employees shouldered the highest overall burden, spending, on average, 11 percent of payroll on health insurance.

Despite clear increases in health insurance costs and cost burden, there is no evidence that firms dropped coverage over the period analyzed. Health insurance offer rates remained relatively stable from 2000 to 2005, even for the smallest firms (<25 employees and <11 employees). These findings suggest that firms, and ultimately their employees, were willing to shoulder the burden of rising health insurance costs even if it meant giving up increases in wages. But if health insurance costs continue to outpace payroll growth, it is unclear whether employers and their employees will be able to afford this burden in the future.

The study also found that small firms with fewer than 25 employees offered plans that were of slightly lower quality than those offered by large firms. Specifically, the plans had slightly lower actuarial values, especially for non-HMO plans (e.g., preferred-provider organizations and traditional fee-for-service plans) and for enrollees in the top 50 percent of expenditures.

How Have Some Proposed Solutions Affected Small Firms?

Beyond facing a higher economic burden relative to large firms in providing health insurance to their employees, small U.S. firms have more limited access to health insurance. In 2003, only 43 percent of firms with fewer than 50 employees offered health insurance, compared with 95 percent of firms with 50 or more employees. Moreover, health insurance plans offered to small businesses tend to suffer from limitations, including high premiums and preexisting-condition clauses that exclude expensive conditions from coverage. Some insurers simply do not sell policies to small firms.

Policy solutions to address these problems have focused on two options: (1) increased regulation of the insurance plans offered to small firms; and (2) the promotion of consumer-directed health plans (CDHPs), which typically combine high deductibles with tax deductible personal health savings accounts and are less costly than traditional health plans.

A KRI-funded study examined the effects of these policies on small businesses. The study found that, to date, neither of these options has improved access to or the affordability of health insurance for small businesses. Although CDHPs appear to be growing in popularity, evidence suggests that small businesses are no likelier than larger ones to offer such plans. In addition, insurance reforms focused on policies offered to smaller firms have not improved small-business access to health insurance and, moreover, seem to have had unintended effects. For example, many small employers that were near the threshold in terms of whether their insurance plans would be covered by the additional regulations appear to have increased their size to avoid the more highly regulated market.

The study recommends exploring new policy solutions, such as small-business purchasing pools. At the same time, the evolving marketplace for CDHP-related products and services should be monitored to track CDHPs' effects on insurance offered to small businesses and identify any barriers to small firms' access to these plans.

READ THE RESEARCH BRIEF: Is the Economic Burden of Providing Health Insurance Greater for Small Firms Than for Large Firms?

READ THE RESEARCH BRIEF: State Insurance Mandates and Consumer-Directed Health Plans: Are They Helping Small Businesses Provide Health Insurance to Employees?

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