1. The Small-Group Market Chapter 17

2. 2 Overview Overview of small-group coverage Overview of small-group coverage Managed care and small groups Managed care and small groups Reasons for coverage patterns Reasons for coverage patterns Premium elasticities Premium elasticities Small-group reform Small-group reform Association health plans Association health plans

3. 3 Figure 17-1: Percent of Small Firms Offering Coverage Source: data from Claxton et al. (2006)

4. 4 Characteristics of Small Businesses that Offer Health Insurance Coverage Firms with more than 10 workers more likely to offer coverage Firms with more than 10 workers more likely to offer coverage Firms in which workers earn more than $2,200 (2001 data) per month, on average, more likely to offer coverage Firms in which workers earn more than $2,200 (2001 data) per month, on average, more likely to offer coverage Firms with low turnover more likely to offer coverage Firms with low turnover more likely to offer coverage Firms with more high school graduates more likely to offer coverage Firms with more high school graduates more likely to offer coverage Source: data from Kaiser Family Foundation (2002)

5. 5 Table 17-1: Percent of Small Employers Offering: Firm Size 1-910-1920-249ALL Offer Health Insurance 40.671.379.247.6 Offer an FSA 5.116.419.416.0 Offer an MSA 4.25.610.25.0 Offer reimbursement to employees for some/all of the health insurance premiums they purchase on their own 11.416.617.512.5 Source: data from NFIB (Morrisey 2003)

6. 6 Choice of Health Plans Offered? Vast majority of small firms offering health insurance offer only one plan Does not vary much by firm size: 1 to 9: 83% 10 to 19: 84% 20 to 249: 80% 83% 16% 1% Source: data from NFIB (Morrisey 2003) One Plan 2 or More Plans

7. 7 Types of Plans Offered by Small Businesses Offering One Plan, 2003 1-910-1920-249ALL Conventional25.6%23.6%16.9%23.9% HMO22.1%20.6%26.0%22.9% PPO45.7%45.1%47.8%45.9% POS0.0%4.9%5.1%1.6% Other4.5%2.0%1.7%3.7% DK/Refused2.0%3.9%2.5%2.4% Firm Size Source: data from NFIB (Morrisey 2003)

8. 8 “Switching to Managed Care in the Small- Group Market” Source: data from Morrisey and Jensen (1997) Percentage of Workers in Firms of <50 Workers

9. 9 Model and Data MC = f(price, knowledge, legislation, firm, and worker characteristics) MC = f(price, knowledge, legislation, firm, and worker characteristics) 1993 and 1995 KPMG/Wayne State Small Employer Survey 1993 and 1995 KPMG/Wayne State Small Employer Survey Price Price Relative premium of managed care to conventional Relative premium of managed care to conventional Knowledge Knowledge Number of insurance solicitations Number of insurance solicitations HMO and PPO penetration—lagged HMO and PPO penetration—lagged Legislation Legislation Guaranteed issue and renewal, preexisting conditions limits Guaranteed issue and renewal, preexisting conditions limits Source: Morrisey and Jensen (1997)

10. 10 Findings Relative Premium Matters Relative Premium Matters 10 percent lower managed care premium leads to a 2.4 percent greater probability of offering managed care 10 percent lower managed care premium leads to a 2.4 percent greater probability of offering managed care Knowledge Matters Knowledge Matters Each one percentage point increase in HMO or PPO penetration leads to a 1.4 percentage point increase in the probability of offering managed care Each one percentage point increase in HMO or PPO penetration leads to a 1.4 percentage point increase in the probability of offering managed care Marginal impact declines with greater market share Marginal impact declines with greater market share HMO and PPO effects are distinct HMO and PPO effects are distinct Legislation Had No Effect Legislation Had No Effect Source: Morrisey and Jensen (1997)

11. 11 Why Small Firms Do and Do Not Offer Coverage

12. 12 Figure 17-3: Reasons Why Small Employers Offer Health Insurance Source: data from NFIB (Morrisey 2003)

13. 13 Figure 17-2: Reasons Why Small Employers Do Not Offer Health Insurance Source: data from NFIB (Morrisey 2003)

14. 14 “Health Insurance Availability at the Workplace: How Important Are Worker Preferences?” “In this paper…we have hypothesized that an employer’s decision to offer coverage reflects worker preferences and that workers with weak tastes for health insurance seek employment in firms that do not provide coverage in order to obtain higher wages. Our results for single workers are consistent with this sorting behavior and suggest that preferences may be as important as worker characteristics in explaining the health insurance status of uninsured workers with weak preferences. We also find that workers who believe that their health status does not warrant health insurance do incur lower health expenditures than other workers. In addition, the report themselves to be in better health than workers with strong preferences.” “In this paper…we have hypothesized that an employer’s decision to offer coverage reflects worker preferences and that workers with weak tastes for health insurance seek employment in firms that do not provide coverage in order to obtain higher wages. Our results for single workers are consistent with this sorting behavior and suggest that preferences may be as important as worker characteristics in explaining the health insurance status of uninsured workers with weak preferences. We also find that workers who believe that their health status does not warrant health insurance do incur lower health expenditures than other workers. In addition, the report themselves to be in better health than workers with strong preferences.” Source: Monheit and Vistnes (1999)

15. 15 Price Sensitivity in the Small-Group Market

16. 16 “Effect of Premiums on the Small Firm’s Decision to Offer Health Insurance” RWJF Survey of 2000 Minnesota firms in 1993 RWJF Survey of 2000 Minnesota firms in 1993 Offer = f(Premium, Competitors, Worker Characteristics, Industry) Offer = f(Premium, Competitors, Worker Characteristics, Industry) Premium is endogenous and is predicted in two- stage model using employees, coverage, and firm characteristics as instruments Premium is endogenous and is predicted in two- stage model using employees, coverage, and firm characteristics as instruments Source: Feldman et al. (1997)

17. 17 Small-Firm Insurance Premium Elasticity A 1 percent increase in the single coverage premium led to a 3.9 percent decrease in the probability of offering single coverage A 1 percent increase in the single coverage premium led to a 3.9 percent decrease in the probability of offering single coverage A 1 percent increase in the family coverage premium led to a 5.8 percent decrease in the probability of offering family coverage A 1 percent increase in the family coverage premium led to a 5.8 percent decrease in the probability of offering family coverage Source: Feldman et al. (1997)

18. 18 “Small Firms’ Demand for Health Insurance: The Decision to Offer Insurance” RWJF Survey of Employers in 1997 RWJF Survey of Employers in 1997 Small establishments < 100 workers Small establishments < 100 workers Offer = f(Premium, Worker, Firm, and Insurer Characteristics) Offer = f(Premium, Worker, Firm, and Insurer Characteristics) Premium is endogenous Premium is endogenous Overall elasticity of offer: -.54 Overall elasticity of offer: -.54 Different elasticity estimates by firm size, wage rates, and average family income Different elasticity estimates by firm size, wage rates, and average family income Source: Hadley and Reschovsky (2002)

19. 19 Table 17-3: Predicted Premiums, Offer Rates, and Elasticities Premium ($) Offer Rate Elasticity Establishment Size <10 <10 10-24 10-24 25-49 25-49 50-99 50-99176162151150.40.69.83.92-.63-.30-.24-.03 Percent Low-Wage ($7/hr) Workers >75% >75% 50% - 75% 50% - 75% <50% <50%178175169.22.37.57-1.18 -.58 -.58 -.30 -.30 Average Family Income per Worker <$15,940 (0-5 percentile) <$15,940 (0-5 percentile) $15,940-$18,401 (5-10 percentile) $15,940-$18,401 (5-10 percentile) $18,401-23,158 (10-25 percentile) $18,401-23,158 (10-25 percentile) >$25,158 (25-100 percentile) >$25,158 (25-100 percentile)151152165175.24.33.28.53-.98-.88-1.11-.52 Source: data from Hadley and Reschovsky (2002)

20. 20 Small-Firm Price Responsiveness Mixed evidence Mixed evidence Firm level premium sensitivity is smaller than individual worker sensitivity Firm level premium sensitivity is smaller than individual worker sensitivity Firm level price responsiveness declines with: Firm level price responsiveness declines with: Larger firm size Larger firm size Larger percentage of higher-wage workers Larger percentage of higher-wage workers Higher average family income Higher average family income

21. 21 “Small Group Reform and Insurance Provision by Small Firms, 1989–1995” Bare-Bones Coverage Bare-Bones Coverage Exempt small firms form some or all state insurance mandates Exempt small firms form some or all state insurance mandates Premium Regulation Premium Regulation Rating bands for premiums Rating bands for premiums Community and modified community rating Community and modified community rating Underwriting Practices Underwriting Practices Guaranteed issue and guaranteed renewal Guaranteed issue and guaranteed renewal Portability Portability Preexisting condition clauses Preexisting condition clauses Source: Jensen and Morrisey (1999b)

22. 22 Number of States with Insurance Reforms 19891995 Bare-bones provisions 143 Rating restrictions 145 Guaranteed issue 038 Guaranteed renewal 143 Portability343 Preexisting condition waiting periods 1145 Source: data from Jensen and Morrisey (1999b)

23. 23 Percentage of Small Firms with Preexisting Condition Waiting Periods, by Duration and Plan Type 19931995 Conv.PPOPOSConv.PPOPOS No waiting period 301514372830 1 to 5 month wait 3112345 6 to 12 month wait 244652334831 >12 month wait 340504 Other/missing402532222030 Source: data from Jensen and Morrisey (1999b)

24. 24 Findings Results suggest that alone, or as a group, none of the reforms had a statistically significant effect on the decision to offer coverage. Results suggest that alone, or as a group, none of the reforms had a statistically significant effect on the decision to offer coverage. HIPAA provisions on portability and preexisting conditions unlikely to have much impact on small employers HIPAA provisions on portability and preexisting conditions unlikely to have much impact on small employers

25. 25 “Effects of ‘Second Generation’ Small Group Health Insurance Market Reforms, 1993–1997” “In the mid-1990s several state legislatures enacted a ‘second generation’ of small group health insurance reforms that required guaranteed issue of all products and prohibited the use of health as a rating factor. We use data from two large employer surveys to compare the behavior of small business in nine states that adopted these reforms between 1993 and 1997 to the behavior of small business in 11 states and the District of Columbia, where neither of these small group health insurance market reforms existed prior to 1997 ….Overall, we found no effect of small group reform on any of the outcomes ; the sign of the effect is not consistent across reform states, the estimates rarely attain statistical significance, and they show no consistent pattern across the outcomes. Therefore, predictions of the harm these regulations might cause…and the hopes for a solution to low coverage rates among small businesses have not materialized.” “In the mid-1990s several state legislatures enacted a ‘second generation’ of small group health insurance reforms that required guaranteed issue of all products and prohibited the use of health as a rating factor. We use data from two large employer surveys to compare the behavior of small business in nine states that adopted these reforms between 1993 and 1997 to the behavior of small business in 11 states and the District of Columbia, where neither of these small group health insurance market reforms existed prior to 1997 ….Overall, we found no effect of small group reform on any of the outcomes ; the sign of the effect is not consistent across reform states, the estimates rarely attain statistical significance, and they show no consistent pattern across the outcomes. Therefore, predictions of the harm these regulations might cause…and the hopes for a solution to low coverage rates among small businesses have not materialized.” Source: Marquis and Long (2001/2002)

26. 26 Employer Coalitions Why don’t small businesses band together and with their combined employees to get the lower health insurance premiums enjoyed by larger firms? Why don’t small businesses band together and with their combined employees to get the lower health insurance premiums enjoyed by larger firms?

27. 27 Employer Coalitions What defines objective risk? What defines objective risk? Number of covered lives Number of covered lives Expected claims experience Expected claims experience Variance in claims experience Variance in claims experience Can a coalition do better than an insurance agent? Can a coalition do better than an insurance agent?

28. 28 AHPs (and HealthMarts) Allow professional and other organizations to offer group health insurance to their members Allow professional and other organizations to offer group health insurance to their members Importantly, AHPs are exempt from state insurance regulation Importantly, AHPs are exempt from state insurance regulation Nonprofit organizations that offer health insurance products to all small firms within their geographic service areas. Exempt from most state benefit mandates but not state premium regulations. Association Health PlansHealthMarts

29. 29 “Predicting Response to Regulatory Change in the Small Group Insurance Market: The Case of Association Health Plans and HealthMarts” “For several years, the U.S. Congress has considered legislation that would establish two new vehicles for offering health insurance coverage to small employers: Association health plans (AHPs) and HealthMarts. In this paper, we present a model of estimating the impact the new entities would have on coverage and premiums in the small group insurance markets….We estimate that approximately 4.6 million people would obtain coverage through AHPs and HealthMarts, but fewer than half a million of them would be newly insured (based on 1999 population figures). Premiums would increase slightly for firms that continued to purchase coverage in the traditional market.” “For several years, the U.S. Congress has considered legislation that would establish two new vehicles for offering health insurance coverage to small employers: Association health plans (AHPs) and HealthMarts. In this paper, we present a model of estimating the impact the new entities would have on coverage and premiums in the small group insurance markets….We estimate that approximately 4.6 million people would obtain coverage through AHPs and HealthMarts, but fewer than half a million of them would be newly insured (based on 1999 population figures). Premiums would increase slightly for firms that continued to purchase coverage in the traditional market.” Source: Baumgardner and Hagen (2001/2002)

30. 30 Why Is the Small-Group Market So Unresponsive? Diverse and complex… Diverse and complex… Detailed survey work in San Diego, CA—2001 Detailed survey work in San Diego, CA—2001 2,830 businesses with 2–50 employees 2,830 businesses with 2–50 employees 79.5 percent response rate (!) 79.5 percent response rate (!) 26.5 percent did not offer coverage 26.5 percent did not offer coverage Source: Kronick and Olsen (2006)

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32. 32 Discussion Questions Suppose the local metropolitan small-business association decides to offer health insurance to its members. Under what circumstances would this effort result in premium savings to its members? Suppose the local metropolitan small-business association decides to offer health insurance to its members. Under what circumstances would this effort result in premium savings to its members?

33. 33 Discussion Questions Why do you think state legislation limiting waiting periods for preexisting conditions had so little impact on coverage in the small-group market? Do you think there is any relationship between your answer and the probability that a state legislature would enact such a law? Why do you think state legislation limiting waiting periods for preexisting conditions had so little impact on coverage in the small-group market? Do you think there is any relationship between your answer and the probability that a state legislature would enact such a law?

34. 34 Discussion Questions Suppose a state wanted to encourage small employers to offer health insurance and did so by subsidizing the premium for two years. What effect do you think this would have on the proportion of small firms offering coverage? Why? Suppose a state wanted to encourage small employers to offer health insurance and did so by subsidizing the premium for two years. What effect do you think this would have on the proportion of small firms offering coverage? Why?