There is a backlash from small businesses against greedy insurance companies, which charge them more than their larger competitors for health insurance. In Massachusetts, the Division of Insurance has begun an investigation into the practice.
There are a few reasons why small business pays more for health insurance, and health care reform can address some of these issues, but some of the bills being considered won't go very far.
1. Small businesses tend to have adverse selection.
Large companies offer health insurance universally, while small businesses (<50 employees) offer insurance in only about 60% of instances. Those businesses that offer health insurance aren’t randomly distributed amongst small businesses; rather, they are small businesses that see the value of health insurance. No surprise, they tend to have older employees, more chronic illness, and higher expenses. Small businesses tend to offer lower subsidies for insurance, too, so the healthiest employees of small businesses are more likely to take a pass and forego insurance. It’s also hard to “game” the system by putting an ill relative or friend on the payroll for the purpose of health insurance in a large company with formal human resource policies, and far easier to do so in a very small company. Groups that are more expensive simply will pay more for their insurance.
2. It’s more expensive to sell policies to small groups than to large groups.
When a health plan sells health insurance to a large company like Bank of America, a single negotiation leads to tens of thousands of “covered lives.” It’s simply more expensive to sell ‘retail’ than ‘wholesale,’ and sales and marketing represents a larger portion of the overall expense of selling health insurance policies to small groups.
3. It’s more expensive to deliver services to small groups.
Health plans have to collect member information, deliver health insurance cards, and deliver customer service through call centers. Small businesses tend to be less automated, so data is less likely to be exchanged electronically – leading to higher transaction costs.
4. Regulations merging small group and individual market in Massachusetts have led to decrease in individual premiums, but there is a small amount of subsidy of individual insurance by small groups.
5. Large employers can self-insure. Self-insurance generally means that the employer is responsible for all bill payment after services are delivered, rather than paying a premium for insurance in advance. Thus, large employers don’t have to pay for a health insurer’s margin on ‘insurance risk,’ only on health plan services delivered. Large employers can also avoid state insurance mandates for coverage, and can tailor plans to be substantially less expensive. For instance, in Massachusetts fully insured health plans such as those available to small employers must include coverage of artificial reproductive techniques, while self-insured plans can restrict these services and thus decrease claims costs.
6. Large employers have substantial leverage, and can negotiate lower prices, while small employers are “price takers,” and must accept rates offered. Small employers also don’t usually have in-house expertise to negotiate with health plans, and thus also have higher brokerage costs.
What will health reform mean for the differentially higher costs for small business?
A robust individual mandate would substantially diminish the issue of adverse selection. When everyone must have insurance, the healthy employees of all small companies have to be in the pool, lowering average costs. Modest penalties, though, would be far more politically palatable. If the penalties for not having insurance are not steep, more healthy people will continue to forego insurance, and adverse selection would continue.
A health insurance exchange could decrease the cost of marketing and administering health insurance for small employers, which could lower the cost of this insurance. The exchange could also negotiate on behalf of small businesses, increasing their leverage.
The proposed health care reform could lower premiums for health insurance for small businesses. However, bringing healthy Americans into the system lowers cost per insured person, but does not lower the aggregate cost of health care.
