The New York Times has a front page story today of the struggles that very small employers face in maintaining health insurance for their employees. It quotes the Kaiser Family Foundation - Health Research Educational Trust 2008 survey (images above) which shows that employers are bearing most of the cost increase of health insurance, and small employers have cut back on the percentage of employees insured. If anything, the KFF-HRET data understates the problem, since this survey defines small employers at <200>
The problems for small employers revolve mainly around the size of the risk pool. Small employers are more likely to opt into insurance if their employees (or they themselves) believe they will have substantial insurance costs. They have more information than the insurance plan (which knows about this information asymmetry). Further, they are more likely to employ a sick relative or friend who needs insurance - and again, the insurers know this. Therefore, where legal they seek to do "medical underwriting" and exclude the people who need insurance most, or exclude certain conditions.
What can be done?
Some states require "community rating," which means all small employees would pay the same rate. The bad news is that small employers with young, healthy populations would therefore have to pay higher rates than in an unregulated market. "Guarantee issue" can also prohibit exclusion of individuals (Massachusetts has this), and states can regulate the exclusion of conditions (imagine a hypertensive purchasing an insurance plan that excluded future heart disease).
A mandate to purchase insurance eliminates much of the problem of adverse selection -- although it's hard to push for mandate in our "free choice" culture. The Obama health plan does not include a mandate, while Hillary Clinton's (and Tom Daschle's) does.
The government can also set up a high risk pool for those unable to purchase insurance on the open market (the ultimate in adverse selection), or a "connector" to aggregate many small employers together. This works best with a mandate to avoid adverse selection.
Finally, the government can offer "reinsurance" for health plans, so that patients with catastrophic illnesses (i.e. >$50,000 per year) have some or most of their expenses removed from the insurer's obligations. This was part of John Kerry's health plan, and many of Obama's health advisers have proposed this. Stuart Altman recently told an audience at the Mass Medical Society that this was getting little traction in Washington, though.
Some of the answer must lie with the delivery system. We offer episodic, innovation-driven, very expensive health care - and if the costs continue to rise at the current rate, we will likely offer this to a smaller portion of the population.
