Small-Group and Individual Coverage Deborah Chollet, Ph.D. Senior Fellow

Source: AHRQ, MEPS Insurance Component, Private sector workers only. Most firms are small, but most workers are employed in large firms

Small firms are less likely to offer coverage, but workers are more likely to be eligible and to enroll Source: Estimated from AHRQ, MEPS Insurance Component, Private sector workers only.

Excluding public-sector employees, small group employees (1-49) are 20% of the group market Source: Estimated from AHRQ, MEPS Insurance Component, Private sector workers only.

Average premiums per benefit paid are higher for small firms Higher administrative cost per member Higher administrative cost per member –Fixed cost per member –High rate of plan change and “churning” Greater risk of adverse selection, higher reserves Greater risk of adverse selection, higher reserves Low opportunity to self-insure Low opportunity to self-insure Loss ratios are typically percent Loss ratios are typically percent

To maximize group size and minimize premiums, small employers: Offer one plan, no choice Offer one plan, no choice Offer restricted-provider plans—neither EPO or unrestricted indemnity Offer restricted-provider plans—neither EPO or unrestricted indemnity Pay a larger share (or all) of premium to achieve threshold size Pay a larger share (or all) of premium to achieve threshold size

Small-group employees are less likely to contribute to coverage No employee contribution for: Source: AHRQ, MEPS Insurance Component, Private sector workers only.

Small employers pay higher premiums and ~25% more in contributions per worker Source: Estimated from AHRQ, MEPS Insurance Component, Private sector workers only.

Small firms are exempted from some federal regulation, but often not by states Federal regulation Exempt Exempt –COBRA –Maternity coverage (Title VII - Civil Rights Act) Not exempt Not exempt –HIPAA (not exempt)  Guaranteed issue  Guaranteed renewal  Portability –Post mastectomy surgery State regulation (selected states) Mini – COBRA Mini – COBRA Community rating Community rating Rate bands Rate bands Mandated benefits Mandated benefits Strong mental health parity Strong mental health parity Mandated coverage (Hawaii) Mandated coverage (Hawaii)

Does insurance regulation raise the cost of small-group coverage? Guaranteed issue (HIPAA) Guaranteed issue (HIPAA) –Reduced small-group coverage –Increased coverage of high-risk workers Community rating and/or comprehensive rate limits Community rating and/or comprehensive rate limits –No significant effect proven Mandated benefits Mandated benefits –Little difference in benefits when exempt, but some benefits may add cost –Low demand for “bare bones” plans

Basic features of the individual market: It’s small — 5-15% of the <65 population in every state — and 1/3 are age It’s small — 5-15% of the <65 population in every state — and 1/3 are age Underwriting is aggressive: applicants are denied, conditions permanently excluded, rated up Underwriting is aggressive: applicants are denied, conditions permanently excluded, rated up It’s expensive: premiums are high, and benefits are just percent of premiums It’s expensive: premiums are high, and benefits are just percent of premiums It’s unstable It’s unstable –Shrinks rapidly when employer coverage expands –Insureds have modest income: 43% < 300% FPL –Many small insurers, each with small market share

HIPAA solved few problems in the individual market Guaranteed renewal Guaranteed renewal Group-to-individual portability for some Group-to-individual portability for some But: But: –No guaranteed issue –No individual-to-individual portability –No affordability protections

Some states have tried to address insurability, affordability Guaranteed issue (3) Guaranteed issue (3) High risk pools (32) High risk pools (32) –> 250 percent of market rates, 6-12 month waiting periods –Very low enrollment and impact on market Rate bands: health, age, composite Rate bands: health, age, composite Community rating (16) Community rating (16) Pure community rating (1) Pure community rating (1)

Ideas to improve the individual market include: Federal refundable tax credits Federal refundable tax credits Federal funding to make high risk pools affordable Federal funding to make high risk pools affordable –Federal funds for administrative costs State (or federal) reinsurance to support State (or federal) reinsurance to support –Guaranteed issue products –Individual-to-individual portability