Health Insurance and Small Businesses: Ways to Make Coverage More Affordable

As policymakers continue to struggle with how best to meet the health care coverage needs of employees of small businesses, legislation has once again stalled in Congress. On May 11, 2006, a bill that would have allowed small businesses to join together and create association health plans (S. 1955) failed to pass in the Senate.

Introduced in November 2005, this bill sponsored by Senate Health, Education, Labor and Pensions Committee Chair Mike Enzi (R-WY)would allow small businesses and trade associations to form association health plans across state lines. These association-sponsored Small Business Health Plans (SBHPs) would contract with a licensed insurance carrier to provide health insurance to the association's members and their employees. Unlike current regulations, insurers would be allowed to sell plans to employers and individuals as part of the SBHP that do not meet current state benefits mandates. They would then, however, also be required to offer a plan with benefits provided under a state employees' plan in one of the five most populous states ( California, Florida, Illinois, New York and Texas ). Variation in premiums from one small business to another would be also limited, preempting current state laws.1

Of the three bills currently before Congress, the Enzi bill was widely viewed as having the best chance of passing. Proponents of the Enzi bill, including the Bush administration and trade associations, argued that it would help small businesses by improving affordability to employers and employees, exempting small businesses from having to comply with expensive and varying state requirements.2 3 4 Those opposing the Enzi legislation, as well a the formation of association health plans in general, contend that insurers and small businesses will be exempt from state mandated protection, resulting in possible harm and increased costs for sicker workers.5

Group purchasing arrangements, including AHPs, vary widely in their structure, and state regulation of such plans also varies. All such plans seek to achieve cost savings by encouraging employers and/or self-employed individuals to combine their purchasing power to negotiate health insurance premiums lower than they could otherwise achieve. Some group purchasing arrangements are self-insured, and therefore, able to save additional costs of traditional insurers, including premium taxes. Group Purchasing Arrangements: Issues for States, an issue brief prepared for the State Coverage Initiatives program, highlights policy and regulatory issues arising from group purchasing arrangements.

In a HCFO-funded study, Mila Kofman, J.D., and colleagues at Georgetown University have been examining the dynamics of pooled purchasing arrangements, including association health plans (AHPs), multiple employer welfare arrangements (MEWAs), and health insurance purchasing coalitions (HIPCs). In particular, she has examined market problems, like the historically high risk of insolvencies in self-insured arrangements and fraudulent health insurance promoted through pooled purchasing arrangements. Kofman's work suggests that the challenge for policymakers will be to balance the benefits of association health plans with the potential that these arrangements have for financial instability. A searchable database, with information gathered as part of this study, is available at http://www.hcfo.net/mewa/index.cfm.

In an effort to better understand the likely impact of exempting AHPs from state regulation, some analysis of group purchasing arrangements has been done. In particular, Mila Kofman and colleagues at the Health Policy Institute at Georgetown University examined states' experiences with Multiple Employer Welfare Arrangements (MEWAs), self-insured AHPs, often with less stringent licensing requirements than traditional insurers. As reported in a Commonwealth Fund issue brief, MEWAs have "a troublesome history of financial instability." Kofman warns that policymakers must be aware of the need for consumer protections, particularly with respect to plan solvency.

Despite the frustration of three failed attempts to address the health coverage needs of small businesses, in as many years, federal policymakers are likely to revisit this issue. As Senator Joe Lieberman (D-CT) said, the "failure ultimately will signify nothing good for millions of Americans who need health insurance."6 With his debate remaining on the policy agenda, ongoing and completed HCFO projects can inform discussion and policy proposals addressing the health insurance needs of small businesses, in general, and the merits of association health plans, in particular.

HCFO Funded Research

Title: Private Insurance Markets: The Missing Link - Association Health Plans and Other Pooled Purchasing Arrangements
Institution: Georgetown University
Principal Investigator: Mila Kofman, J.D.
Grant Duration: April, 2003 - April, 2005

Paragraph Summary: What are the dynamics of pooled purchasing arrangements? In this study, the researchers were: (1) identifying and describing different types of pooled purchasing arrangements, identifying examples of each type, and discussing how such arrangements are regulated by states and the federal government; (2) describing how coverage sold through such arrangements is regulated, focusing on key market reforms and consumer protections as well as applicable federal standards; (3) providing estimates on the prevalence of such arrangements; (4) summarizing how self-insured arrangements are regulated, identifying weaknesses in the law, discussing recent insolvencies, and identifying successful oversight approaches; and (5) discussing market failures focusing on the recent influx in health insurance scams promoted through pooled purchasing arrangements. The objective of this study was to inform state and federal policy discussions on expanding the role of association health plans and other pooled purchasing arrangements. In addition, it intended to help policymakers address current problems that consumers face such as insolvency and fraud.

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Title: The Anatomy of ERISA Health Plans: Describing their Basic Structure and Key Areas of Variation
Institution: George Washington University, Center for Health Services Research and Policy
Principal Investigator: Phyllis Borzi, J.D.
Grant Duration: October, 2001 - August, 2002

Paragraph Summary: How do variations in ERISA health plans affect the formation of policy? The researchers examined the anatomy of key types of ERISA health plans (i.e. identifying the fundamental characteristics, features, and structures that distinguish the plans), focusing on those distinctions that are relevant to the current "patients' rights" and "defined contribution" debates. In addition, they attempted to correct "prevalent public misconceptions" that may impede legislative development (i.e. the misconception that HMO's are making health plan decisions, when, in fact, decisions may be made by the administrators or fiduciaries of an ERISA plan.) The researchers hypothesized that "there exist important areas of variation among different types of ERISA health plans that might present policymakers with cause to consider crafting flexible laws and regulations that take into account this variation." The objective of the project was to provide policymakers with information on variations in ERISA health plans that are relevant to current debates on health plan regulation.

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Title: Sustaining Individual Health Insurance Markets Under Community Rating and Open Enrollment
Institution: Rutgers, The State University of New Jersey
Principal Investigator: Joel Cantor, Sc.D.
Grant Duration: April, 2002 - September, 2003

Paragraph Summary: What is the current extent of risk selection in New Jersey 's Individual Health Coverage Program (IHCP), which was implemented in 1992 as part of the state's individual market reforms? What are the policy options for sustaining access to individual health plans and describe the role of the non-group coverage in New Jersey 's health care insurance market? Using data from The Robert Wood Johnson Foundation-funded New Jersey Family Health Survey (NJFHS), the researchers aimed to answer the following questions: (1) How has the distribution of risk changed in the IHCP since 1995-6 and what are the implications of those changes for the viability of community rating and related reforms? (2) What is the potential impact on current or potential IHCP enrollees of adopting modified community rating? and (3) What role does the IHCP play in the continuum of coverage in New Jersey ? The objective of this study was to analyze changes in New Jersey 's small group market in order to inform state policymakers who are considering reforms to make the non-group markets accessible and viable. The researchers supplemented the NJFHS data with a sample of 600 non-group subscribers (subscriber lists provided by top 4 or 5 carriers in state who cover 95% of lives in the individual market). Using the same methodological approach utilized by Swartz and Garnick in the early years of the IHCP, they assessed the risk of medical expenditures of adult IHCP enrollees compared to that of a contrast population comprised of individuals with non-small-group employment-based insurance. They also compared the IHCP enrollees with the entire employer-group market and the uninsured.

Grantee Publications:

Title: Market Watch: Community Rating and Sustainable Individual Health Insurance Markets in New Jersey

Author(s): Monheit AC, Cantor JC, Koller M, and Fox KS

Journal: Health Affairs

Volume: 23(4)

Date: July/August 2004

Title: Simulation of the Impact of Modified Community Rating in the New Jersey Individual Health Coverage Program

Author(s): Monheit A, Cantor J, and Banerjee P

Journal: Rutgers Center for State Health Policy

Volume: N/A

Date: March 2005

Title: State Health Care Purchasing Practices
Institution: JSI Research and Training Institute
Principal Investigator: James H. Maxwell, Ph.D.
Grant Duration: December, 2001 - February, 2004

Paragraph Summary: What are the implications of state employers' purchasing practices for employees and future purchasing? This study continued their earlier HCFO-funded work looking at purchasing among Fortune 500 employers and built on earlier HCFO work conducted by Bryan Dowd. Specifically the researchers pursued five objectives. They were: 1) documenting the health care purchasing practices among state employers; 2) exploring the relationship between health care purchasing and procurement for other goods and services; 3) studying the effects of public sector unions and collective bargaining on health benefits; 4) comparing the results from this study to the findings from the Fortune 500 study; and, 5) examining innovation in purchasing among state employers. This study provides state executives and other decision makers with more information about the purchasing behavior of state employers.

Grantee Publications:

Title: Managed Competition versus Industrial Purchasing of Health Care among the Fortune 500
Author(s): Maxwell J and Temin P
Journal: Journal of Health Politics, Policy and Law
Volume: 27(1)
Date: February 2002

Title: Corporate Health Care Purchasing Among Fortune 500 Firms
Author(s): Maxwell J, Temin P, and Watts C
Journal: Health Affairs
Volume: 20(3)
Date: May/June 2001

Title: Managed Competition in Practice: 'Value Purchasing' by Fourteen Employers
Author(s): Maxwell J, Briscoe F, Davidson S, Eisen L, Robbins M, Temon P, and Young C
Journal: Health Affairs
Volume: 17(3)
Date: May/June 1998

Title: Corporate Health Care Purchasing Among The Fortune 500
Author(s): Maxwell J, Briscoe F, Watts C, Zama S, Temin P
Journal: National Health Care Purchasing Institute
Volume: N/A
Date: May 2001

Title: The Benefits Divide: Health Care Purchasing in Retail versus Other Sectors
Author(s): Maxwell J, et al.
Journal: Health Affairs
Volume: 21(5)
Date: September/October 2002

Title: Private health purchasing practices in the public sector: a comparison of state employers and the Fortune 500
Author(s): Maxwell J, Temin P, Petigara T
Journal: Health Affairs
Volume: 23(2)
Date: March/April 2004

Title: Private Health Purchasing Practices in the Public Sector: A Comparison of State Employers and the Fortune 500

Author(s): Maxwell J, Temin P, and Petigara, T
Journal: Health Affairs
Volume: 23(2)
Date: March/April 2004

Title: Guaranteed Renewability in Individual and Group Health Insurance: Functioning and Future Prospects
Institution: University of Pennsylvania, The Wharton School
Principal Investigator: Mark V. Pauly, Ph.D
Grant Duration: November, 2001 - October, 2002

Paragraph Summary: If private insurers can be encouraged to improve the protection offered by their products, is it possible that those improvements can benefit consumers and obviate the need for regulation with undesirable side effects? This project focused on the individual and small group insurance markets; namely, the sharp increases in premiums which occur when an individual incurs large medical expenses. The researchers carried out three research tasks, summarized as follows: 1) Estimated the age profile of premiums for an "optimal," benchmark guaranteed renewability (GR) policy that would cover claims (including the expenses of high-risk insureds) but not be priced so high that low-risks would leave for a cheaper policy. 2) Used data from MEPS, longitudinal claims data bases, and the Health and Retirement Survey to calibrate an empirically based, "exploratory" model derived from the optimal policy described in (1) that they can use in task #3. 3) Simulated hypothetical case studies that members of the Society of Financial Service Professionals, participating in "virtual focus groups," evaluated on the basis of degree of realism. This study determines the effects of guaranteed risk on public policy, (particularly if GR could provide protection to high risks in a population) and informs insurance firms and insurance regulators on how to make GR work better.

Grantee Publications:

Title: Guaranteed Renewability and the Problem of Risk Variation in Individual Health Insurance Markets
Author(s): Patel V, Pauly MV
Journal: Health Affairs Web Exclusive
Volume: N/A
Date: September 2002

Title: The Non-Group Health Insurance Market: Short on Facts, Long on Opinions and Policy Disputes
Author(s): Pauly MV, Nichols LM
Journal: Health Affairs Web Exclusive
Volume: N/A
Date: October 2002

Title: Studies of the Working Uninsured, Their Dependents and Insurance Reform on Their Behalf
Institution: The Urban Institute
Principal Investigator: Linda J. Blumberg, Ph.D.
Grant Duration: June, 2000 - July, 2002

Paragraph Summary: What are the effects of certain insurance market reforms that were designed to expand coverage? Researchers at the Urban Institute conducted several analyses looking at the working uninsured and these effects using the Current Population Survey (CPS), the National Survey of America's Families (NSAF), and the National Health Interview Survey. In particular, they aimed to answer the following five questions: 1) Who are the working uninsured? 2) Why do employer-sponsored coverage rates vary across the 50 states? 3) Have health insurance market reforms affected the composition of insured risk pools? 4) Did HIPAA have any effect in the small group market? and 5) Why do so many workers in large firms lack health insurance? The objective of this series of studies was to provide a better understanding of the working uninsured in order to better inform the policy debate about coverage expansions and identify those interventions most likely to work.

Grantee Publications:

Title: Subgroups of Working Uninsured Require Different Enrollment Strategies
Author(s): HCFO
Journal: AcademyHealth
Volume: 6(6)
Date: December 2003

Title: Exploring State Variation in Uninsurance Rates Among Low-Income Workers
Author(s): Blumberg L and Davidoff A
Journal: New Federalism Policy Brief, The Urban Institute
Volume: B-56
Date: October 2003

Title: Consider the Source: Studying Low-Income Uninsured Workers Using Three Different Surveys
Author(s): Blumberg L and Davidoff A
Journal: The Urban Institute
Volume: N/A
Date: 2002

Title: An Evaluation of the Primary and Secondary Effects of Insurance Market Reform
Institution: Bowman Gray School of Medicine
Principal Investigator: Mark A. Hall, J.D.
Grant Duration: September, 1996 - December, 2000

Paragraph Summary: What are the effects of state health reforms? Researchers at the Bowman Gray School of Medicine evaluated insurance market reforms in 12 states. The effects within a single carrier's various lines of business will be compared among carriers within a given state, and these statewide patterns were compared across states. The study consisted of intensive case studies of insurance market reforms and their effects in a non-random sample of six states that have enacted varying reforms, and a less intensive study of an additional six states. The researchers: 1) conducted two rounds of open-ended interviews of key informants; 2) conducted participant observational studies of insurance agents; 3) did content analyses of sales literature and news articles; and 4) conducted statistical analyses of archival documents and secondary data. The objective of this study was to inform lawmakers and the public policy community on whether and how these reforms have achieved their multiple purposes or caused any negative consequences, and how these reforms might be improved.

Grantee Publications:

Title: HealthMarts, HIPCs, MEWAs, and Association Health Plans: A Guide for the Perplexed
Author(s): Hall M, Wicks E, and Lawlor J
Journal: Health Affairs
Volume: 20(1)
Date: January/February 2001

Title: The Geography and Health Insurance Regulation: A Guide to Identifying, Exploiting, and Policing Market Boundaries
Author(s): Hall M
Journal: Health Affairs
Volume: 19(2)
Date: March/April 2000

Title: Purchasing Cooperatives for Small Employers: Performance and Prospects
Author(s): Wicks E and Hall M
Journal: Milbank Quarterly
Volume: 78(4)
Date: December 2000

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1. "Senate Democrats Block Cloture Motion on Association Health Plan Bill; Measure Now Stalled". Kaiser Daily Health Policy Report, Friday May 12, 2006.
2. Appleby, Julie. "Bill to Help Small Business with Health Insurance Criticized." USA Today. April 26, 2006.
3. Alliance for Health Reform, "Ideas for Making Health Insurance More Affordable for Small Businesses,' April 24, 2006.
4. "Senate Democrats Block Cloture Motion on Association Health Plan Bill; Measure Now Stalled". Kaiser Daily Health Policy Report, Friday May 12, 2006.
5. Ibid.
6. Ibid.