Small employers and expanded health insurance coverage

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  Brief                                             New England Public Policy Center
                                                    at the Federal Reserve Bank of Boston                                           July 2007

  07-5                                               Small employers and
                                                     expanded health insurance coverage
                                                     Direct and indirect costs and uncertainty limit participation
New England Public                                   By Phil Primack
Policy Center
                                                          The real action on plans to expand           for larger firms had company-based insur-
Director                                             health insurance coverage is at the state         ance in 2004, compared to about 50 percent
Robert Tannenwald                                    level. As Wal-Mart Director of State Health-      of those working for smaller businesses.
                                                     Care Policy Joe Quinn put it at a New Eng-             To some extent, these coverage num-
Staff                                                land Public Policy Center conference about        bers may reflect the very nature of small
Heather Brome                                        covering the uninsured, “This game is with        business, which faces less market predict-
Tom DeCoff                                           CEOs and with governors.”1                        ability, generally lower profit margins, and
Joanna Helou
                                                          New England states have been national        often has a greater dependence on part-
Matthew Nagowski
                                                     leaders in developing and enacting health         time or seasonal workers. But according to
Antoniya Owens
Darcy Rollins Saas
                                                     insurance programs. But as the new laws           small employers, the biggest reason for of-
Alicia Sasser                                        play out on real ground, various constituen-      fering little or no health insurance coverage
Bo Zhao                                              cies are seeing real or perceived devils in the   is cost.
                                                     detail of the expansion laws. For one group            Unlike large employers, many of which
The New England Public Policy                        in particular—small employers—efforts to          are either self-insured or are able to use
Center is dedicated to enhancing                     extend coverage have become a two-edged           their size to negotiate both greater benefits
access to high-quality analysis on                   sword. On the positive swing, the new             and lower premiums, small employers lack
economic and public policy issues                    plans offer small businesses that do not of-      such leverage. Also unlike larger companies,
that affect the region.                              fer employer-provided plans a way to get          small businesses are less able to afford ei-
                                                     their workforce covered. And healthier em-        ther in-house human resources personnel or
For more information about the
                                                     ployees are generally more productive em-         consultants to help them navigate new and
New England Public Policy Center,
                                                     ployees. But the other swing means higher         often changing health care regulations.
please visit:
                                                     labor costs, greater administrative hassles,           Small firms that do cover a significant
                                                     additional requirements and, in some cases,       share of their employees’ health care pre-
The views expressed are the                          mandates. This policy brief focuses on some       miums are finding it increasingly costly to
author’s and not necessarily those                   of the challenges facing small employers          do so. “We are getting hit with larger rate
of the Federal Reserve Bank of                       as the health insurance expansion process         increases each year than larger employers,”
Boston or the Federal Reserve                        continues to evolve, drawing on interviews        said Philip M. Papoojian, President and
System.                                              with people in or working at the state level      Chief Operating Officer of Metachem Res-
                                                     with small businesses.                            ins Corporation (MERECO) in West War-
                                                                                                       wick, RI, and chair of the health care sub-
                                                     Snapshot of small employer coverage               committee for the Rhode Island Economic
                                                     Employees working for large employers are         Summit. “It has to do with the small group
         federal reserve
         bank of boston                        TM
                                                     significantly more likely than those employed     rating. There is a real disparity between
                                                     by small firms (fewer than 50 employees) to       the premium rates insurers give larger (50
                                                     be eligible for and/or covered by employer-       or more employees) and smaller companies
       New England Public Policy Center              based health insurance (see chart on next         (fewer than 50 employees).”
                                                     page). For both New England and the na-                In general, smaller firms face higher pre-
       at the Federal Reserve Bank of Boston

                                                     tion, just over 71 percent of those working       miums because the size of the insured pool
                                                                                                             for both individuals and
Eligibility and coverage rates                                                                               employers alike. For ex-
                                                                                                             ample, enrollment in
Full-time, private-sector employees, 2004
                                                                                                             Maine’s DirigoChoice
                                                                                                             program has been much
                                                           Percent of total employees eligible               less than anticipated,
                                                           Percent of total employees covered
        Percent                                                                                              due in part to its cost
                    86.5                                  86.9                                               and benefits structure
         80                71.5                                  71.2         71.3                           but also to the daunting
                                                                                                             challenge of getting the
                                                                                                             younger, healthier indi-
         20                                                                                                  viduals—to be willing
                                                                                                             to get insurance, said
                    More than          Less than         More than             Less than                     Kristine M. Ossenfort,
                  50 employees       50 employees       50 employees         50 employees
                            UNITED STATES                         NEW ENGLAND
                                                                                                             Senior Governmental
                                                                                                             Affairs Specialist for the
Source: Author’s calculations based on 2004 Medical Expenditure Panel Survey                                 Maine State Chamber
                                                                                                             of Commerce.
                                                                                                                  DirigoChoice was
                        is one of the factors used by insurers to price
                                                                                     originally projected to cover 100,000 people,
                        risk. In addition, because they cannot afford
                                                                                     including about 31,000 in its first year. Actual
                        to self-insure because of their size, small busi-
                                                                                     first-year enrollment was just 7,500 people.
                        ness are unable to avoid state-mandated ben-
                                                                                     Enrollment as of May 2007 was 15,800,3 “but
                        efits, such as infertility treatments, that add
                                                                                     that is just not going to have a significant im-
                        to premium costs. Administrative costs can be
                                                                                     pact when Maine’s uninsured population is
                        more burdensome for smaller firms as well.
                                                                                     about 125,000 people,” said Ossenfort. Few
                             Papoojian, for example, received notice
                                                                                     individuals leave DirigoChoice, but those who
                        this past spring of a nearly 23 percent in-
                                                                                     do are more likely to be young and healthy.
                        crease in health insurance premium costs for
                                                                                     Those who voluntarily left the program cited
                        his 23 employees. That premium hike trans-
                                                                                     costs, inadequate benefits, and other issues,
                        lates into an additional $43,000, bringing his
                                                                                     such as dissatisfaction with administration of
                        company’s spending just on health insurance
                                                                                     subsidies. They also felt that “Dirigo wasn’t
                        premiums to nearly $250,000 a year. While his
                                                                                     going to last.”
                        premiums are especially high because of the
                                                                                           The DirigoChoice program also expected
                        over-50 average age of his workforce, Papooji-
                                                                                     greater participation rates by businesses. How-
                        an said insurers in Rhode Island have placed
                                                                                     ever, the program requires employers to pay at
                        firms with one to five employees in the high-
                                                                                     least 60 percent of employees’ premium costs
                        est risk group. “One legislative proposal want-
                                                                                     before they can enroll in the program, which
                        ed to segment the small group market from
                                                                                     can be a significant hurdle for small busi-
                        one to five, and then from 25 to 50 employ-
                                                                                     nesses. According to a recent New York Times
                        ees. The larger group would have seen rates
                                                                                     article, the problems with enrollment in Di-
                        go down, but firms with fewer than five em-
                                                                                     rigo Health are also related to some “particular
                        ployees would have incurred large increases,
                                                                                     challenges” faced by Maine, which has large
                        and such firms make up a lot of all businesses
                                                                                     rural, low-income and elderly populations with
                        in the state.” (In Rhode Island, 85.1 percent
                                                                                     significant health care needs, a large number
                        of all firms had fewer than 20 employees in
                                                                                     of small businesses and part-time or seasonal
                        2004, which was about the same proportion
                                                                                     workers, and few employers that voluntarily
                        as for New England as a whole and slightly
                                                                                     can offer health insurance to employees.4
                        under the national rate of 89.3 percent.2)
                                                                                           Another problem—in all states—is that
                                                                                     health care is a complex issue to take on, es-
                        Costs and complexity limit participation
                                                                                     pecially for small businesses that often lack in-
                        Across New England, efforts to expand health
                                                                                     house expertise. “When you talk about taxes or
                        coverage have included a special focus on
                                                                                     labor issues or something with clearer impact,
                        small businesses. But so far, such efforts have
                                                                                     it’s easier to motivate businesses,” says Ossen-
                        met limited success. Costs are a key factor
fort. “But health care is complicated, with so       Massachusetts law, for example, premiums for
many moving pieces. Many small business own-         workers will be lower if their employers set
ers feel a sense of powerlessness, that they can’t   up “Section 125” plans that treat employees’
do anything. Even people like me, who watch          premiums as pre-tax income. All employers
this all the time, don’t get the nuances.”           with 11 or more full-time equivalent employ-
     Massachusetts is addressing participation       ees must have such plans in place by July 1.
issues head-on by imposing both individual                That raises another concern: uncertainty.
and employer mandates for health insurance           “Some small businesses worry that over time
coverage. Enrollment by individuals in the           requirements will change, leading to higher
state’s subsidized CommonwealthCare plan             levels of premium contributions or higher lev-
has exceeded expectations. For example, as           els of participation among employees,” said
of June 1, about 79,000 people—roughly half          McAnneny. “Such uncertainty and unpredict-
of the eligible population earning less than         ability cause angst—companies want to know
300 percent of the federal poverty level—had         what the law is so they can choose to provide
already been enrolled. Most of these new             coverage or pay the annual per-employee fee
enrollees were automatically enrolled, hav-          of $295.”
ing previously received payment for medical               It is unclear whether the employer
services through the state’s Uncompensated           assessment will have a major effect on the
Care Pool since they lacked other coverage.          percentage of firms offering health insurance.
     “By and large, the smaller the company,         Because the “fair share” premium contribution
the less likely it is to offer insurance,” said      requirement towards providing coverage for a
Eileen McAnneny, Vice President of Gov-              given worker is much higher than the $295 as-
ernment Affairs for Associated Industries of         sessment, it is unlikely that more employers
Massachusetts. Because a smaller percentage          will choose to offer coverage. Yet some worry
of them offer coverage to begin with, smaller        that firms that already offer health insurance
firms are disproportionately feeling the effect      may see a significant increase in the number
of the employer mandate.                             of workers taking up the benefit, which may
                                                     increase costs to the point that such employ-
Indirect costs and uncertainty also                  ers decide to drop coverage altogether. How-
concern small employers                              ever, given that many of the firms that already
Unlike other New England states, Massachu-           offer health insurance are likely to do so for
setts will require all individuals to have health    competitive reasons, some analysts anticipate
insurance by July or face financial penalties,       that relatively few would likely drop coverage
beginning with loss of their personal income         in response to the employer mandate.
tax exemption in 2007. As part of its landmark
law, the state also requires employers with 11       Other states, other approaches
or more employees to make a “fair and rea-           Compared to other New England states, Rhode
sonable” premium contribution to a qualified         Island is taking a more modest approach to in-
plan5 or pay $295 for each employee for whom         surance reform. In April, the state announced
it does not. When the individual mandate be-         that this fall, private insurers would begin to
comes effective in Massachusetts, McAnneny           offer two new plans offering discount rates to
said some workers who have opted out of em-          employees of small businesses who agree not
ployer-based coverage might decide that it is        to smoke and take various measures to keep
cheaper to go with the employer plan than            fit, such as health screenings. Premiums for
face the state penalty. If more employees            the discounted plans cannot exceed 10 per-
suddenly enroll in their employers’ plans, it        cent of an average worker’s annual wages. In
“carries real financial consequences for em-         Rhode Island, the monthly individual premi-
ployers who have not budgeted for such a cost        um target is $314.
increase,” said McAnneny.                                 Papoojian says small employers welcome
     Besides such direct additional costs,           any relief from double-digit rate increases.
smaller businesses face sometimes unantici-          “The concept and the benefit design of these
pated indirect costs as a result of state health     plans are excellent,” he said. “The challenge
coverage expansion. For one thing, they must         is to market it properly to the right people.”
comply with a range of new reporting and oth-             In Vermont, small employers are facing
er administrative requirements. As part of the       new financial obligations as that state’s plan

                to cover some of the uninsured—Catamount            “Getting out the message that they are in a bet-
                Health—takes effect. Beginning July 31, em-         ter position by offering coverage is more effec-
                ployers will pay a $1 per day fee for every full-   tive than punishing them for not offering it.”
                time equivalent employee who does not have               States’ success in getting out that message
                health insurance coverage. Some employers           may prove more effective than formal man-
                say they are having a hard time understand-         dates in getting businesses, especially small
                ing and complying with new requirements in          ones, to offer health plans to their employees.
                order to calculate the payments they must           The challenge for policy makers remains to
                make. They must, for example, determine not         convince small employers that the carrot of a
                only which of their employees are not enrolled      healthier workforce and the social responsibil-
                in the company health plan, but also which          ity to provide coverage more than offset the
                have insurance through another job or spouse.       stick of higher costs.
                     Senator Richard Mazza, a small business
                owner himself who voted for the plan with its       Endnotes
                employer assessment, said that even he is hav-      1“Covering     the Uninsured: Costs, Benefits, and Policy Alternatives for New
                                                                    England.” New England Public Policy Center at the Federal Reserve Bank of Boston
                ing hard time understanding the requirement.        conference. December 5, 2006.
                “There are going to be a lot of small businesses    ences/2006/uninsured/index.htm

                that are going to be complaining,” he said.6
                                                                    2   Small Business Administration, based on data from the U.S. Census Bureau.

                     In Maine, Ossenfort said she does not          4 Belluck,   Pam. “As Health Plan Falters, Maine Explores Changes.” The New York

                think employer mandates are the best way to         Times. April 30, 2007.
                                                                    5A   qualified plan is defined as either (1) at least 25 percent of the employer’s
                generate greater small business participation       full-time employees are enrolled in the employer’s group health plan, or (2) the
                in state plans to expand health coverage. “The      employer offers to contribute at least 33 percent of the premium cost of its health
                                                                    plan to all full-time employees.
                reason most small businesses don’t offer insur-     6 Remsen,    Nancy. “Vermont Employers Grapple with Health Care Fee.” Burlington
                ance isn’t that they don’t want to—they can’t       Free Press. February 11, 2007.

                afford to. And a mandate doesn’t make it any
                more affordable for them.
                     “The incentive for business to offer health
                insurance is already there—retention and re-
                cruitment of workers,” Ossenfort continued.

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