Small Business and Access to Health Insurers, Particularly HMOs

by Saundra H. Glover, Ph.D., Carleen Stoskopf, Sc.D., Thomas E. Brown, Dr. PH.,

Fran Wheeler, Dr. PH., Yang Kim, Ph.D., Sudha Xirasagar, MBBS.

2000. [94] pages. Completed by Consult, Inc., 149 Belton Drive, Orangeburg, SC

under contract no. SBA-HQ-98-C-0015

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Employees of small businesses are significantly less

likely to have employer-provided health care coverage than are workers in large firms, despite a variety

of state laws designed to make coverage available.

This study was designed to uncover the types of state

mandates and incentives that pertain to smallemployer health plans, the actions of health maintenance organizations (HMOs) in offering products to

small firms, and the reasons these firms do or do not

choose to offer HMO coverage to employees. Such

information can be helpful in documenting the present state of the market, how it is changing, whether

current state (or federal) laws are effective or counterproductive, and what additional policies may be helpful for increasing coverage of workers in small firms.

Scope and Methodology

The study comprised four elements: a review of the

literature, a compilation of state legislative and regulatory requirements regarding small employer health

insurance in the District of Columbia and every state,

a survey of health insurers in 10 selected states, and

a series of focus groups of small employers in several geographical areas of one state (South Carolina).

The state-by-state analysis shows which states had

rules affecting permissible rate differentials between

large and small employers (ratings bands) and other

ratings practices, guaranteed right to renew policies,

requirements that health plans offer some insurance

product to small employers (guaranteed issue), limits

on pre-existing conditions exclusions in policies,

reinsurance limitations, mandated benefits, and

requirements that plans pay out at least a certain percentage of premiums in claims (minimum loss ratio).

Surveys were sent to a total of 439 health insurers

in 10 selected states; 69 responded. However, 37 of

these were exiting the HMO business. Only 22 companies responded in detail, of which 16 offered an

HMO, 10 a preferred provider organization (PPO—

another type of managed care plan), and 14 a traditional point-of-service (indemnity) plan. (At least

two types of coverage were offered by 16 companies.)

Focus groups and individual interviews were conducted with 67 small business owners or representatives in various sites in South Carolina.

Highlights

The comprehensive review of health insurance regulations across the states did not uncover any significant patterns that could be associated with the number of uninsured in each state. State-to-state variations in health care markets and economic, social,

and political conditions mask any discernible relationships between state regulations and the number

of uninsured.

• HMOs in 10 states were surveyed and asked

about specific features and options of their three

most popular plans offered to small firms. Respondents

listed 50 HMO plans offered to small employers.

Respondents were also asked a series of questions on

their perspective of the issues concerning the small

employer insurance market.

No. 202

October 2000
• As to why the 22 respondents believe small

employers provide health insurance benefits, 21 listed the need to attract and retain employees, 17 said

they do it to respond to employee demands for coverage, 14 thought it was only to provide coverage for

the owner and family, and 10 mentioned the tight

labor market.

• The most common reason that small employers

do not offer coverage is cost, cited by 20 of the 22

insurance companies. High employee turnover was

listed by 12.

• Of the 67 focus group participants, 51 offered

health insurance to employees and eight said they were

actively seeking health insurance. Just under half of

the 51 companies offered HMO coverage, 16 offered

PPO coverage, and 11 offered indemnity coverage.

• The most common split on premiums was for

employers to pay 100 percent of employee-only coverage (35 companies) and for employees to pay 100

percent of dependent coverage (39 companies).

• Both the firms with health insurance and those

without agreed that health insurance was a necessary

benefit for recruitment and retention in today's tight

labor market.

• No participant expressed a concern that their

small business lacked access to health insurance or

HMO coverage. Several respondents indicated that

their companies had a choice of insurance products.

Their primary concerns were the cost of premiums

for employers and employees and a belief that insurance brokers and salespeople were biased against

small accounts because they generate lower commissions and higher costs.

Conclusions

• The 22 insurance companies used a variety of

definitions of "small business" and often were at

variance with states' definitions. The researcher

noted that the nature of the discrepancy raised a

question about both the states’ rationale in defining

small business and the HMOs’ motivations in including larger employers in the small business sector, in

contravention of prevailing regulations.

• HMOs appear to be complying with mandates

related to maternity and mental health benefits, and

with guaranteed renewal provisions.

• However, small employers in the focus groups

reported they did not feel that insurers were complying with mandates to provide full information about

insurance options. “This raises an important issue of

how far regulation can really ensure the fair marketing of low-cost plans by insurance agents, which is

the key to improving small business access to insurance.”

Ordering Information

The full text of this report, along with summaries of

other studies performed under contract with the U.S.

Small Business Administration’s Office of Advocacy,

is available on the Internet at www.sba.gov/advo/

research.

Printed copies are available from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Tel.: (800) 553-6847

TDD: (703) 487-4639

Order number: pending

Price codes: pending

The National Technical Information Service’s

complete data base of federally funded business

research is available on the Internet at www.ntis.gov.