No. 224

 January 2003

SMALL BUSINESS

RESEARCH

SUMMARY

Study of the Administrative Costs and

Actuarial Values of Small Health Plans

by Rose C. Chu and Gordon R. Trapnell

2002. [68] pages. Actuarial Research Corporation, Annandale, VA 22003

under contract no. SBAHQ-01-M-0811

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

Efforts to extend full health care coverage in the

United States have focused on small businesses.

Small businesses, on average, have more tenuous

finances and less market clout than large businesses.

Small businesses also often have employees that

obtain health care coverage through another family

member. For these reasons, small businesses offer

health care coverage to a lower percentage of their

work force and are a different type of customer than

large firms.

This study looks at the non-care costs to insurers

of small firm health policies and compares the value

of the health care products that small and large firms

buy. This information will better enable policymakers to understand small businesses as a consumer of

health care coverage.

Overall Findings

The prices that small and large firms paid for health

insurance and the value of the products purchased

are more similar than expected. However, insurers of

small health plans have higher administrative

expenses than those who insure larger companies.

Sales, underwriting, and operating expenses are all

higher for small health plans. Considering these

expenses, it is unclear why small firms’ insurance

prices appear to be similar to what large firms pay.

At least part of the explanation may be that small

firms received slightly less generous health insurance

benefits, according to calculations of actuarial value.

Highlights

• Administrative expenses for insurers of small

health plans make up 25 to 27 percent of premiums

and 33 to 37 percent of claims. This compares with

about 5 to 11 percent of claims for large companies’

self-insured plans.

• For small business insurers, administrative costs

break out as follows: The cost of commissions makes

up 4 to 11 percent of premiums, taxes and fees make

up 2 to 3 percent, general expenses make up 10 to 11

percent, and profits make up 4 to 5 percent.

• Legislation has been proposed to exempt association health plans (AHPs) from rate regulation and

state benefit mandates. The researchers' analysis

indicates that AHPs have the potential to lower

insurance premiums for small firms by freeing

employers from direct and indirect state taxation,

some mandated benefits, and the cost of compliance

with multiple state regulations.

• Commission rates vary widely. The researchers

studied two states: West Virginia, where commissions average 4 percent of premiums, and Colorado,

where they average 11 percent.
• The actuarial value of a health plan is a measure

of the plan's generosity; that is, it measures how

much of the health expenditures of a standard

employed population would be paid by the health

plan. The higher the actuarial value, the greater the

benefits per dollar. Actuarial value ranged from 78

percent of expected costs for firms with one to nine

employees to 83 percent of expected costs for firms

with 1,000 or more employees.

• While there is only a small difference in actuarial value between the plans purchased by small and

large businesses, firm size is a major factor in the

difference.

• Small and large firm premiums are similar overall, but some data sources show conflicting price

trends across firm sizes for individual and

family coverage.

• All data sources show increases in health care

premiums in recent years for both small and large

firms. Data from Kaiser/HRET Surveys found that

increases have been higher for small firms. 

• Reports from state insurance departments and

insurance executives offered the researchers some

insight into the recent substantial consolidation in the

small group health insurance market. A variety of

factors, including state laws enacted in the 1990s,

have made it very difficult for most insurers without

large, concentrated market shares to operate profitably; many insurers have left the market. The 

resulting concentration and reduced competition

mean small employers have fewer choices and 

higher costs. 

Scope and Methodology

In introducing the subject matter, the researchers discuss basic results from various health information

sources. To conduct the research, they relied upon

publicly available information in the 1997 Robert

Wood Johnson Survey (RWJS) and they sought out

accounting information from small group insurers in

Colorado and West Virginia. These two states were

chosen because of the availability of data. The administrative expenses for 19 insurers were broken down

and discussed. A model was created using RWJS

data to determine the actuarial value of policies. The

report focuses on the time period 1997 to 2002,

depending upon the availability of data.

Ordering Information

The full text of this report and summaries of other

studies performed under contract to the U.S. Small

Business Administration’s Office of Advocacy are

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

Printed copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Tel. (800) 553-6847

TDD: (703) 487-4639

www.ntis.gov

Order number: PB2003-101119

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