Academic journal article Journal of Risk and Insurance

Do Small-Group Health Insurance Regulations Influence Small Business Size?

Academic journal article Journal of Risk and Insurance

Do Small-Group Health Insurance Regulations Influence Small Business Size?

Article excerpt


State small-group health insurance reforms, implemented in the 1990s, aimed at controlling the variability of health insurance premiums and to improve access to health insurance. These reforms only affected firms within a specific size range, and as a result, they may have affected the size of small firms around the legislative threshold and may also have affected the propensity of small firms to offer health insurance. We examine the relationship between small-group reform and firm size and find evidence that small firms just below the regulatory threshold that were offering health insurance grew in order to bypass reforms.


Small firms in the United States that seek to offer health insurance to their employees have historically reported problems with the availability and affordability of their options. The cost of health insurance has been the primary concern of small business owners for several decades. In 2008, over half of small business owners listed health-care costs as a critical problem--a proportion that increased by 8 percentage points between 2000 and 2008 (National Federation of Independent Business [NFIB], 2008).

The health insurance market operates very differently for the small-group market compared to the large-group market. Group sizes are not simply points on a continuum; they constitute entirely different product lines, often sold by different sales forces and serviced by different insurers or corporate divisions (Hall, 2000). Health insurance plans offered to small businesses tend to suffer from limitations that are widely acknowledged. First, small-group health insurance premiums have varied dramatically depending on the expected cost of the group (Cutler, 1994). In addition, the health insurance policies offered to small firms often contain preexisting condition clauses that exclude expensive conditions from coverage (U.S. Congress, Office of Technological Assessment IOTA], 1988). Some insurers simply do not offer policies to small firms resulting in limited choices for small firms.

In an attempt to address these problems with the small-group market, most states passed small-group health insurance reforms in the 1990s. These reforms have three key characteristics. First, they guarantee access to insurance by restricting insurers' ability to deny coverage to small firms. Second, they restrict premium variability and finally they encourage portability when employees move from job to job. Preexisting condition exclusion limitations are reinforced by the federal Health Insurance Portability and Accountability Act (HIPAA) of 1996. Although small-group reforms aimed to improve insurance availability for small firms, research shows that the effect of the reforms on premiums and health insurance availability has been mixed. In this article, we explore whether state small-group reforms had unintended effects by studying the extent of size distortions among small firms as a result of small-group health insurance regulations. In particular, we ask whether firms right around the legislative threshold and that offered health insurance manipulated their size to avoid or take advantage of the reforms.

Small-group health insurance reforms regulate the health insurance policies that are offered to firms below a certain size threshold. Firm size thresholds are specified in the regulations and vary by state. The upper limit of the size threshold is usually 25 or 50 employees, whereas the lower limit is usually two or three employees. Smallgroup health insurance reforms were typically implemented as a package with the component reforms, such as guaranteed access, portability, and premium variability, implemented at the same time and with the same firm size thresholds (U.S. General Accounting Office [GAO], 1995). The size thresholds embodied in these regulations raise the possibility that firms may be influenced by health insurance regulations in making choices regarding the size of the workforce. …

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