small business health plans

Issue in Brief

Congress has a number of ideas on deck to bring down health care costs and/or increase the ranks of the health-insured. One - "Association Health Plans" (AHP) or "Small Business Health Plans" (SBHP) as it's now in vogue to call them - would let small businesses band together to give health insurance to their employees while being freed up from state rules. It's not a new idea; AHP bills have passed in the House for a few years in a row now, but they usually get stopped in the Senate where critics say the plans leave folks unprotected by minimum care requirements and risk skewing the health insurance market. A renewed push to pass an SBHP bill in the Senate failed to make it to the floor in May, 2006. With the dems taking over Congress in 2007, it's doubtful SBHPs will make any headway for the next couple of years.

What's the plan

The flagging SBHP bill in the Senate would let small businesses band together to offer employees insurance plans that don't have to meet state regulations. When S 1955 was first proposed, it required that all plans keep up with the minimum requirements of at least 45 states, but the Senate committee dropped that requirement in March; instead, according to Congress Daily, business pools could offer plans that don't meet state rules as long as they offered at least one "comprehensive" plan that did. Another set of tweaks made in May narrowed the allowable gap between the most and least expensive premiums that could be offered and would have made plans comply with minimum care standards in 26 states.

What the fans say

The rationale behind S1955 is that small businesses don't buy health insurance plans because they cost too much. If businesses could pool together and buy plans - plans that wouldn't have to follow state guidelines - they would be cheaper and more attractive to small employers. The Senate committee (pdf) says that their bill would bring down health care costs for small businesses by 12% and draw about 900,000 employees into the land of the insured.

(Caveats: CJ isn't sure if the numbers above apply to the final bill since they are based on a March 7 Mercer study (pdf) that looked at S1955 before it was tweaked and passed in committee. There's a lot, in fact, that is unclear about S1955; besides Congress Daily's mention of the March changes, CJ couldn't find a nonpartisan analysis of the bill since it was tweaked in March.)

What the critics say

There are two big criticisms of SBHPs: one is that because SBHPs don't have to abide by state rules - which were created in the first place to protect the insured - folks will be buying into plans that may lack appropriate coverage of, say, mental health services or gynecological services. Because the plans will be cheaper and offer less coverage, critics say they'll also siphon off the young and healthy from more expensive plans - which will then put the pinch on those plans and force them to raise premiums on older and sicker insureds.

A little background on small business insurance

Employers don't have to offer health insurance to their workers but when they do they can either buy plans from an outside insurer (like an HMO) or they can offer insurance themselves, setting aside money and pooling the risk of all their employees (while often buying back-up insurance, just in case). For obvious reasons*, it's easier for large companies to become "self-funders" - as the second system is known - than it is for smaller companies. And that's what pans out in reality: small businesses tend to buy outside insurance while large companies self-fund. The advantage to being a self-funder is that you don't have to follow state rules for minimum coverage (although you still have to comply with federal rules, which are less restrictive). State minimum coverage rules mostly apply to outside insurers like HMOs. Small businesses can band together and act like a large company, pooling their risks to become self-funders, but here's the kicker: those kinds of arrangements (known as MEWA) also have to follow state minimum coverage guidelines.

No nuance unturned: Okay, we won't unturn them, but we thought we should mention that states not only regulate minimum care requirements for insurance plans; many also have rules about how premiums can be set. According to the GAO, for example, a small business in Texas with older, sicker employees could be charged premiums up to four times more expensive than a younger, healthier business, but the same two companies, if they were in New York, would have to be charged the same premium. It's not clear - from anything CJ has seen - whether S1955 would leave those state rules intact or what.

Facts

  • outside insurance plans vs. self-funding (GAO)

    • 12% of businesses with fewer than 50 employees are self-funders

    • 60% of businesses with 50 or more employees are self-funders

    • 76% of companies with 500 or more employees offer a self-funded plan.

  • how many companies offer health insurance

    • small firms (fewer than 200): 59% (KFF - pdf). 68% of employees in small companies get insurance through their employer (Mercer)

    • large firms (greater than 200) 98% (KFF - pdf)

  • state rules for minimum coverage (GAO) (on top of federal mandates)

    • 7 states have 30-45 mandates

    • 29 states have 16-29 mandates

    • 15 states have 15 or fewer mandates

  • how much those state rules add to health care costs

    • 1-3% (in marginal costs - GAO)

Where we got all this info from:

  • A 2003 GAO report gives an overview of the laws that cover insurance for small businesses. A 2005 CRS explainer says much of the same.

  • The March 2006 Mercer report on the Senate's SBHP bill. Their 2003 report said the AHP bills would raise premiums for small businesses.

Some opinions

*Okay, maybe not so obvious. See this wonky site for a legit explanation of risk. The idea behind any insurance gig is that you get to "pool" the risk of a lot of people; everyone chips in a little money in case someone gets sick. How much you chip in is based on the probabilities or predictability of how many will get sick and how much in health expenses they'll have to pay. Probabilities work better with large groups of people; it's easier to predict how much 1000 people will spend on health in a year than it is to predict how much 20 people will spend.

Updated January, 2007

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