According to a National Federation of Independent Business membership survey, the number one small business issue is the cost and availability of insurance. Aspects of insurance that may drive small business concern are premium increases and administrative costs.
Advocacy research shows that 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 explantion may be that small firms received slightly less generous health insurance benefits, according to calculations of acturial value.
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.
Sources: National Federation of Independent Business; Kaiser Family Foundation; Advocacy-funded research by Rose C. Chu and Gordon R. Trapnell ( Research Summary #224)
Information courtesy of the Small Business Administration, Office of Advocacy.
