The large number of Americans who have no health insurance is

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1 DataWatch Private Employment-Based Health Insurance In Ten States by Joel C. Cantor, Stephen H. Long, and M. Susan Marquis Abstract: This DataWatch reports key findings from the 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey, through which more than 20,000 employers in ten states were interviewed. Our report contrasts the behavior of four size classes of small businesses (fewer than fifty workers) with that of all other businesses. We examine offer rates by business size; characteristics of employers and workers in businesses offering and not offering insurance; premiums, benefits, and medical underwriting; the extent of choice among plans; and self-insurance. We discuss the implications of our findings for health policy. The large number of Americans who have no health insurance is viewed by many as stemming largely from failure to provide employment-based health insurance. This view is not surprising; employment is the largest source of medical coverage in the United States, yet about three-fourths of the uninsured are workers or their dependents. 1 Moreover, expanding employment-based coverage may be politically more viable than other approaches to increasing coverage because public support is lacking for expanding the role of government in health care. 2 Short of employer mandates, the policy options to expand employmentbased insurance focus on reducing barriers to the availability and affordability of coverage, most often in the small-group market. The problem of availability arises from insurance industry practices that exclude groups or individuals based on their risk of high medical expenses. Groups with a disproportionate share of high-risk members may also be priced out of the market by experience-rated premiums. In addition, the cost per covered life of selling and administering health insurance in the small-group market is considerably higher than the cost for large groups. These costs are believed to result in higher premiums to small groups for the same benefits. 3 In 1993 The Robert Wood Johnson Foundation (RWJF) commissioned surveys of employers in ten states to investigate the barriers to employersponsored coverage and to describe the premiums and other characteristics of health plans offered by employers. The RWJF Employer Health Insur- Joel Cantor is director of evaluation research at The Robert Wood Johnson Foundation in Princeton, New Jersey. Steve Long and Susan Marquis are senior economists at RAND in Wa s h i n gt on, D.C.

2 200 HEALTH AFFAIRS Summer 1995 ance Survey was developed as part of the foundation s State Initiatives in Health Care Reform program, which provides funding and technical assistance to states developing and undertaking major reforms to expand health insurance coverage. Prior to the RWJF survey, no data were systematically available at the state level to aid in defining problems in the employmentbased insurance market and analyzing the impacts of states policy options. Data on employer-sponsored health insurance for analyzing national policy options were also limited. Most previous surveys on employer health insurance issues have concentrated on the characteristics of coverage and the employers that offer coverage, to the exclusion of adequate information about employers that do not offer coverage. 4 Moreover, data from most existing surveys focus on large firms, but many policy options focus on improving access to insurance for small employers. In a recent Health Affairs DataWatch, Michael Morrisey, Gail Jensen, and Robert Morlock helped to fill this gap with data from a 1993 national survey regarding the health benefits offered by about 750 firms with fewer than fifty workers. 5 The results from the RWJF survey, which we present here, add to that information in several ways. First, we investigate variation among states in the characteristics of employment-based insurance. Second, we examine the differences between very small firms (one to four workers) and others. Third, we include large employers in our survey, which allows us to examine, from a single database, characteristics of health benefits offered by both large and small firms and also characteristics of benefits offered to all workers. Finally, we look at characteristics of workers to examine how these relate to employers decisions to offer insurance. Study Methods The RWJF survey was conducted in the latter half of 1993 and early 1994 in Colorado, Florida, Minnesota, New Mexico, New York, North Dakota, Oklahoma, Oregon, Vermont, and Washington. 6 Although the survey was designed to represent establishments and workers in each of the ten states, not the nation as a whole, collectively these states are very similar to the nation on measures of employment, earnings, and health care system characteristics (Exhibit 1). Thus, we believe that our data from the ten states generally reflect the pattern of employer health benefits nationally. 7 Approximately 2,000, thirty-minute telephone interviews were conducted with private employment establishments in each state for a total of 22,347 interviews. 8 The sample in each state was allocated equally to four strata of small businesses defined by the number of workers at the establishment (one to four, five to nine, ten to twenty-four, and twenty-five or more). 9 While the sample and analysis unit is the establishment-a physi-

3 D ATAWATCH 201 Exhibit 1 Characteristics Of RWJF Survey States And All States Characteristics RWJF states All states Percent of U.S. population (1993) 21.1% 100.0% Employment and earnings Unemployment rate (1993) Average annual pay (1992) Percent nonfarm workers by industry (1993) Construction Mining Manufacturing Transportation, public utilities Wholesale/ retail trade Finance, insurance, real estate Services Government Health care system Hospital, physician, and prescription drug spending per capita (1991) Percent uninsured ( ) 6.9% 6.8% $26,690 $25, % 4.2% , $1,945 $1, % 14.2% Source: U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States: 1994, 114th ed. (Washington: U.S. GPO, September 1994), 27, 111, 118, 399, 421, and 428. Note: RWJF is The Robert Wood Johnson Foundation. cal location of business-for many analyses we categorize establishments according to the size of the firm, which includes workers at all locations nationwide. Establishments were the sample unit because our objective was to make state estimates, and so we sampled a unit that was contained within state borders. However, insurance decisions in firms with several establishments are typically made at a regional or national level; thus, the size of the firm better reflects the purchasing power and administrative overhead of the unit. In eight of the states, the sample was drawn from Dun s Market Identifiers, a national census of employment establishments maintained from a variety of public sources by Dun and Bradstreet; in the remaining two states, the sample was drawn from state unemployment insurance files. Excluded from our sample were establishments of self-employed persons who have no employees. 10 The interview was conducted with the person(s) in each establishment most knowledgeable about health benefits and firm and worker characteristics. The response rate for the survey was 71 percent, ranging from 59 percent in New York to 80 percent in North Dakota. We use sampling weights to make estimates for three units of observation-establishments, workers, and insurance plan enrollees. In addition to scaling estimates to the appropriate unit of analysis, the weights adjust for

4 202 HEALTH AFFAIRS Summer 1995 the probability of selection of each establishment and for differential nonresponse among subgroups of establishments. All point estimates refer to the day of the interview, and period estimates refer to calendar year Study Findings Offer of health insurance coverage. Overall, 58 percent of establishments in the ten states offer health insurance to at least some of their workers as a benefit of employment. As expected, the likelihood that coverage is offered is related to firm size (Exhibit 2). Only about one-third of establishments of small firms (firm size of one to four workers) offer coverage, compared with 93 percent of establishments that are part of large firms (fifty or more workers). Our ten-state estimate that half of establishments of firms with fewer than fifty workers offer health insurance accords with Morrisey and colleagues estimate that, nationwide, 51 percent of businesses with fewer than fifty workers offer this benefit. While the offer rate for all establishments varies among the states from 51 percent in New Mexico to 63 percent in New York-the relationship between firm size and the offer of insurance is very consistent across the states. (See Appendix Exhibit 1 for the offer rate and other selected variables for each of the ten states.) That most public policies to expand employment-based health insurance focus on the small-group market is not surprising in light of these findings. Almost 60 percent of establishments that do not offer insurance are establishments of firms with fewer than five workers, and more than 80 percent are establishments of firms with fewer than ten workers (Exhibit 3). How- Exhibit 2 Percentage Of Establishments Offering Health Insurance, By Firm Size Source: 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey.

5 D ATAWATCH 203 Exhibit 3 Distribution Of Establishments Not Offering Insurance And Employees Not Offered And Not Enrolled In Own Employer Group Plan, By Firm Size Number of employees Establishments not offering i n su r an ce Employees in establishments not offering i n su ran ce Employees not enrolled in own group plan or more 57% % % Source: 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey. ever, a substantial proportion of workers who are not offered coverage through their job would receive no remedy from policies focused on the small-group market alone. Whereas establishments of firms with fifty or more workers account for only 3 percent of establishments not offering insurance, the workers in these establishments make up 16 percent of all employees not offered coverage. Moreover, workers in these establishments account for 55 percent of all workers not enrolled in coverage through their own employer. 11 In contrast, workers in establishments of firms with fewer than five employees account for only one-quarter of workers who are not offered insurance and only 10 percent of workers not enrolled in a plan sponsored by their own employer, even though these establishments comprise 60 percent of all establishments not offering insurance. Characteristics of workers also differ between establishments that do and do not offer insurance (Exhibit 4). Establishments that offer insurance have higher average payroll per worker-regardless of firm size-than establishments that do not offer insurance. Controlling for firm size, establishments that offer insurance are more likely to have at least some unionized workers and fewer part-time and temporary workers than establishments that do not offer insurance. These worker characteristics are factors associated with the demand for insurance; thus, the result suggests that workers demands influence employers decision to offer insurance. 12 Nonetheless, a substantial share of establishments that do not offer insurance have made recent efforts to assist employees with their medical bills. Almost 40 percent of establishments not offering insurance have actively shopped for insurance for their employees within the past two years (defined as obtaining a premium quote) or help employees with their medical bills in other ways, such as offering a voucher that can be used for health insurance or assisting in paying medical bills directly. Such efforts occur even more frequently among establishments that offered insurance

6 204 HEALTH AFFAIRS Summer 1995 Exhibit 4 Characteristics Of Workers In Establishments That Do And Do Not Offer In surance, By Firm Size Num ber of em p loyees 50 or Ch a r a ct er i st i cs I m o r e All firms Average payroll per worker Offers $24,075 $25,946 $26,542 $25,615 $25,804 $25,627 Does not offer 17,114 17,472 16,936 15,812 16,746 17,135 Percent earning less than $14,000 per year Offers 24% 26% 25% 30% 33% 28% Does not offer Percent union workers Offers Does not offer _ a _ a _ a _ a 2 1 Percent part-time workers Offers Does not offer Percent temporary workers Offers Does not offer Source: 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey. a Less than 0.5 percent. within the past five years but do not do so now. Such establishments make up 17 percent of establishments not offering insurance; among them, 50 percent have shopped for insurance for their employees recently, and 59 percent have made some effort to assist employees with their medical expenses (Exhibit 5). Characteristics of workers also distinguish firms that Exhibit 5 Characteristics Of Establishments Not Offerine Insurance Did not offer All establishments Offered insurance insurance in not offering in past five years past five years insurance All establishments 17% 83% 100% Efforts to assist with medical bills Shopped a Other ways b Both Ever denied coverage Source: 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey, a Obtained premium quote within past two years. b Offers voucher to purchase insurance or helps pay bills directly.

7 D ATAWATCH 205 have recently shopped for insurance or have recently offered insurance from those that have not offered or shopped for the benefit. For example, average payroll per worker is about 10 percent higher in the former establishments than in the latter ones ($17,347 versus $15,778). Few establishments that do not offer coverage report having been denied insurance. Even among those establishments that have recently dropped insurance, only 8 percent report having been denied insurance. Thus, availability is not reported as a major barrier to the offer of insurance. Characteristics of coverage offered. Premiums paid by establishments of small firms are not appreciably higher than those paid by establishments of large firms (Exhibit 6). Instead, the plans offered by small firms provide fewer benefits, and they are more likely to be subject to medical underwriting practices.1 3 In all ten states, premiums across different-size firms are relatively constant, but benefits increase with firm size (Appendix Exhibit 1). Plans offered by establishments of small firms have considerably higher Exhibit 6 Characteristics Of Health Insurance Policies Offered, Bv Size Of Firm Number of employees 50 or Charact erist i cs m o r e All firms Average monthly premium Single coverage $166 $172 $161 $152 $155 $161 Family coverage Coefficient of variation in premiums a Single coverage Family coverage Employer share Single coverage Family coverage 90% 87% 84% 81% 80% 84% Benefits Average annual deductible $408 $329 $ $ $202 $282 Plan includes Prenatal care Maternity Prescription drugs Mental health Alcoholism and drug abuse Dental Limits preexisting condition coverage Medical undetwriting 81% 83% % 94% 96% 89% % 67% 61% 60% 63% 63% Source: 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey. a The coefficient of variation is the standard deviation divided by the mean, a relative measure that is unaffected by the absolute level of the premium.

8 206 HEALTH AFFAIRS Summer 1995 deductibles. Also, they are less likely to include prenatal care, maternity, prescription drug, mental health, alcoholism and drug abuse, or dental benefits. Finally, the practice of excluding workers for specific preexisting conditions, termed medical underwriting, is used for more than 40 percent of the smallest groups but for only one-fifth of the large groups. 14 Although average premiums are similar among small and large firms, the variability in premiums is substantially higher for small firms than for large firms. 15 The variability in premiums differs from state to state (Appendix Exhibit 1). However, in all states there is more premium variability in establishments of small firms than in those of large firms. This result is consistent with experience rating and the law of large numbers. 16 In large groups a few insured persons with unexpectedly high expenses will have little influence on the average group expenses (and experience), whereas in small groups a few persons can have a large effect on the group claims experience. Plan choices offered. Small groups are less likely than large groups to offer a choice of insurance plans; only 14 percent of establishments of firms with fewer than fifty workers offer a choice of plans, whereas 40 percent of establishments of large firms offer a choice (Exhibit 7). 17 The type of Exhibit 7 Choice And Type Of Plans For Establishments Offering Insurance, By State All ten Est ablishm en t s states CO FL MN NM NY ND OK OR VT WA Offering a choice of plans All establishments 22% 14% 20% 17% 16% 30% 11% 14% 23% 15% 21% l-49 workers or more workers Type of plan offered a Indemnity PPO HMO Offering a self-insured plan All establishments l-49 workers or more workers Em p loyees Offered a choice of plans Type of plan offered a Indemnity PPO HMO Source: 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey. Note: PPO is preferred provider organization; HMO is health maintenance organization. a Column sums to greater than 100 percent because some establishments offer more than one type of plan.

9 D ATAWATCH 207 insurance plan offered also varies by group size. Establishments of small firms that offer insurance are less likely than establishments of large firms to offer a managed care plan-that is, a preferred provider organization (PPO) or a health maintenance organization (HMO). Among all ten states, a minority of establishments that provide insurance offer a choice of plans or an HMO plan: 22 percent offer a choice, and one-quarter offer an HMO (Exhibit 7). This picture, however, looks considerably different when we count the number of workers who are offered a choice of plans or enrollment in an HMO. Half of the workers in establishments that offer insurance have a choice from among two or more plans, and almost half (45 percent) are offered an HMO plan. This difference arises because establishments of small firms comprise the majority of establishments, and so they factor heavily in estimates of establishment proportions. However, the majority of workers are employees of establishments of large firms, and so these establishments count heavily in estimates of the insurance plans offered to workers. The degree of choice varies considerably among the ten states. The proportion of establishments offering a choice ranges from 11 percent to 30 percent among the states (Exhibit 7). There is also state-to-state variability in the types of insurance plans offered by employers because states differ considerably in the role that HMOs play in the delivery of care. The variability in the types of plans offered is related to the frequency with which employers offer more than one plan. The proportion of establishments providing health insurance that offer an HMO, either alone or among other options, was only 3 percent in the state offering the least amount of choice (North Dakota) but was 30 percent in the state offering the most choice (New York). Establishments in the state with the least choice were also less likely to offer a PPO and more likely to offer an indemnity plan. Counting workers, rather than establishments, the percentage of workers in establishments providing insurance that are offered a choice of plans ranged from 20 percent to 64 percent, and the percentage of workers offered an HMO ranged from 4 percent to 56 percent (Exhibit 7). Self-insured plans. One-fifth of establishments in the ten states selfinsure for health benefits (Exhibit 7). 18 This practice is rare among small businesses in all of the states. Across the ten states, between 6 percent and 10 percent of establishments of firms with fewer than fifty workers selfinsure. However, there is variation among the states in the number of larger businesses that self-insure, ranging from 40 percent to 52 percent. Summary And Discussion On many dimensions, the employment-based insurance system looks

10 208 HEALTH AFFAIRS Summer 1995 very similar from state to state. Although there are differences among states in offer rates, benefit levels, and premiums, the relationship between these characteristics and firm size is consistent across states. In all states, offer rates increase as firm size increases; plans offered by large firms have a more generous scope and breadth of benefits; and there is less variability in premiums among establishments of large firms. States differ in the amount of choice offered, but in all states only a minority of establishments offer workers a choice of plans. Few small businesses self-insure in any state, but there is variation among states in the number of establishments of larger firms that self-insure, and thus there is variation in the proportion of businesses that are exempt from state insurance regulation. States have adopted a variety of reforms to reduce barriers to health insurance for small businesses. Many have regulated medical underwriting practices to address problems of availability of insurance to small businesses. Many have also addressed the affordability problem by requiring various forms of community rating and by encouraging or forming group purchasing arrangements for small businesses. What do our survey results imply for the success of these strategies? Although few small groups face problems of availability as a barrier to obtaining insurance, many more small groups than large face medical underwriting practices. These provisions may present a barrier to the availability of adequate coverage for small-group employees. Our finding that small groups receive fewer benefits while paying premium amounts that are essentially equal to those paid by large groups implies that small groups face higher prices than large groups face for equivalent insurance benefits. There is also greater variability in premiums for small groups, so some small groups pay premiums that are much higher than average. Moreover, almost one-third of establishments that do not offer insurance have recently shopped for a policy to offer their workers, suggesting that affordability is a barrier for many establishments. Purchasing cooperatives have the potential to reduce costs to small groups, if they can reduce administrative and marketing costs by serving one large group that comprises many small groups. In addition, a large purchasing pool may lower costs, if it negotiates lower premiums and promotes competition among plans. Encouraging individuals and families to engage in comparison shopping among health plans and promoting more efficient delivery systems, such as HMOs, is a key element of the managed competition approach to lowering health care costs. Such choices are now quite limited. Only half of workers offered insurance have a choice between two or more plans. Choice is especially limited for workers in small groups, although the degree of choice varies considerably from state to state. Depending on their practices, purchasing pools for small businesses could

11 D ATAWATCH 209 provide a mechanism for expanding choice. However, small businesses now purchase a less generous benefit package, on average, than large businesses do. If policies to promote purchasing cooperatives also promote comprehensive standard benefit packages, then the richer benefit packages might preclude premium savings in the smallgroup market. Even if a wide range of choices is offered, small businesses might respond to lower prices by purchasing more benefits, rather than by reducing their total spending. Purchasing cooperatives are one approach to correcting insurance market failures for small groups by spreading risk more broadly. For cooperatives to accomplish this, they must attract a broad spectrum of small groups. Therefore, states that have adopted purchasing cooperatives usually include them as part of a package of market reforms to prevent adverse selection into the cooperative. The success of these reforms is threatened if groups can opt out by self-insuring for health benefits. Across all states, however, self-insurance is rare among establishments of small firms. But the survey results also indicate that the problem of uninsured workers is not just a small-group problem. Although small groups are less likely than large groups to offer insurance, half of all workers not enrolled in a health insurance plan sponsored by their own employer are in establishments of firms with fifty or more workers. Thus, policies directed at only small employers will not expand coverage to all workers. In addition, in small and large groups alike, insurance is less likely to be offered if workers are low wage earners or if many of them are part-time or temporary workers. The failure of employers to offer insurance may be attributable in part to lack of demand by workers. Policies to eliminate supply problems in the small-group market, therefore, are likely to fall short of achieving universal coverage for workers. This is both because many small firms will persist in not offering insurance, and because these policies do not address problems of the uninsured in large groups that choose not to offer insurance. The views expressed herein are solely those of the authors, and no endorsement by The Robert Wood Johnson Foundation Or RAND is intended or should be inferred. The authors thank Roald Euller for his considerable effort in cleaning the raw survey data and preparing the tabulations on which this paper is based. An earlier version was presented at the annual meeting of the Association for Health Services Research, San Diego, California, 14 June 1994.

12 210 HEALTH AFFAIRS Summer 1995 Appendix Exhibit 1 Establishments Offering Insurance And Characteristics Of Offered Plans, BY State O ffers i n su ran ce CO FL MN NM NY ND OK OR VT WA All establishments l-4 workers 5-9 workers workers workers 50 or more Plan characteristics Family premium All establishments l-4 workers 5-9 workers workers workers 50 or more 56% 55% 57% 51% 63% 54% 51% 60% 61% 63% $367 $406 $376 $334 $446 $365 $376 $351 $374 $ Coefficient of variation, premium All establishments l-4 workers workers workers workers or more Deductible All establishments l-4 workers 5-9 workers workers workers 50 or more $310 $336 $255 $342 $253 $338 $368 $232 $267 $ Source: 1993 Robert Wood Johnson Foundation Employer Health Insurance Survey. NOTES 1. Tabulations from the March 1993 Current Population Survey. 2. R.J. Blendon et al., The Beliefs and Values Shaping Today s Health Reform Debate, Health Affairs (Spring I 1994): Charges for administration and risk in group policies for small firms are about 40 percent higher than those for large firms. Library of Congress, Congressional Research Service, Effects of Extending Health Insurance Coverage (Washington: CRS, 1988). 4. The most significant source of information from employers has been a series of surveys sponsored by the Health Insurance Association of America (HIAA). The most recent survey modeled on the HIAA approach is described in J. Gabel et al., The Health Insurance Picture in 1993: Some Rare Good News, Health Affairs (Spring I 1994): M.A. Morrisey, G.A. Jensen, and R.J. Morlock, Small Employers and the Health Insurance Market, Health Affairs (Winter 1994):

13 D ATAWATCH These are ten of the grantee states under RWJF s State Initiatives in Health Care Reform program. States in the program were selected through a competitive process. For selection criteria, see Robert Wood Johnson Foundation, Call for Proposals: State Initiatives in Health care Financing Reform (October 1991). We will comment on instances in which our results from the ten states differ from national estimates made by Morrisey and colleagues. The interviews were conducted by Westat, of Rockville, Maryland. Data were also collected from public employers in each state, but their responses are not included in this analysis. The probability of selection for establishments of twenty-five or more workers was proportionate to the number of workers in the establishment. In some states, very large employers were sampled with certainty. These establishments were excluded because the focus of the survey was on employers offers of insurance to employees. Some intuition for the successively greater importance of large business in the distributions shown in Exhibit 3 follows. The 3 percent figure reflects both the very low rate of not offering insurance among large businesses and the small proportion of businesses that are large. The 16 percent figure reweights the previous distribution by recognizing that there are more workers per large business. The 55 percent figure is based on the complementary relationship-that is, the distribution of offering coverage-but adjusted for a relatively constant rate of workers not enrolling across firm sizes. Also note that lacking an offer of coverage from (or not being enrolled in coverage) through one s own employer should not be equated with being uninsured. For instance, workers may have coverage through a spouse s employer or a public program. Nevertheless, ownemployer offer and enrollment statistics are important because they illustrate the shortcomings of public policies that would address only small employers. S.H. Long and M.S. Marquis, Gaps in Employer Coverage: Lack of Supply or Lack of Demand? Health Affairs (Supplement 1993): Morrisey and colleagues also report that premiums are similar in large and small businesses but that the breadth of benefits is greater in large firms. In addition, they present data showing that the scope of benefits is greater in large firms; coverage of specific services is 6-28 percent more likely in large firms. Although this practice is allowed for 35 percent of establishments with fewer than fifty workers, we find, as did Morrisey and colleagues, that it is infrequently used. Only 5 percent of small establishments report that some workers or dependents are excluded. This finding is quite different from the results reported by Morrisey and colleagues. They find no difference between firms of different sizes in premium variability. They also report less variability in premiums than we estimate. Our estimates, however, are consistent with actuarial analyses that use premium variability to study winners and losers under community-rating reform. See K.E. Thorpe, Expanding Employment- Based Health Insurance, Inquiry 29, no. 2 (1992): Although some of the states have now introduced rating reforms, either these were not in place or states permitted wide premium bands at the time of our survey. The choice is among different benefits or types of plans. This does not necessarily mean that the worker has a choice of carriers. Some of these (20 percent) also offer a fully insured plan (often an HMO) as an option.