Private Health Insurance: Small Employers Continue to Face	 
Challenges in Providing Coverage (31-OCT-01, GAO-02-8). 	 
								 
Many small employers-- defined as those with 50 or fewer	 
employees--do not offer health benefits to their workers. This is
particularly true for the smallest employers--those with fewer	 
than 10 employees. The families of workers employed by small	 
employers are about twice as likely to be uninsured as households
with a worker at a large employer. Despite efforts by Congress	 
and states to help small employers buy coverage, many small	 
employers continue to cite cost as a major obstacle to providing 
coverage. Small and large employers purchasing health insurance  
generally had comparable premiums in 1998, but this comparison	 
does not fully reflect the challenges facing small employers in  
providing health insurance for their employees. Although the	 
premiums were similar, the health plans offered by small	 
employers were slightly less generous on average--they had	 
slightly higher average cost-sharing requirements for their	 
employees and were somewhat less likely to offer some benefits,  
excluding, for example, mental health services and chiropractic  
care. Also, insurers' costs to administer employer-based health  
insurance and protect against potentially large health care costs
result in a larger share of small employers' premium dollars	 
being spent on these nonbenefit expenses. Nearly all states have 
passed laws that limit the ability of insurers to vary premiums  
charged to small employers on the basis of the group's risk	 
factors, including health. Other state efforts to make insurance 
more affordable for small employers have had limited results. Few
small employers appear interested in lower-cost benefit packages 
that require significantly higher cost sharing by individuals or 
that scale back benefits that are covered.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-8						        
    ACCNO:   A02393						        
  TITLE:     Private Health Insurance: Small Employers Continue to    
Face Challenges in Providing Coverage				 
     DATE:   10/31/2001 
  SUBJECT:   Employee benefit plans				 
	     Employee medical benefits				 
	     Health insurance cost control			 
	     Insurance premiums 				 
	     Small business					 
	     AHRQ Medical Expenditure Panel Survey		 

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GAO-02-8
     
Report to the Ranking Minority Member, Committee on Small Business and
Entrepreneurship, U. S. Senate

United States General Accounting Office

GAO

October 2001 PRIVATE HEALTH INSURANCE

Small Employers Continue to Face Challenges in Providing Coverage

GAO- 02- 8

Page i GAO- 02- 8 Small Employer Health Insurance Letter 1

Results in Brief 2 Background 4 Similar Premiums for Small And Large
Employers May Mask

Coverage Differences And Potentially Higher Costs to Small Employers for
Those Not Insured 7 Insurers? Costs to Provide Coverage Are Higher for Small

Employers 13 State Reforms to Restrict Small Employers? Premiums Have

Varying Impact 16 Other State Efforts Have Had A Limited Effect on
Affordability 22 Concluding Observations 26 Comments From External Reviewers
27

Appendix I Methodology 29

Appendix II Health Insurance Premium Quotes 35

Related GAO Products 39

Tables

Table 1: Average Annual Single and Family Premiums by Size of Employer, 1998
8 Table 2: Selected Demographics and Self- Reported Health

Characteristics for Individuals Insured Through Small and Large Employers,
1996 11 Table 3: Self- Reported Health Characteristics for Workers of All

Ages and Workers 30 to 64 Years Old, Including Their Dependents, by
Insurance Status at Small Employers, 1996 12 Table 4: Percentage Difference
in Monthly Premiums for Low- and

High- Risk Hypothetical Small Employer Groups in Selected Localities 13
Table 5: MEPS Sample and Estimated Population Sizes, December

1996 31 Contents

Page ii GAO- 02- 8 Small Employer Health Insurance

Table 6: Groupings Based on Whether States Allow the Use of Health
Characteristics in Setting Premiums, 1996 32 Table 7: Monthly Premium Quotes
for Three Hypothetical Small

Employer Groups With Increasing Risk Characteristics in Selected Localites,
2000 36

Figures

Figure 1: Small Employers Make Up the Majority of U. S. Private
Establishments, But Employ a Smaller Share of Private Sector Employees, 1998
5 Figure 2: Comparison of Selected Benefits Offered, by Employer

Size, 2000 10 Figure 3: States' Small- Employer Premium Restrictions, June
2000 18 Figure 4: Average Percentage Change in Premiums Quoted for

Three Hypothetical Small Employers With Increasing Risk Characteristics in
Selected Localities, 2000 20

Abbreviations

AHRQ Agency for Healthcare Research and Quality COSE Council of Smaller
Enterprises EBRI Employee Benefit Research Institute EPO exclusive provider
organization ERISA Employee Retirement Income Security Act GPCI Geographic
Practice Cost Index HIPAA Health Insurance Portability and Accountability
Act HMO health maintenance organization HRET Health Research and Educational
Trust MEPS Medical Expenditure Panel Survey NAHU National Association of
Health Underwriters POS point of service PPO preferred provider organization

Page 1 GAO- 02- 8 Small Employer Health Insurance

October 31, 2001 The Honorable Christopher ?Kit? Bond Ranking Minority
Member Committee on Small Business

and Entrepreneurship United States Senate

Dear Senator Bond: Many small employers- generally defined as those with 50
or fewer employees- do not offer health benefits to their workers. This is
particularly true for the smallest employers- those with fewer than 10
employees. Partly as a result, workers employed by small employers, and
these workers? families, are about twice as likely to be uninsured as
individuals in households with a worker at a large employer. The Congress
and states have enacted laws and continue to consider proposals intended to
assist small employers in purchasing coverage, but many small employers
continue to cite cost as a major obstacle to providing coverage. Concerned
about the affordability of health insurance for small employers, you asked
that we review the challenges small employers face in providing health
insurance for their employees. Specifically, we examined

 small and large employers? health insurance premiums and benefit plans,

 insurers? costs to provide health insurance to small and large employers,

 the effect of state efforts to restrict the premiums that insurers charge
small employers, and

 other state efforts to help make coverage more affordable for small
employers.

To compare premiums for coverage offered by small and large employers and
the health characteristics of individuals insured through small and large
employers, we analyzed data available from the Agency for Healthcare
Research and Quality?s (AHRQ) Medical Expenditure Panel Survey (MEPS)- both
its survey of employers? health plan premiums (insurance component) for 1996
and 1998 and its survey of individuals? demographics, employment, health
characteristics, and medical spending

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 8 Small Employer Health Insurance

and utilization (household component) for 1996. 1 We obtained unpublished
data from the Kaiser Family Foundation/ Health Research and Educational
Trust (Kaiser/ HRET) Employer Health Benefits 2000 Annual Survey to compare
aspects of health plans provided by small and large employers. Unless
otherwise noted, the MEPS and Kaiser/ HRET data include health plans that
are fully insured- that is, the employer purchases the plan from a third-
party insurer- and those that are self funded- that is, the employer assumes
some or all of the financial risk associated with providing coverage. To
analyze the effects of state premium restrictions, we obtained premium
quotes through insurance agents affiliated with the National Association of
Health Underwriters (NAHU) for three hypothetical small employers in a
selected city in each of five states (California, Florida, Maryland, New
York, and Texas) with varying approaches to regulating insurance premiums
for the small group market. To obtain state- specific information on the
small group market, we interviewed state insurance regulators in these
states. We also interviewed health policy experts, insurers, 2 actuaries,
and associations representing these groups; reviewed relevant literature on
the small group health insurance market; and drew on our earlier work. 3

Appendix I provides more detailed information on our methodology. We
performed our work from April 2000 through October 2001 in accordance with
generally accepted government auditing standards.

Small and large employers purchasing health insurance had, on average,
comparable premiums in 1998, but this comparison does not fully capture the
challenges facing small employers in providing health insurance for their
employees. Although the premiums were similar, the health plans offered by
small employers were slightly less generous on average- they had slightly
higher average cost- sharing requirements for their employees and were
somewhat less likely to offer some benefits, excluding, for

1 The 1996 version of the MEPS household component was the most recently
available at the time of our analysis that had complete information allowing
us to link individuals? characteristics, including health status, and their
insurance status, including the size of the employer offering their
coverage. We were able to use the most recently available MEPS insurance
component (1998) to compare premiums among small and large employers.

2 For the purposes of this report, the term ?insurers? is used to include
managed care organizations and insurance carriers that provide fee- for-
service health insurance coverage. 3 A list of related GAO products is
included at the end of this report. Results in Brief

Page 3 GAO- 02- 8 Small Employer Health Insurance

example, mental health services and chiropractic care. Furthermore, many
small employers would likely have had to pay higher- than- average premiums
if they provided coverage to their uninsured workers and dependents,
including those who were offered coverage but declined and those who were
not offered coverage. Based on self- reported health characteristics,
uninsured workers and their families at small employers were less healthy
than those who were insured by comparably sized employers; and in most
states, insurers could charge more to groups with less healthy individuals.

Insurers? costs to administer employer- based health insurance and protect
against potentially large health care costs result in a larger share of
small employers? premium dollars being spent on these nonbenefit expenses
than large employers?. From 20 percent to 25 percent of small employers?
premiums typically go toward expenses other than benefits, compared with
about 10 percent for large employers. These administrative expenses include
insurers? marketing and billing, which increase the per- person cost of
insurance more for smaller groups than for larger ones because there are
fewer people to share the cost. In addition, insurers bear other expenses
that are unique to or higher for small employers, including expenses
incurred to protect themselves from potentially large health care costs. For
example, because they cannot predict the health status and the accompanying
costs of small groups as well as they can for large groups, insurers in many
states are allowed to review the medical history of each individual in the
group and charge higher premiums for groups with individuals in poor health,
a practice known as medical underwriting. Insurers are most likely to
medically underwrite very small groups for which there is the greatest
concern that the employers are purchasing coverage only because they
anticipate a need for it. Insurers may also add a surcharge to a small
employer?s premium to lessen the impact of potentially large health care
costs.

Nearly all states have enacted laws that limit the extent to which insurers
can vary premiums charged to small employers on the basis of the health and
other risk factors of the group. State laws that more tightly restrict
variation in premiums can make coverage more affordable for small employers
with high- risk employees but may also increase the cost of insurance for
healthier groups. For example, in New York, a state with tight restrictions,
a small employer with older workers, including some in poor health, would
pay the same premium as an employer of the same size and geographic location
with younger, healthier workers. In contrast, a small employer in Texas with
older and less healthy workers could pay two and a half to nearly four times
as much as an employer of the same

Page 4 GAO- 02- 8 Small Employer Health Insurance

size and geographic location with younger, healthier employees. Twelve
states did not allow insurers to adjust premiums for the health
characteristics of enrollees in 1996. Small employers in these states had
average premiums about 6 percent higher, compared with the other states,
when adjusted for geographic differences in cost of physician services.

Besides premium restrictions, other state efforts to make insurance more
affordable for small employers have had limited results. Few small employers
appear interested in lower- cost benefit packages that require significantly
higher cost sharing by individuals or that scale back the benefits that are
covered. Pooling small employers into purchasing cooperatives makes it
easier for employees to access a broader selection of plan options, but it
has not resulted in reduced premiums when compared to similar plans
available outside of the cooperatives. A few states have recently
established programs that provide temporary tax incentives or subsidies to
encourage small employers to offer coverage to their employees. However,
previous studies of the effects of tax incentives on individual and small
employer behavior suggest that the incentives need to represent a
significant portion- half or more- of the premium and to be in place
permanently to result in any significant number of newly covered
individuals.

Small employers with fewer than 50 employees represent more than
threefourths of all U. S. private establishments and employ nearly one-
third of the private sector workforce. (See fig. 1.) However, small
employers are less likely than large employers to offer health insurance to
their employees. In 1998, whereas 96 percent of employers with 50 or more
employees offered health insurance, 71 percent of employers with 10 to 49
employees provided coverage and only about 36 percent of employers with
fewer than 10 workers offered health benefits to their employees. 4 The
primary reason small employers cited for not offering coverage was cost. 5

4 Data are from AHRQ?s MEPS Insurance Component, 1998, and GAO analysis. 5
See Paul Fronstin and Ruth Helman, ?Small Employers and Health Benefits:
Findings from the 2000 Small Employer Health Benefits Survey,? EBRI Issue
Brief No. 226 and Special Report SR 35, Employee Benefit Research Institute
(Oct. 2000), p. 15. Background

Page 5 GAO- 02- 8 Small Employer Health Insurance

Figure 1: Small Employers Make Up the Majority of U. S. Private
Establishments, But Employ a Smaller Share of Private Sector Employees, 1998

Source: AHRQ?s MEPS Insurance Component, 1998.

During the early 1990s, concern about small employers? access to health
insurance and the affordability of providing coverage to their employees led
most states to adopt small group insurance market reforms. While the extent
and scope of reforms varied across states, most states included

 reforms guaranteeing that small employers seeking coverage would be
accepted for at least certain plans offered by insurers (known as guaranteed
issue);

 guarantees that small employers could renew health insurance even if they
had high claims except under certain circumstances, such as the failure to
pay premiums (guaranteed renewal);

 limits on how long insurers could deny coverage for medical conditions
individuals had at the time they obtained coverage (limits on preexisting
condition exclusions); and

 limits on the variation allowed in premiums.

Percentage of establishments 22% 17%

61%

10 to 49 employees

50+ employees

Fewer than 10 employees

Percentage of employees 68% 10 to 49

employees 50+ employees Fewer than

10 employees

22% 17% 15%

Page 6 GAO- 02- 8 Small Employer Health Insurance

States regulate insurance products sold within their borders, but their laws
do not affect all employers. The Employee Retirement Income Security Act of
1974 (ERISA) generally preempts states from directly regulating employer-
sponsored health plans. Thus, employers that assume the risk for, or ?self-
fund,? their employees? health benefits are largely exempt from state
regulation, including premium taxes and mandated benefits. 6 The MEPS data
from 1998 show that approximately 52 percent of large employers self- funded
at least one health plan, compared with 11 percent of small employers.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
established minimum federal standards that further enhanced state efforts to
ensure access to health insurance for small employers. While many of the
state reforms already met or exceeded the HIPAA minimums, HIPAA ensured
consistency in the definition of small employers (those with 2 to 50
employees) and established minimum standards regarding guaranteed issue,
guaranteed renewal, and limits on preexisting conditions applying to both
insured and self- funded health plans. States could exceed these minimum
standards in their own statutes and regulations. While HIPAA helped ensure
that small employers would have access to insurance, it did not impose any
restrictions on premiums or otherwise address the affordability of insurance
for small employers.

6 All states have enacted laws that require insurers to provide certain
health care benefits. Every insurance plan to which the mandates apply must
provide certain specified coverage. In addition, some mandates require that
insurers make certain benefits available. While specific mandated benefits
vary considerably by state, they commonly include treatment for alcoholism,
coverage for mammograms, and coverage for a variety of health care services
including those from chiropractors and podiatrists.

Page 7 GAO- 02- 8 Small Employer Health Insurance

Average annual health insurance premiums- the total amount paid by both
employers and employees- were nearly the same for small and large employers
in 1998. Small employers? premiums were slightly higher than large
employers? for single coverage and slightly lower for family coverage.
However, while small and large employers paid similar premiums, small
employers? coverage was generally less generous- their plans covered
slightly fewer benefits and required those insured to pay higher out-
ofpocket costs. Furthermore, many small employers would likely have had to
pay higher than average premiums if they had provided coverage to their
uninsured workers and their dependents, including those who were offered
coverage but declined and those who were not offered coverage. This is
because more of these uninsured individuals reported not being in excellent
health than did those with insurance and most states allow insurers to
charge small employers higher premiums to cover individuals in poorer
health.

Overall, average health insurance premiums for small and large employers
varied only slightly. The total amount paid by the employer and employees
for single coverage was on average slightly higher for small employers than
for larger ones in 1998. Specifically, the average annual single premium was
4 percent higher ($ 83 more) for all small employers and 8 percent higher ($
182 more) for the smallest of these- those with fewer than 10 employees.
Average annual family premiums, however, were lower for small employers
compared to large employers- about 3 percent lower for all small employers
($ 180 less) and 7 percent lower for the smallest of these ($ 357 less). 7
(See table 1.) Within these average premiums, however, employers may find a
considerable range of available premiums. For example, analysis of 1996 MEPS
data indicates that annual single premiums at the smallest employers ranged
from $995 to $4,540 per employee- about 456 percent- in 1996. In comparison,
single premiums at

7 Workers covered through small employers more often purchase single rather
than family coverage, perhaps in part because small employers typically pay
a slightly higher share of single premiums and a slightly smaller share of
family premiums than large employers. Specifically, according to 1998 MEPS
data, 59 percent of workers covered through small employers had single
coverage compared to 45 percent through large employers, with the remainder
having family coverage. Small employers paid an average of 86 percent of
single premiums and 72 percent of family premiums; large employers paid an
average of 81 percent for single coverage and 76 percent for family
coverage. Similar Premiums for

Small And Large Employers May Mask Coverage Differences And Potentially
Higher Costs to Small Employers for Those Not Insured

Small Employers Pay About the Same as Large Employers But Get Less Value

Page 8 GAO- 02- 8 Small Employer Health Insurance

small and large employers varied by about 369 percent and about 306 percent,
respectively. 8

Table 1: Average Annual Single and Family Premiums by Size of Employer, 1998
Average annual premiums a Type of coverage

Smallest employers (fewer than 10

employees) b Small employers

(fewer than 50 employees)

Large employers (50 or more employees)

Single $2,334 $2,235 $2,152 Family $5,265 $5,442 $5,622

a Premiums represent both employee and employer shares. b These employers
are also included in calculating the premiums for small employers.

Source: AHRQ?s MEPS Insurance Component, 1998.

While small and large employers generally paid, on average, about the same
amount for health insurance coverage, small employers received less value
for their premium dollars for several reasons. Small employers generally
purchased coverage with higher cost- sharing requirements for their
employees compared to larger employers. Also, small employers tended to
receive slightly fewer covered benefits for the same premiums paid by large
employers.

To make coverage more affordable, small employers tend to purchase plans
that require higher deductibles and higher maximum annual out- of pocket
costs for their employees. Average annual deductibles in preferred provider
organizations- the plan type most often purchased by workers covered by
small employers 9 -are more than $100 higher for employers

8 These ranges represent the 5th to the 95th percentiles. Average annual
family premiums varied by 371 percent at the smallest employers while they
varied 322 percent at small employers and 332 percent at large employers.
The variation in premiums may result from several factors, including
differences in benefits purchased and the risk characteristics of groups
purchasing coverage.

9 A preferred provider organization is a type of managed care plan that
offers a choice of health care providers but offers financial incentives to
use preferred health care providers. In 2000, 40 percent of workers covered
by small employers purchased preferred provider organization plans compared
to 25 percent purchasing point- of- service plans, 23 percent purchasing
health maintenance organization plans, and 12 percent purchasing indemnity
plans.

Page 9 GAO- 02- 8 Small Employer Health Insurance

with 3 to 50 employees than for larger employers. 10 A higher deductible
typically translates into a lower premium. For example, actuarial experts
estimate that a plan with an annual $200 deductible would reduce claims
costs by about $65 per year compared to the same plan with a $100
deductible. 11 Further, workers covered through small employers typically
are potentially liable for higher out- of- pocket costs than those employed
by larger employers. Specifically, about 35 percent of workers covered
through small employers have maximum annual out- of- pocket limits that are
$2,500 or more, compared to about 20 percent of workers covered through
large employers. 12

In addition, workers covered through small employers are less likely to
receive certain benefits. As shown in figure 2, while workers covered
through small employers were nearly as likely as those covered through large
employers to have coverage for prescription drugs and adult physicals, they
were slightly less likely to have coverage for other services such as
prenatal care and mental health. 13 The largest differentials between small
and large employers- as much as 15 percentage points- were for benefits less
likely to be covered by employers of any size, such as chiropractic care,
oral contraceptives, and acupuncture.

10 These are unpublished data from Kaiser/ HRET Employer Health Benefits
2000 Annual Survey. For preferred provider organizations, the average annual
deductible for preferred providers is $281 for employers with 3 to 50
workers compared to $174 for larger employers; for nonpreferred providers
the average annual deductible is $489 for small employers compared to $344
for large employers. The differentials in deductibles are considerably less
among fee- for- service and point- of- service plans.

11 William F. Bluhm, Principal Editor, Group Insurance (Winsted, Conn.:
ACTEX Publications, Inc., 2000), p. 438. 12 These are unpublished data from
Kaiser/ HRET Employer Health Benefits 2000 Annual Survey. Small employers?
workers enrolled in preferred provider organizations also had

less generous lifetime maximum benefits- 10 percent had lifetime maximums of
less than $1 million compared with 3 percent of those in large employer
plans.

13 Under the Pregnancy Discrimination Act of 1978 health insurance sponsored
by employers with 15 or more workers must cover expenses for pregnancy-
related conditions on the same basis as it does for other medical
conditions. Firms not offering prenatal care benefits are primarily those
with fewer than 15 employees. Unpublished data from the Kaiser/ HRET
Employer Health Benefits 2000 Annual Survey indicate that 85 percent of
workers insured through the smallest employers- employers with 3 to 9
workers- had coverage for prenatal care whereas 97 percent of workers
covered by employers with 25 to 50 employees were in plans containing
prenatal care benefits.

Page 10 GAO- 02- 8 Small Employer Health Insurance

Figure 2: Comparison of Selected Benefits Offered, by Employer Size, 2000

Source: GAO analysis of unpublished data from Kaiser/ HRET Employer Health
Benefits 2000 Annual Survey.

Individuals covered by small employers? health care plans had, on average,
health characteristics that were similar to those insured through large
employers. Table 2 shows that selected demographic and self- reported health
characteristics of individuals insured through small and large employers did
not vary significantly. Specifically, whether they were insured through
small or large employers, about the same percentages of individuals reported
excellent physical and mental health. Moreover, nearly the same percentage
of those insured through the smallest Insured at Small and Large

Employers Reported Similar Health Characteristics

0 10

20 30

40 50

60 70

80 90

100 Pres

cription drugs Prenata

l care Outpatient menta

l health

Well- baby care Inpat

ient mental health

Adu lt physicals

Chiropractic care

Oral co

ntra ceptives

Acupuncture Covered benefits Percentage of covered workers

3 to 50 employees 51 or more employees

Employer size

Page 11 GAO- 02- 8 Small Employer Health Insurance

employers- those with fewer than 10 employees- reported being in excellent
health (39. 5 percent).

Table 2: Selected Demographics and Self- Reported Health Characteristics for
Individuals Insured Through Small and Large Employers, 1996

Individuals insured through employers a Selected demographics and
selfreported health characteristics

Small employers (2 to 50 employees)

Large employers (51 or more employees) Demographics

Average age in years 29.8 29.7 Percentage less than 40 years old 67.0% 67.3%

Percentage with self- reported health characteristics

Select medical conditions b 26.1% 27.0% Excellent physical health 43.0%
40.2% Excellent mental health 51.8% 50.6%

a Individuals insured through employers include workers and their covered
dependents. b Select medical conditions include those that AHRQ identified
as prevalent, expensive, or relevant to policy. These include conditions
that are (1) long- term and life- threatening- such as cancer, (2) chronic
and manageable- such as arthritis, and (3) of policy interest- such as
Alzheimer?s disease.

Source: GAO analysis of AHRQ?s MEPS Household Component, 1996.

Compared to individuals insured through small employers, uninsured workers
at these employers and their dependents appear to be less healthy. 14
Therefore, they could represent greater risks to insurers if small employers
provided coverage to the uninsured. As shown in table 2, individuals insured
through small employers had similar self- reported health characteristics
when compared to those insured through large employers. However, our
analysis of 1996 MEPS data shows that uninsured workers and their dependents
at small employers considered themselves to be less healthy than their
insured counterparts. 15 This difference was particularly evident for
workers from age 30 to 64 years

14 Uninsured workers include those who are not offered health insurance
coverage and those who are offered coverage but decline it. 15 Overall, the
self- reported health status of individuals in households in which one adult
works for a small employer was similar to those in households in which an
adult works for a large employer. We do not report the self- reported health
status of individuals in the small employer households who may be insured
through public programs or other sources. Uninsured at Small

Employers May Be Greater Health Risks and Could Prompt Higher Premiums

Page 12 GAO- 02- 8 Small Employer Health Insurance

and their dependents. 16 The MEPS data showed that a smaller share of
uninsured individuals in this age group reported being in excellent physical
health- about 27 percent- compared to about 36 percent for insured people of
similar ages. In addition, a smaller percentage of uninsured individuals
reported having excellent mental health. (See table 3.)

Table 3: Self- Reported Health Characteristics for Workers of All Ages and
Workers 30 to 64 Years Old, Including Their Dependents, by Insurance Status
at Small Employers, 1996

At least one individual in household works for small employer (2 to 50
employees) Workers of all ages and

dependents Workers 30 to 64 years old and dependents Self- reported health
characteristics Insured Uninsured Insured Uninsured

Excellent physical health (percent) 43.0 34.7 36.4 27.1 Excellent mental
health (percent) 52.0 44.6 47.0 37.0

Source: GAO analysis of AHRQ?s MEPS Household Component, 1996.

Unless prevented from doing so by state law, insurers often screen small
employers for health and other risk factors associated with their workers
when setting health insurance premiums and charge more for higher- risk
groups. For example, we obtained premium quotes for hypothetical small
employers in a selected city in each of four large states. Table 4 shows
that in Austin, Texas the relatively high- risk small employer group would
pay anywhere from 82 percent to 290 percent more than a relatively low- risk
group. In the other three locations, premium quotes were 29 percent to 132
percent higher for the relatively high- risk small employer group. 17 Small

16 We focused on the self- reported health characteristics of individuals
from 30 to 64 years of age because a high proportion of younger individuals
is uninsured regardless of the size of their employers.

17 HIPAA?s nondiscrimination provisions prohibit insurers or employers from
excluding, providing less coverage to, or charging higher premiums to any
individual in a group due to his or her health status, but the entire group
could be charged a higher premium (or have benefit exclusions). Also, HIPAA
requires insurers to offer insurance to any small employer, but does not
restrict the premium charged. Some state laws may provide further
restrictions on underwriting or premiums, as discussed in the following
sections.

Page 13 GAO- 02- 8 Small Employer Health Insurance

employers that had workers considered to be higher risk typically would have
had to pay more for health insurance than healthier groups for the same
coverage.

Table 4: Percentage Difference in Monthly Premiums for Low- and High- Risk
Hypothetical Small Employer Groups in Selected Localities

Percentage difference in premium quotes obtained from different insurers for
low- and

high- risk small employer groups Locality Lowest difference Highest
difference

Austin, Texas 82 290 Baltimore, Maryland 29 132 Orlando, Florida 65 94
Sacramento, California 36 82

Notes: Ranges represent differences in premium quotes obtained from multiple
insurers in selected states. For example, for Baltimore, Maryland, five
insurers provided 10 premium quotes for the lowrisk hypothetical small
employer group and 10 quotes for the high- risk group. The lowest of the 10
differences between the quotes for the low- and high- risk groups was 29
percent and the highest was 132 percent.

We also collected premium quotes for a fifth location- Albany, New York- but
premiums did not vary in Albany because state law allows premiums to vary
only by geographic location, number of employees and dependents covered, and
type of coverage purchased.

The lowest risk group consists predominantly of individuals in their 20s.
The highest risk group consists of women of childbearing age, men in their
50s, several smokers, and one individual with juvenile- onset diabetes. See
appendix II for a detailed description of the hypothetical small employer
groups.

Source: Premium quotes obtained from agents in collaboration with NAHU.

Insurers? administrative costs and expenses (other than benefits) are higher
for small employers than for large employers. As a result, insurers spend a
smaller share of small employers? premium dollars on benefits and more on
administrative and other expenses than they do for large employers?. 18 For
smaller employers, administrative costs such as marketing and billing are
spread over fewer people. Furthermore, because large employers typically
assume the risk for their employee health

18 Health insurance premiums are typically composed of two elements- the
expected medical claims associated with the benefits covered and the
insurers? costs for the administrative activities required to provide
coverage. Insurers typically set premiums by applying a ?loading factor?-
that is, an additional charge- to the expected medical claims of the group.
This loading covers the insurers? administrative expenses, such as billing,
enrollment, claims payment, taxes, risk charges, underwriting, broker
commissions, overhead, and profit, and varies by type of plan and the size
of the group being insured. Insurers? Costs to

Provide Coverage Are Higher for Small Employers

Page 14 GAO- 02- 8 Small Employer Health Insurance

benefits by self- funding rather than purchasing insurance, other expenses,
such as premium taxes, can be avoided. Insurers also report the potential
for adverse risk selection- or purchasing of insurance by those with
relatively high health care needs- is greater with the smallest groups, and
to remain financially viable, insurers generally take steps to avoid
covering a disproportionate share of these costly groups. Therefore,
insurers may attempt to mitigate the difficulty of predicting the risk of a
small group compared to a large group by reviewing the medical history of
individuals in the group- called medical underwriting- or adding a premium
surcharge to better ensure that they can cover costs resulting from
unexpectedly large health care costs.

Our analysis of existing data indicates that, overall, insurers?
administration costs and expenses, other than benefits, typically account
for about 20 percent to 25 percent of small employers? premiums compared to
about 10 percent of large employers? premiums. 19 These expenses can range
from around 5 percent to 30 percent of the premium dollar, depending on the
size of the employer, type of plan, and insurer. 20 The smaller the size of
the group the larger the share of the premium that goes towards paying for
expenses other than benefits. This is due in part to the fact that small
employers have fewer individuals over which to spread expenses and certain
costs are lower or can be avoided by large employers. Insurers?
administrative activities, such as marketing and billing, increase small
employers? premiums more because, with fewer people to share the costs, they
cannot obtain the financial savings afforded to larger groups. For example,
if it costs an insurer $5 a month to generate a bill for each employer, this
cost spread over a group of five people would increase each person?s monthly
premium by $1. In contrast, for a group with 100 people this same activity
would increase the monthly premium for each person by only 5 cents.

In addition, some expenses associated with insurance for most small
employers may be avoided or reduced for large employers who assume the

19 This estimate is based on our analysis of information from health
insurance experts, published studies, and health insurers. 20 Data from the
late 1980s indicate a larger differential in administrative costs, with
small employers? administrative costs as high as 40 percent of premiums
compared to costs as low as 5 percent for large employers. However, some of
these differences may have narrowed due to the growth in managed care and
improvements in information technology. Administrative Costs

Account for More of Small Employers? Premiums

Page 15 GAO- 02- 8 Small Employer Health Insurance

financial risk for their employees? health coverage or perform some
administrative functions internally. By self- funding, large employers avoid
expenses such as state premium taxes assessed on insurance sold in the state
that typically represent about 1 percent to 3 percent of health insurance
premiums. 21 In addition, large employers may perform some administrative
activities, such as employee enrollment and education, which insurers or
agents perform for, and therefore charge, small employers. Large employers
typically purchase insurance with the assistance of benefits consultants,
whom they pay a fixed hourly or lump sum fee. A recent survey by Kaiser/
HRET estimated that the average administrative cost borne internally by
large employers- those with 200 or more employees- for providing health
benefits is approximately $250 per covered worker. 22 This would increase
the cost per covered employee by approximately 6 percent. Small employers,
on the other hand, typically purchase insurance through agents whose fees
can account for as much as 8 percent to 10 percent of the insurance premium.

Where permitted by state law, insurers may also incur additional expenses
assessing small employers? risks and protecting themselves against the
greater uncertainty in risk associated with these groups. Insurers are more
concerned about increased financial risk to cover people through small
employers for three reasons. First, insurers are unable to predict risk as
accurately for small employers as they are for large employers. Estimates of
a group?s future expenses that are based on prior health care use tend to be
more accurate the larger the group is. 23 Actuaries indicate that until a
group approaches about 500 people its prior health care use and costs are
not reliable enough to be the only data used in setting premiums. Second,
insurers report that small employers, especially those with two or three
employees, may be costly because they are more likely to seek coverage only
when their employees anticipate needing it, a phenomenon known as adverse
selection. Third, since smaller groups generate smaller amounts of

21 ERISA preempts all state law as it pertains to an employee benefit plan,
except such laws regulating state insurance and premium taxes. States,
however, maintain the ability to regulate and impose taxes on insurance sold
in their state. Self- funded health plans are generally not deemed to be
insurance and are not subject to state insurance regulations or taxes.

22 Comparable data are not available regarding the costs borne internally by
employers with fewer than 200 employees. 23 The concept that events cannot
be predicted for a few individuals but can be forecast relatively accurately
for a large group of individuals is known as the law of large numbers.
Insurers May Screen Small

Employers More Closely for Potential Risks

Page 16 GAO- 02- 8 Small Employer Health Insurance

premium revenue, insurers may be less willing to assume the potential risk
of one individual incurring a catastrophic accident or illness that could
elevate costs significantly and generate expenses exceeding premium revenues
contributed by the group as a whole.

To protect against these risks, insurers may review the medical history for
each individual in the small group and set the group?s premiums accordingly-
a practice known as medical underwriting. The degree to which medical
underwriting is done depends on the size of the group. Very small groups are
often screened most extensively, with each person required to provide a
detailed medical history. As the group size increases, approaching 20
individuals or more, fewer questions may be asked. Such individual level
assessments are not typically done for large employers so this cost accrues
only for insurers when selling coverage to small employers.

Furthermore, some insurers may add a surcharge of 1 percent to 5 percent of
small employers? premiums to increase their financial reserves- a pool of
money they invest to help ensure that there will be sufficient funds should
an unanticipated large expense occur. This surcharge tends to be higher when
the insurer is less certain of the risk of the group and may be imposed in
lieu of or in addition to medical underwriting. However, not all states
permit these activities and not all insurers underwrite small groups or add
a risk surcharge.

Most states have enacted laws- generally referred to as state rating
reforms- that restrict how much small employers? health insurance premiums
can vary. How these restrictions affect premiums depends on the latitude
each state allows insurers when setting these premiums. Nearly all states
have restricted insurers? ability to vary small employers? premiums to some
degree. Tight restrictions allow no or little variation in premiums, while
looser restrictions allow premiums to vary widely according to the health
risk and demographic characteristics presented by each small employer. In
states that do not allow insurers to set premiums based on health status,
small employers with employees who have health conditions pay the same
premiums as those with employees who do not have any health conditions, all
other characteristics being the same. In states allowing insurers to adjust
premiums for health and other characteristics, premiums for small employers
with high- risk employees can be several times higher than those for
employers with low- risk employees. Overall, average premiums, adjusted for
geographic differences in the cost of physician services, were about 6
percent higher in states that did not allow rates to vary for employees?
health status than State Reforms to

Restrict Small Employers? Premiums Have Varying Impact

Page 17 GAO- 02- 8 Small Employer Health Insurance

in those that did. However, our analysis found that states prohibiting
insurers from setting premiums based on health status did not have a higher
proportion of high- risk individuals insured through small employers than
states with more flexible restrictions.

To differing degrees, state laws restrict the variation allowed in small
employers? health insurance premiums. Two states- New York and Vermont- have
adopted a premium restriction practice called community rating that
essentially requires insurers to charge all small employers of the same size
a common rate regardless of their employees? and their dependents? ages,
health, or other demographic characteristics. In these states, premiums are
allowed to vary only for geographic location of the group, plan or benefit
design, and family size. As of June 2000, 10 other states had adopted
modified community rating laws that also prohibit variation in premiums
based on the health status of employees, but may allow some variation for
other factors. For example, Maryland allows premiums for small employers to
vary only by limited amounts for age, geographic location, and family size.

Most other states allow premiums to vary based on health as well as other
factors, but restrict the degree to which variation is allowed; these
restriction categories are called rating bands. In these states, insurers
can charge higher premiums for small employers insuring employees with
certain characteristics- such as older individuals, women of childbearing
age, smokers, individuals in poor health, and employees in certain
industries- that are considered high risk or costly. However, the amount of
variation is limited. For example, California allows insurers to consider
age, family size, geographic area, and health factors when setting premiums,
but limits the amount of variation for health factors to plus or minus 10
percent. Other states with rating bands allow much wider variation for
health and other factors. For example, Texas allows factors such as age,
sex, geography, group size, industry, and health to be considered in setting
premiums, but limits the amount premiums can be adjusted for health to plus
or minus 25 percent. As of June 2000, 35 states used rating bands when
setting premiums. (See fig. 3.) State Premium

Restrictions and Their Effects on Small Employers Vary Widely

Page 18 GAO- 02- 8 Small Employer Health Insurance

Figure 3: States? Small- Employer Premium Restrictions, June 2000

a While Arizona and New Mexico are classified as rating band states,
modified community rating applies to specific insurers. Restrictions in
Arkansas, Louisiana, Missouri, North Dakota, and Tennessee apply to a subset
of the small group market, and Virginia?s restrictions only apply to certain
types of plans. b Restrictions in Oregon apply to a subset of the small
group market. Rating bands (35 states a )

Community or modified community rating (12 states b ) No restrictions (4
states c ) Type of rating restriction

Page 19 GAO- 02- 8 Small Employer Health Insurance

c The District of Columbia, Hawaii, Michigan, and Pennsylvania had no
market- wide rating restrictions. However, in Hawaii certain insurers use
community rating; and in Michigan and Pennsylvania one insurer in each state
uses community rating.

Source: Data from Georgetown University, Institute for Health Care Research
and Policy, Washington, D. C.

The differences in state restrictions can greatly affect the premiums paid
by small employers, particularly for those considered to be high risk. To
illustrate these differences, we obtained premium quotes from several
insurers in a selected city in each of five states representing different
approaches to restricting premiums for the following three hypothetical
small employers:

 Group 1: Low- risk group of 10 individuals, predominantly in their 20s,
with few smokers, and none with any identified existing health conditions.

 Group 2: The same as group 1, but one of the workers has juvenile- onset
diabetes.

 Group 3: A relatively high- risk group of 10, with several members in
their 50s, several smokers, several women of childbearing age, and one
member with juvenile- onset diabetes.

The extent to which the second and third groups paid higher premiums than
the first group depended on the state?s premium restrictions. (App. II
provides a description of the hypothetical groups and the premium quotes we
obtained within these localities.) For example, see the following.

 In New York (which has community rating and does not allow rates to vary
for health or other factors), each of the groups paid the same premium.

 In Maryland (which does not allow premiums to vary for health but does
allow limited variation for other factors), group 2 with one employee with
juvenile- onset diabetes paid the same as group 1, and premiums were on
average 73 percent higher for group 3 (with older workers, women of
childbearing age, and more smokers).

 In California (which allows up to a 10- percent variation for health) and
Florida (which allows up to a 15- percent variation for health 24 ),
premiums were on average the same or slightly higher for group 2, and 53
percent to 85 percent higher for group 3 than for group 1.

24 Florida changed its law to allow this variation for health
characteristics in July 2000; previously, Florida had not allowed variation
in premiums for health characteristics.

Page 20 GAO- 02- 8 Small Employer Health Insurance

 In Texas (which allows up to a 25- percent variation for health), where
premiums can vary for multiple factors, the differences were most
pronounced. On average, the insurers would charge the second group 44
percent more than the low- risk group, while they would charge the highest-
risk group 176 percent more. Several insurers would have charged the high-
risk group premiums two and a half to nearly four times as much as the low-
risk employer.

As shown in figure 4, for each location we compared the average percentage
change in premiums for the group with one health condition (group 2) and the
high- risk group (group 3) to the low risk group (group 1).

Figure 4: Average Percentage Change in Premiums Quoted for Three
Hypothetical Small Employers With Increasing Risk Characteristics in
Selected Localities, 2000

Notes: New York and Maryland do not permit variation in premiums for health
conditions, but Maryland allows limited variation for other factors such as
age. California, Florida, and Texas permit variation to different degrees
for health conditions, and also allow variation for other factors.

The first bar above each locality represents the average percentage change
from group 1 to group 2 (as defined above) of all the premium quotes
received from insurers. The second bar above each locality represents the
average percentage change from group 1 to group 3 (as defined above) of all
the premium quotes received from insurers.

0 0 0 73

0 53

6 85

44 176

0 20

40 60

80 100

120 140

160 180

Albany, NY Baltimore, MD Sacramento, CA Orlando, FL Austin, TX

Average percentage change for group with one additional health condtion

Average percentage change for highest- risk group

Percentage

Page 21 GAO- 02- 8 Small Employer Health Insurance

See appendix II for a list of premium quotes we received, the percentage
change between groups, and the average of these percentage changes for all
responding insurers within each locality.

Source: Premium quotes obtained from agents in collaboration with NAHU.

By making the cost of coverage similar for low- and high- risk groups,
states with tighter restrictions might be expected to attract a larger share
of high- risk small employers, and thereby have higher average premiums,
than states without tight restrictions. Based on 1996 MEPS data- adjusted
for geographic cost differences 25 -average annual single premiums for fully
insured small employer plans 26 were about 6 percent higher in states that
prohibited premium adjustments for health characteristics ($ 2, 150) than in
other states and the District of Columbia that either had rating bands
allowing limited variation for health characteristics or had no restrictions
($ 2,034). Average annual family premiums were about 7 percent higher in
states that prohibited premium adjustments for health characteristics ($
5,189) than in the other states and the District of Columbia ($ 4,855). 27

While average premiums were slightly higher in states prohibiting the use of
health characteristics to set premiums, these states do not appear to have a
higher proportion of high- risk groups insured in the small group market
based on certain characteristics associated with risk. Using the 1996 MEPS,
we compared average medical expenditures and use, demographic
characteristics, and self- reported health characteristics for individuals
insured through a small employer in states that (1) prohibited

25 To help mitigate potential distortions due to underlying cost differences
in the states, we adjusted the premiums based on the 1997 Geographic
Practice Cost Index (GPCI) developed by the Health Care Financing
Administration, now known as the Centers for Medicare and Medicaid Services.
The GPCI attempts to measure the relative cost differences involved with
operating a private medical practice in different areas compared to the
national average. The GPCI is used to vary Medicare payments among fee
schedule areas according to the extent that relative costs vary. Also,
factors that we did not account for, such as differences among states in
plan benefit levels, industry mix, and plan type, could explain some of the
difference in premiums.

26 Excludes self- funded health plans. ERISA generally preempts states from
regulating these employer- sponsored health plans. 27 As of 1996, 12 states
had implemented community or modified community rating and 34 states had
rating bands in place. Four states and the District of Columbia had not
implemented any type of rating reform. MEPS data show that without adjusting
for geographic differences, average annual single and family premiums were
12 percent and 13 percent higher, respectively, in the 12 states that
prohibited premium adjustments based on health- those with community or
modified community rating- compared to the remaining states and the District
of Columbia. Average Premiums Were

Slightly Higher in States That Do Not Allow Adjustments for Health

Page 22 GAO- 02- 8 Small Employer Health Insurance

premiums from varying for health characteristics and (2) allowed at least
some variation for health or had no restrictions. We found individuals in
both groups of states to have generally similar expenditures, use,
demographic characteristics, and health characteristics.

States have undertaken other efforts to help small employers purchase health
insurance, but have had limited success in addressing affordability issues.
Attempts to reduce premiums by allowing insurers to offer less generous,
scaled- back benefit packages have not been widely embraced by small
employers. State and private efforts to pool small employers into purchasing
cooperatives have made it easier for small employers to offer a broader
choice of plans to their employees, but most efforts have not resulted in
expected premium reductions when compared to similar plans available outside
of the cooperatives. A few states have recently begun to provide tax
incentives or subsidies to small employers offering insurance. While these
initiatives are too new for their effect to be fully evaluated, previous
studies suggest that tax incentives need to represent a significant portion-
half or more- of the premium to significantly increase coverage.

Scaled- back benefit plans that cover fewer services or have higher out-
ofpocket requirements can reduce premiums, but they have not been widely
purchased when offered. 28 For example, see the following.

 Illinois officials reported that 25 people were enrolled in plans with
scaledback benefits when they were offered in the 1990s. The Illinois
Department of Insurance stopped approving the sale of these plans in 1997.

 Florida allows insurers to offer a basic low- cost plan that contains most
of the state?s mandated benefits but has high deductible and coinsurance
requirements. Few of these plans were sold, accounting for less than 1
percent of premiums collected in Florida?s small group market.

28 Scaled- back benefit packages (also known as ?bare bones? policies) can
provide less expensive coverage by being exempted from certain state-
mandated benefits or by restricting other major benefits, such as providing
less than 30 days of inpatient hospital care or maximum annual benefits of
$50,000 or less instead of the more comprehensive coverage typically offered
through most benefit plans. These plans also may have high deductibles ($
1,000 or more), no out- of- pocket cap on coinsurance of 20 percent on all
services, or high annual maximum out- of- pocket costs (up to $5,000). Other
State Efforts

Have Had A Limited Effect on Affordability

Scaled- Back Benefit Packages May Make Insurance More Affordable, But Have
Limited Appeal

Page 23 GAO- 02- 8 Small Employer Health Insurance

 Texas allows insurers to offer basic and catastrophic benefit plans. Both
plans cover many common benefits, such as maternity, outpatient services,
and hospital charges, and the catastrophic plan has deductibles as high as
$5,000 and maximum out- of- pocket expenses up to $10, 000. Data provided by
the Texas Department of Insurance indicate that, at peak enrollment in 1997,
only 53 basic and catastrophic plans were sold.

 In 1999, a major national health insurer introduced a set of scaled- back
benefit plans designed for small employers. The plan reimburses a maximum of
$50 of the cost of a doctor?s visit and pays as little as $100 toward the
cost of inpatient hospitalization after the 10th day. A year after
introducing the program, which is available in about 30 states, the company
acknowledged that the experiment failed to generate much interest from small
employers.

Experts attribute the poor sales of scaled- back policies to a desire among
small employers to offer benefits comparable to those offered by large
employers. Also, experts have reported that employees tend to be averse to
high deductibles, for example, those of $1,000 or more. Furthermore, some
small employers may not even be aware of the availability of these scaled-
back benefit plans because agents, whose commissions tend to be lower for
these plans, may not market them aggressively.

Private and public efforts to allow small employers to join together and
purchase health insurance have not, in most cases, lowered the cost of
coverage. In general, small- employer purchasing cooperatives try to
function like large employers to obtain lower premiums, offer more plan
options, and achieve administrative economies of scale. In 2000, 20 states
had laws allowing small employers to pool together into cooperatives for the
purpose of purchasing health insurance, and several recent congressional
proposals would further encourage the development of similar purchasing
arrangements. 29 However, most cooperatives account for a small share of
each state?s small group market (typically, less than 5 percent of small
employers), and several cooperatives recently have failed. We reported in
2000 on the experience of five relatively large, geographically dispersed
cooperatives, most of which offered a wide range of benefit options and
administrative services to participating small employers. For similar plans,
premiums inside the cooperatives were

29 See H. R. 2990, Quality Care for the Uninsured Act of 1999 (Oct. 1999)
and H. R. 1774, Small Business Health Fairness Act of 2001 (May 2001).
Purchasing Cooperatives

Generally Have Not Made Insurance More Affordable

Page 24 GAO- 02- 8 Small Employer Health Insurance

about the same as those available outside. 30 Specifically, we reported that
individuals in a group made up of 20- to 30- year- olds in the cooperatives
in California, Connecticut, and Florida paid average monthly premiums
ranging from $108 to $187 in 1999. The premiums for individuals in a
comparable group outside the cooperatives in these states ranged from $101
to $169. A 1997 national survey found similar average monthly single
premiums for small employers participating in any pooled purchasing group-$
180, compared with $172 for nonparticipants. 31

Several states have recently offered tax incentives or other subsidies to
small employers that offer insurance to their employees. 32 These actions
have the potential to make premiums less expensive and encourage more small
employers to offer coverage and more individuals to purchase it. Two
recently implemented efforts to lower premiums for small employers provide
assistance for up to about 18 percent of the average premium. For example,
starting in 2000, Kansas allowed employers to receive a refundable tax
credit for the first 5 years they provide health insurance to their
employees. 33 The credit is worth up to $420 per employee per year for the
first 2 years and then decreases to no more than $315 for the remaining

30 See Private Health Insurance: Cooperatives Offer Small Employers Plan
Choice and Market Prices (GAO/ HEHS- 00- 49, Mar. 31, 2000). This report
reviewed the experience of small employer purchasing cooperatives in
California, Connecticut, Florida, North Carolina, and Texas. Several other
recent studies have also concluded that small employer purchasing
cooperatives have not generally offered premiums lower than are available
outside the cooperatives. See, for example, Elliot K. Wicks et al, ?Barriers
to Small- Group Purchasing Cooperatives, Purchasing Health Coverage for
Small Employers,? Economic and Social Research Institute, March 2000, and
Elliot K. Wicks and Mark A. Hall,

?Purchasing Cooperatives for Small Employers: Performance and Prospects,?
The Milbank Quarterly (Vol. 78, No. 4, 2000). Wicks notes that the Council
of Smaller Enterprises (COSE) in Ohio, which dominates the small group
market in Cleveland, appears to offer lower premiums than are typically
available to small employers outside the cooperative. However, whereas the
other cooperatives we reviewed had 3 to 18 participating insurers, COSE has
2 participating insurers and nearly all of its enrollment is with a single
insurer.

31 See Long and Marquis, ?Pooled Purchasing: Who Are The Players?? Health
Affairs (July/ Aug. 1999). This survey looked at small employers
participating in a variety of pooled purchasing arrangements. 32 In
addition, some recent congressional proposals would provide tax incentives
to lowincome workers or small employers to encourage their employees to
purchase health insurance.

33 Employers cannot have contributed to a health insurance premium on behalf
of an employee in the last 2 years prior to receiving the credit. The 2-
year period runs backward from the date of application to the Kansas
Insurance Department. Tax Incentives and

Subsidies May Not Be Sufficient to Substantially Increase Coverage

Page 25 GAO- 02- 8 Small Employer Health Insurance

3 years. Massachusetts makes payments to qualified small employers providing
health benefits to eligible low- income employees of up to $400 per employee
per year for single coverage and $1,000 for family policies. Assistance is
also available in Massachusetts to eligible employees for their portion of
the premium.

As part of its Healthy New York Program, the state has recently initiated a
unique subsidy intended to assist certain small employers and working
uninsured individuals in obtaining coverage. The state is providing
financial reimbursement to health maintenance organizations (HMO), with
other insurers able to participate on a voluntary basis, to cover high- cost
claims- a type of reinsurance known as ?stop- loss? coverage. This could
help address concerns about the potential for some HMOs and insurers
receiving a disproportionate share of high- cost enrollees and the greater
uncertainty in the risk for insurers providing coverage to small employers.
Specifically, the New York program covers 90 percent of each enrolled
individual?s claims between $30,000 and $100,000. 34 Also, the stop- loss
coverage- along with a standardized, scaled- back benefits package that HMOs
must offer- is intended to make health insurance more affordable and
accessible. New York estimates that the program will cost the state about
$300 to $500 for each enrolled individual. However, because the program just
started at the beginning of 2001, it is too early to assess its
effectiveness.

These tax incentives and subsidies reduce the net cost to small employers of
providing health insurance, but it is uncertain whether they will be
sufficient to encourage many new small employers to begin offering coverage.
At small employers, even large premium subsidies may not persuade a
significant number of workers- particularly low- income workers- to purchase
health insurance when it is offered. A 1997 study estimated that, for
workers eligible to participate in employer- sponsored coverage, subsidies
as high as 75 percent would only increase participation rates from 89
percent to 93 percent. 35 In addition, some

34 New York has allocated $219 million for a 2ï¿½- year period starting
January 1, 2001. Of this amount, $163 million (about 75 percent) is targeted
to cover eligible small employers and $56 million (about 25 percent) is to
cover eligible low- income working individuals whose employers do not
provide health benefits.

35 See Michael Chernew, Kevin Frick, and Catherine G. McLaughlin, ?The
Demand for Health Insurance Coverage by Low- Income Workers: Can Reduced
Premiums Achieve Full Coverage?? Health Services Research, Vol. 32, No. 4
(1997), p. 453. This study also identifies other studies that concluded that
reducing premiums by as much as 50 percent would not greatly increase the
provision of insurance at small employers.

Page 26 GAO- 02- 8 Small Employer Health Insurance

studies have indicated that tax incentives to individuals need to represent
a significant portion of the premium- perhaps half or more- to result in
many individuals newly purchasing health insurance. 36 However, the Kansas
and Massachusetts subsidies would represent less than 20 percent of a small
employer?s typical single coverage premium. Furthermore, the temporary
nature of some state programs- such as the Kansas subsidy that lasts for 5
years- may limit their effectiveness. Experts report that small employers
may be hesitant to begin offering coverage even with subsidies if they are
uncertain that the subsidy will be available for the long term because
employers do not want to drop coverage once they begin offering it.

While federal and state reforms over the last decade have generally made
health insurance more accessible for small employers, many small employers
and their employees continue to face challenges in affording health
insurance. Recognizing the difficulties and costs that many small employers
face in offering their employees health insurance, the Congress has
considered several proposals to assist small employers in sponsoring health
insurance, such as proposed tax incentives and new purchasing arrangements.
These efforts are directed toward helping to make health insurance more
affordable for small employers by subsidizing costs for the employers or
their employees or by helping small employers gain some of the advantages
large employers have in purchasing health insurance. The complexity and
diversity of the small- group health insurance market as well as the
experience of the states in regulating premiums and trying other approaches
to expand coverage are important considerations in crafting effective
reforms.

Small employers often get less value for their premium dollar than large
employers and, in states that do not tightly restrict premium variation,
small employers with high- risk employees may pay substantially higher
premiums than those with lower- risk employees. As a result, many small
employers with uninsured workers and dependents in such states may face
higher premiums if they provide coverage because fewer of these uninsured
individuals report being in excellent health and they therefore may
represent a higher risk to insurers.

36 For example, see Congressional Budget Office, Options to Expand Federal
Health, Retirement, and Education Activities (Washington, D. C.: June 2000).
Concluding

Observations

Page 27 GAO- 02- 8 Small Employer Health Insurance

States? experiences indicate that efforts to increase affordability and
access can have some benefits- such as increasing the availability of a
wider array of plan options for small employers or helping to ensure that
small employers with high- risk employees pay lower premiums. However, they
generally have not made coverage more affordable overall or been sufficient
to encourage many new small employers to begin providing coverage. Other
efforts, such as purchasing cooperatives and scaled- back benefit offerings,
have not attracted a large share of the small group market to date. Further,
recently enacted temporary state subsidies and incentives may not be
sufficient to encourage many small employers to offer coverage.

Several private insurance experts, an expert on the MEPS database, and a
health insurance industry representative provided comments on a draft of
this report. In general, these reviewers concurred with our findings. Two
reviewers noted that while health insurance premiums were higher in states
that implemented tighter rating restrictions compared to the remaining
states, other factors in local health care markets, such as the types of
plans available or mix of industries, might also explain these differences.
We revised the report to reflect that these other factors may also account
for some premium differences across groups of states. Another reviewer
further emphasized that while federal and state smallgroup reforms have made
health insurance more accessible, affordability still remains a major
obstacle to more small employers offering coverage to their workers. The
reviewers also made technical comments that we incorporated where
appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after
its date. At that time, we will send copies to other interested
congressional committees and other parties. We will also make copies
available to others on request. Comments From

External Reviewers

Page 28 GAO- 02- 8 Small Employer Health Insurance

Please call me at (202) 512- 7118 or John Dicken, Assistant Director, at
(202) 512- 7043 if you have any questions. Major contributors to this report
include N. Rotimi Adebonojo, JoAnne Bailey, and Joseph Petko.

Sincerely yours, Kathryn G. Allen Director, Health Care- Medicaid

and Private Health Insurance Issues

Appendix I: Methodology Page 29 GAO- 02- 8 Small Employer Health Insurance

To review the affordability of health insurance in the small group market
we:

 reviewed literature on the small group market;

 analyzed three Medical Expenditure Panel Survey (MEPS) data files- the
1996 Household Component 1 and the 1996 and 1998 Insurance Components;

 analyzed the Kaiser Family Foundation and Health Research and Educational
Trust (Kaiser/ HRET) Employer Health Benefits 2000 Annual Survey;

 obtained health insurance premium quotes for three hypothetical small
employer groups in California, Florida, Maryland, New York, and Texas;

 interviewed insurance regulators in California, Florida, Maryland, New
York, and Texas; and

 interviewed health insurance experts, actuaries, and insurers?
representatives.

Our analyses of the MEPS and Kaiser/ HRET benefit data are further discussed
below, and appendix II includes additional information regarding the premium
quotes we obtained in the five states.

MEPS, conducted by the Agency for Healthcare Research and Quality (AHRQ),
consists of four surveys and is designed to provide nationally
representative data on health care use and expenditures for U. S. civilian
noninstitutionalized individuals. For our analysis, we used two of the four
surveys: the Household Component and the Insurance Component. The Household
Component is a survey of individuals regarding their demographic
characteristics, health insurance coverage, and health care use and
expenditures. The Insurance Component?s list sample is a survey of employers
regarding the health insurance they offer and their premiums. 2 We consulted
with AHRQ staff regarding MEPS, and in some

1 The 1996 version of the MEPS Household Component was the most recently
available at the time of our analysis that had complete information allowing
us to link individuals? characteristics, including health status, and their
insurance status, including the size of the employer offering their
coverage.

2 The Insurance Component consists of two subcomponents- a household sample
and a list sample. We used the list sample subcomponent, a survey conducted
independently from the Household Component. The list sample surveys business
establishments and governments throughout the United States and is designed
to provide national and statelevel estimates of the amount, types, and costs
of health insurance available to Americans through their workplaces.
Appendix I: Methodology

Medical Expenditure Panel Survey

Appendix I: Methodology Page 30 GAO- 02- 8 Small Employer Health Insurance

cases AHRQ or the Bureau of the Census had programmers perform analyses at
our request in order to provide us with additional data or to ensure that
the confidentiality of the data was not compromised.

We used the 1996 MEPS Household Component to compare nonelderly individuals
with health insurance through small and large private employers according to
select demographic and health characteristics. 3 To compare insured
individuals, we identified the size of the employers through which the
coverage was obtained using variables created with the assistance of AHRQ.
We classified insured individuals by employer size according to the
responses provided by the policyholders, who were either self- employed
individuals or wage earners (employees). Our analysis also included
dependents that had coverage through the policyholder. We classified the
following as insured through a small employer: (1) selfemployed individuals
who reported 50 or fewer employees at their firms and (2) wage earners at
single location establishments with 50 or fewer employees. 4 We excluded
from our analysis wage earners at establishments with 50 or fewer employees
whose employers had more than one establishment- approximately 21 percent of
the private, employer- sponsored population- because we could not determine
with certainty whether the employers would have 50 or fewer employees or
more than 50 employees for all locations combined. 5 We classified
selfemployed and wage earners reporting more than 50 employees, regardless
of the number of establishments, as insured through large employers.

When an individual had multiple sources of coverage from two different sized
employers- for example, if he or she was a policyholder on one plan and a
dependent on a spouse?s plan- we assigned the individual to the employer
size of the plan for which he or she was a policyholder. Less than 1 percent
of persons were dependents on more than one private employer- sponsored
plan, and we randomly assigned each of these individuals to either the small
or large employer through which he or she

3 Nonelderly individuals- those under 65 years old- are most likely to be
covered by employer- sponsored health insurance. 4 A firm may consist of a
single or multiple establishments. In the case of a single establishment
firm, the firm and the establishment are identical. 5 These individuals had
demographic characteristics and self- reported health status similar to
those with coverage through small and large employers. The 1996 Household

Component

Appendix I: Methodology Page 31 GAO- 02- 8 Small Employer Health Insurance

had insurance. Table 5 shows the unweighted and weighted sample sizes on
which our analyses are based.

Table 5: MEPS Sample and Estimated Population Sizes, December 1996
Nonelderly (individuals under 65 years old) insured

through a small private employer a

Nonelderly (individuals under 65 years old) insured

through a large private employer b

Sample size (unweighted) 1,397 4,646 Estimated population size (weighted)
19.4 million 61.8 million

a Includes only those nonelderly individuals insured through a current,
private employer with 2 to 50 employees. b Includes only those nonelderly
individuals insured through a current, private employer with 51 or

more employees. Source: GAO analysis of AHRQ?s MEPS Household Component,
1996.

We also compared characteristics of insured and uninsured individuals from
households with at least one individual working for a small employer. For
these analyses we included uninsured nonelderly individuals living in
households for which we could determine that at least one adult was employed
by a small private employer. Furthermore, only those persons eligible to
obtain health insurance from within the household were included. 6 Our
analysis of the uninsured is based on a sample size of 1,462, representing a
population of 16. 1 million uninsured individuals in households with at
least one worker at a small employer.

In addition, we compared the risk characteristics of individuals insured
through small employers in states that prohibited adjustment of premiums
based on the health or claims experience of a group with those insured in
states that allowed premiums to vary for these health characteristics. (See
table 6 for the two state groupings.) To determine which states prohibited
the use of health characteristics in setting premiums in 1996, we used

6 AHRQ provided us with a file that identified persons believed to be able
to obtain health insurance from one another. For example, a nondisabled,
nonstudent, adult child residing with his or her parents would not be
considered eligible to obtain coverage from a parent. This adult child would
be included in our analysis only if he or she worked for a small or large
employer. In this case, the adult child would be considered separately from
his or her parents.

Appendix I: Methodology Page 32 GAO- 02- 8 Small Employer Health Insurance

information from the Institute for Health Policy Solutions, the Blue Cross
and Blue Shield Association?s Survey of Plans, and the Health Policy
Tracking Service of the National Conference of State Legislatures. We
supplemented this information with telephone calls to insurance regulators
in eight states to clarify any inconsistencies.

Table 6: Groupings Based on Whether States Allow the Use of Health
Characteristics in Setting Premiums, 1996

States in which premiums could not be adjusted to reflect health
characteristics of the group

States in which premiums could be adjusted to reflect health characteristics
of the group

Connecticut Alabama a Florida Alaska Kentucky Arizona Maine Arkansas
Maryland California Massachusetts Colorado New Hampshire District of
Columbia a New Jersey Delaware New York Georgia Oregon Hawaii a Vermont
Idaho Washington Illinois

Indiana Iowa Kansas Louisiana Michigan a Minnesota Mississippi Missouri
Montana Nebraska Nevada New Mexico North Carolina North Dakota Ohio Oklahoma
Pennsylvania a Rhode Island South Carolina South Dakota Tennessee

Appendix I: Methodology Page 33 GAO- 02- 8 Small Employer Health Insurance

States in which premiums could not be adjusted to reflect health
characteristics of the group

States in which premiums could be adjusted to reflect health characteristics
of the group

Texas Utah Virginia West Virginia Wisconsin Wyoming

a Alabama, the District of Columbia, Michigan, and Pennsylvania had no
market- wide rating restrictions in 1996. However, in Pennsylvania and
Michigan, the Blue Cross plans, which had a significant share of the small
group market, offer small employers a community rate. Also, in Hawaii, the
Blue Cross plans, which had a significant share of the small group market,
applied limited community rating in the small group market.

Sources: GAO review of information from the Institute for Health Policy
Solutions, the Blue Cross and Blue Shield Association?s Survey of Plans, the
Health Policy Tracking Service of the National Conference of State
Legislatures, and selected state insurance regulators.

To compare the premiums for health insurance provided through small and
large firms, we obtained premium data from the 1998 MEPS Insurance
Component?s list sample. The premium data we present include national
estimates for insurance provided by small employers (those with fewer than
50 employees) as well as large employers (those with 50 or more employees).

To assess the effect of rating reforms that prohibit the use of health
characteristics in setting premiums in the small group market, the Bureau of
the Census and AHRQ staff conducted data analyses of the 1996 MEPS Insurance
Component at our request. We also requested that AHRQ weight premiums to
reflect plan enrollment. The premium data we present include the average
premiums for insurance at small employers (those with 50 or fewer employees)
in our two state groupings- those that prohibit varying of premiums
according to the health characteristics of the group and those that permit
premiums to be adjusted for these characteristics. In addition, we also
present a national range of premiums for employers, representing from the
5th to the 95th percentile in premium costs.

To compare benefits generally purchased by small and large firms, we used
data from the Kaiser/ HRET Employer Health Benefits 2000 Annual Survey.
Kaiser/ HRET surveyed randomly selected public and private employers that
had from 3 to more than 300,000 employees. The survey?s overall response
rate was 45 percent. Kaiser/ HRET provided us with 1996 and 1998 MEPS

Insurance Component Comparison of Health Benefits

Appendix I: Methodology Page 34 GAO- 02- 8 Small Employer Health Insurance

unpublished data to reflect the employer size categories (3 to 50 employees
and 51 or more employees) we requested. We weighted the results by plan type
(including indemnity plans, health maintenance organizations, preferred
provider organizations, and point- of- service plans) to reflect enrollment
patterns among small and large employers.

Appendix II: Health Insurance Premium Quotes

Page 35 GAO- 02- 8 Small Employer Health Insurance

In collaboration with the National Association of Health Underwriters
(NAHU), an association that represents professional health insurance agents
and brokers, we obtained health insurance quotes for three hypothetical
small employer groups in a selected city in each of five states. We selected
states based on size and geography. In addition, we considered the type of
rating reforms they implemented. We selected two states where premiums
cannot vary by health status: (1) New York, which requires community rating
that allows premiums to vary for benefit design, family size, and geographic
location, and (2) Maryland, which requires modified community rating that
allows variation for age, family size, and geography. We also selected three
states where premiums can vary to different degrees by health, along with
other factors. Florida amended its rating system in July 2000 to permit
limited variation in premiums for health status. California and Texas have
rating bands that allow premiums to vary for health and other factors.
Within each state, we obtained quotes for a selected city- specifically, (1)
Albany, New York, (2) Baltimore, Maryland, (3) Sacramento, California, (4)
Orlando, Florida, and (5) Austin, Texas. We asked that agents associated
with NAHU solicit quotes from the three to five major insurers active in
each locality?s small group market. Specifically, based on their expertise,
agents solicited quotes for the most popular and actively marketed benefit
packages from these insurers. 1 The agents did not disclose the purpose of
the survey to the insurers from whom they received premium quotes. In
addition, some premium quotes from the insurers were preliminary and could
have been subjected to further underwriting. The survey instrument was
pretested in Atlanta, Georgia.

Each of the three hypothetical employer groups for which coverage was sought
had 10 workers, 3 of whom were part- time and ineligible for health
insurance. The group applying for coverage consisted of a total of 10
individuals- the 7 eligible workers and 3 dependents. The employer was to
pay for all of the cost of coverage for the employees and nothing toward the
cost of coverage for the dependents. The employees in the first group were
relatively healthy, ranging in age from 25 to 34 years old. The employees in
the second group were similar to the first except one person reported a
serious medical condition- juvenile- onset diabetes. The employees in the
third group were given characteristics that were higher

1 All benefits packages included maternity benefits and, for benefits that
were not included in the most popular plan but were offered by most other
insurers, the agents requested that optional coverage for these benefits be
included to make the plans as comparable as possible. Appendix II: Health
Insurance Premium

Quotes

Appendix II: Health Insurance Premium Quotes

Page 36 GAO- 02- 8 Small Employer Health Insurance

risk than the other two groups. In addition to the serious medical
condition, these workers in the third group were older, had a higher
proportion of smokers and women of childbearing age, and were employed by a
restaurant- an industry considered to be higher risk by some insurers.

We received 147 premium quotes from 18 different insurers in the five
states. Some insurers reported premiums for different plan types (including
health maintenance organizations, (HMO), preferred provider organizations
(PPO), point- of- service (POS) plans, and an exclusive provider
organization (EPO) 2 ) as well as different options within these plan types.
Table 7 shows the health insurance premium quotes we received for each of
the three small employer groups.

Table 7: Monthly Premium Quotes for Three Hypothetical Small Employer Groups
With Increasing Risk Characteristics in Selected Localities, 2000

City/ state/ insurer Plan type/

deductible/ copayment a Group 1 b Group 2 c

Percentage change from

group 1 to group 2 Group 3 d

Percentage change from

group 1 to group 3 Albany, New York

Insurer 1 HMO/ NA/$ 10 $1,976 $1,976 0 $1,976 0 PPO/$ 500/$ 10 2, 150 2,150
0 2, 150 0 Insurer 2 HMO/ NA/$ 15 2,020 2,020 0 2, 020 0 Insurer 3 PPO/$
1,250/$ 12 3,712 3,712 0 3, 712 0 Average percentage change 0 0

Baltimore, Maryland

Insurer 1 HMO/ NA/$ 10 1,614 1,614 0 2, 340 45 POS/$ 200/$ 10 1, 939 1,939 0
2,864 48 Insurer 2 HMO/ NA/$ 10 2,414 2,414 0 3,118 29

POS/$ 200/$ 10 2, 091 2,091 0 3,953 89 PPO/$ 250/$ 20 2, 018 2,018 0 3,816
89 Insurer 3 PPO/$ 250/$ 20 1, 675 1,675 0 3,886 132 Insurer 4 HMO/ NA/$ 5
1,746 1,746 0 2,863 64

POS/$ 200/$ 5 1,976 1,976 0 3,241 64 Insurer 5 HMO/ NA/$ 10 1,667 1,667 0
3,063 84

PPO/$ 750/$ 10 1, 761 1,761 0 3,314 88 Average percentage change 0 73

2 An EPO is a managed care plan that requires its members to remain within
the network to receive benefits. Out- of- network services are not covered
except for a medical emergency.

Appendix II: Health Insurance Premium Quotes

Page 37 GAO- 02- 8 Small Employer Health Insurance

City/ state/ insurer Plan type/

deductible/ copayment a Group 1 b Group 2 c

Percentage change from

group 1 to group 2 Group 3 d

Percentage change from

group 1 to group 3 Sacramento, California

Insurer 1 HMO/ NA/$ 5 $1,312 $1,312 0 $1,989 52 HMO/ NA/$ 10 1,177 1,177 0
1,753 49 HMO/ NA/$ 15 1,101 1,101 0 1,638 49 HMO/ NA/$ 20 1,033 1,033 0
1,564 51 HMO/ NA/$ 10 1,101 1,101 0 1,753 59 POS/$ 0/$ 15 1,623 1,623 0
2,570 58 Insurer 2 HMO/ NA/$ 5 1,406 1,406 0 2,005 43

HMO/ NA/$ 10 1,356 1,356 0 1,970 45 HMO/ NA/$ 15 1,300 1,300 0 1,855 43 HMO/
NA/$ 20 1,185 1,185 0 1,690 43 HMO/ NA/$ 25 1,154 1,154 0 1,646 43 Insurer 3
EPO 557 557 0 1,014 82

HMO/ NA/$ 10 1,289 1,289 0 1,748 36 HMO/ NA/$ 10 1,615 1,615 0 2,200 36 PPO/
e /$ 25 359 359 0 565 57 PPO/$ 5,000/$ 20 724 724 0 1,135 57 PPO/ f /$ 10
1,829 1,829 0 2,827 55 Insurer 4 HMO/ NA/$ 15 1,731 1,731 0 2,520 46

HMO/ NA/$ 10 1,820 1,820 0 3,100 70 POS/$ 300/$ 10 2,094 2,094 0 3,012 44
PPO/$ 500/$ 35 1,447 1,447 0 2,496 72 PPO/$ 250/$ 15 1,838 1,838 0 3,127 70
Average percentage change 0 53

Orlando, Florida g

Insurer 1 PPO/$ 500/$ 10 1,644 1,807 10 3,184 94 PPO/$ 500/$ 15 1,610 1,769
10 3,117 94 PPO/$ 500/$ 15 1,539 1,691 10 2,980 94 PPO/$ 500/$ 15 1,487
1,634 10 2,879 94 Insurer 2 HMO/ NA/$ 10 1,587 1,587 0 2,839 79 Insurer 3
PPO/$ 500/$ 15 2,018 2,055 2 3,521 74

HMO/ NA/$ 15 1,441 1,459 1 2,371 65 Average percentage change 6 85

Austin, Texas

Insurer 1 PPO/ h /$ 10 1,623 2,469 52 4,185 158 Insurer 2 PPO/$ 250/$ 15
1,603 2,985 86 5,195 224 Insurer 3 PPO/$ 250/$ 10 1,674 1,713 2 3,053 82
Insurer 4 PPO/$ 300/$ 10 1,508 2,445 62 5,876 290 Insurer 5 PPO/$ 250/$ 10
1,541 1,527 -1 3,134 103 Insurer 6 PPO/$ 250/$ 15 1,796 2,865 59 5,393 200
Average percentage change 44 176

Appendix II: Health Insurance Premium Quotes

Page 38 GAO- 02- 8 Small Employer Health Insurance

a This column shows an individual?s out- of- network deductibles and in-
network office visit copayments. No out- of- network deductibles are shown
for HMOs as they usually only pay for in- network- services. Therefore, we
indicated these deductibles as not applicable (NA) for HMOs. POS plans
typically allow patients to go out of the network. b Group 1 included 10
enrollees, primarily young with no health conditions and few high- risk

characteristics. Specifically, group 1 included five employees purchasing
single coverage, (four 25- to 28- year- old males, one a smoker; one 26-
year- old, nonsmoking female) and two employees purchasing family coverage
(one 29- year- old married, nonsmoking female with a 25- year- old spouse
and one 34- year- old married, nonsmoking male with a 34- year- old spouse
and a 7- year- old female child). c Group 2 included 10 enrollees similar to
group 1 but with one of the adults reporting a serious health condition.
Specifically, group 2 included five employees purchasing single coverage
(four 24- to 27- year- old males, one a smoker; one 25- year- old,
nonsmoking female with juvenile- onset diabetes) and two employees
purchasing family coverage (one 28- year- old married, nonsmoking female
with a 25- year- old spouse and one 33- year- old married, nonsmoking male
with a 34- year- old spouse and a 7- year- old female child). d Group 3
included 10 enrollees, primarily older individuals with one reporting a
health condition and

others with increased risk characteristics, including sex, smoking status,
and a higher- risk industry. Specifically, group 3 included five employees
purchasing single coverage (four 25- to 48- year- old females, one a smoker
and one with juvenile- onset diabetes; one 55- year- old male, who is a
smoker) and two employees purchasing family coverage (one 51- year- old
married, nonsmoking male with a 46- year- old spouse and one 58- year- old
married male, who is a smoker, with a 48- year- old spouse and a 12- year-
old male child). e No deductible was provided.

f No deductible was provided. g Florida began to allow insurers to use a
health factor for setting premiums as of July 1, 2000. Therefore, some
insurers may not have been using the health factor when these quotes were
obtained. h Out- of- network deductible was not available.

Source: Premium quotes obtained in collaboration with NAHU.

Related GAO Products Page 39 GAO- 02- 8 Small Employer Health Insurance

Health Insurance: Proposals for Expanding Private and Public Coverage (GAO-
01- 481T, Mar. 15, 2001).

Health Insurance: Characteristics and Trends in the Uninsured Population
(GAO- 01- 507T, Mar. 13, 2001).

Private Health Insurance: Cooperatives Offer Small Employers Plan Choice and
Market Prices (GAO/ HEHS- 00- 49, Mar. 31, 2000).

Private Health Insurance: Progress and Challenges in Implementing 1996
Federal Standards (GAO/ HEHS- 99- 100, May 12, 1999).

Health Insurance Standards: New Federal Law Creates Challenges for
Consumers, Insurers, Regulators (GAO/ HEHS- 98- 67, Feb. 25, 1998).

Health Insurance Regulation: Varying State Requirements Affect Cost of
Insurance (GAO/ HEHS- 96- 161, Aug. 19, 1996). Related GAO Products

(201039)

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