New to HR? Templates, tools and development to make you a seasoned pro in no time.
Shawn Premer shows how doing the right thing for employees leads to positive business results.
Is your employee handbook keeping up with the changing world of work? With SHRM's Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Build competencies, establish credibility and advance your career—while earning PDCs—at SHRM Seminars in 12 cities across the U.S. this spring.
#SHRM18 will expand your perspective – on your organization, on your career, and on the way you approach HR. Join us in Chicago June 17-20, 2018
Will health insurance exchanges cure what ails the individual and small group markets?
Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.
Small businesses in the U.S. have been overpaying for health insurance, according to research published in the August 2011 issue of
American Economic Review. The article, “Unhealthy Insurance Markets: Search Frictions and the Cost and Quality of Health Insurance,” finds that the difficulties of comparison shopping increase average health insurance premiums paid by small businesses by 29 percent.
The article is by James Rebitzer, a professor of management, economics and public policy at Boston University's School of Management; Mark Votruba, an associate professor of economics and medicine at Case Western Reserve's Weatherhead School of Management; Randall Cebul, a professor of medicine at Case Western Reserve’s School of Medicine and director of the Center for Health Care Research & Policy at MetroHealth Medical Center in Cleveland; and Lowell Taylor, a professor of economics at Carnegie Mellon's Heinz College and former senior economist for President Bill Clinton’s Council of Economic Advisers.
High Plan Turnover Rates
As the researchers began taking insurance markets’ vital signs a few years ago, one fact particularly captured their attention: small employer groups changed plans very frequently.
This turnover was something of a puzzle. “If markets are competitive, plans of similar value should be offered at similar prices,” said Votruba. “It’s costly to switch plans, so if employers are switching plans all the time, it suggests that something is impeding competition.”
The researchers concluded that they observed a phenomenon economists refer to as “search frictions,” which arise whenever consumers are unable to easily compare all the options available to them in the marketplace. This, they argue, is the case for purchasers of individual and small group health plans.
"Consumers have hundreds, sometimes thousands, of different options, and each plan has its own unique set of benefit details,” Votruba said. “In this complex environment, it’s hard for consumers to find the plan that offers them the best value. What our paper shows is that this 'shopping problem' has important implications for how market competition plays out. If consumers have a hard time evaluating value, competition becomes less about value and more about marketing."
A hallmark of markets with search frictions is that the “law of one price” breaks down. Instead of competition forcing all insurers to offer similar plans at a similar low price, frictions enable many insurers to profitably pursue high margin/low volume strategies. The net effect is that consumers end up paying more for their health insurance—29 percent more on average in the small group market—and insurers spend more on marketing.
Search frictions give employers an incentive to change insurers in search of better rates. "High turnover rates undermine the quality of health plans by reducing insurers’ incentive to finance care that makes their policyholders healthier in the future," Cebul said. "Why spend money on wellness or disease management programs, which yield a return on investment only after several years, for a policyholder who probably isn’t going to stick around long?"
Health Insurance Exchanges Help, in Theory
If search frictions in health insurance markets cause small businesses to pay too much for low-quality policies, can the state-run health insurance exchanges mandated by the health care reform law, set to launch beginning in 2014, do better?
“In theory, they should,” said Rebitzer, “as long as they are designed so that shoppers can easily evaluate the value that they should expect for the prices of different plans. We will know that the exchanges are successful if turnover rates and marketing expenses decrease.”
In Massachusetts, however, the state-run exchange has not been embraced by small businesses, according to Sandy Reynolds, executive vice president of Associated Industries of Massachusetts, an employer group.
Speaking at the 2011 Society for Human Resource Management's Employment Law & Legislative Conference last March in Washington, D.C., she remarked that the expectation had been that small employers would use the "Health Connector"—the
state-run insurance exchange that Massachusetts launched in October 2006—to purchase group policies.
"That hasn't happened," Reynolds said. One reason: "Employers want to keep working with a broker who brings them options, explains the differences among policies and makes recommendations," she pointed out. "Employers have very strong relationships with their brokers" that they want to maintain, the Massachusetts' experience revealed.
"It's been hard for the Connector to compete with the private market," Reynolds added. She said the state was planning to revise its rules for the Connector, seeking to make it more user-friendly.
The Affordable Care Act defines a small employer as an employer having at least one but no more than 100 employees. However, it provides states the option of defining small employers as having at least one but not more than 50 employees in plan years beginning before Jan. 1, 2016.
Generally, if you have fewer than 100 employees (using the definition for full-time equivalents) you will be purchasing coverage in the small group market.
is an online editor/manager for SHRM.
SHRM Online Health Care Reform Resource Page
• Sign up for SHRM’s free
Compensation & Benefits e-newsletter
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Please sign in as a SHRM member before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
Talent Attraction Study: What Matters to the Modern Candidate
Join SHRM's exclusive peer-to-peer social network
SHRM’s HR Vendor Directory contains over 3,200 companies