Reduce Small Employers’ Cost of Buying Health Insurance
SummaryThe main reason that many small employers do not purchase health coverage for their employees is the cost. Texas could reduce that cost by allowing small employers who band together in coalitions to be treated as single employers under state law.
Many Texans working for small employers do not have health insurance. Almost one-third of Texas’ uninsured workers in 2001, or almost 700,000 Texans, worked for employers with fewer than 10 employees. Nearly one-half, or almost 1 million Texans, work for firms with fewer than 25 employees.
The Texas Department of Insurance (TDI) received federal funds through a State Planning Grant (SPG) to collect information and develop options for expanding health insurance to uninsured Texans, especially those working for small businesses. The study included a survey of Texas small businesses that generated 13,000 completed responses. The Texas Insurance Code defines small employers as firms with 2 to 50 employees.
Sixty-nine percent of Texas small business firms answering the TDI survey stated that the main reason they do not offer health insurance coverage is the cost. A U.S. General Accounting Office (GAO) report distributed by TDI also cited cost as the primary reason small employers do not offer health insurance coverage to their employees.
Small employers’ administrative expense and risk
Health insurance companies incur higher costs when administering insurance plans for small firms than they do with larger firms. From 20 percent to 25 percent of small employers’ premiums typically go toward expenses other than benefits, compared with about 10 percent or less for larger employers. Administrative expenses include insurers’ marketing and billing. These items increase the per-person administrative cost of insurance more for smaller groups than for larger ones because there are fewer people to share the cost. This pattern is also true in Texas.
Smaller firms also must pay more if they have a sick employee. Larger employers have more people over which to spread the risk of a chronically ill employee and to spread the likelihood of illness than employers with fewer workers.
Higher administrative expenses for small groups result in higher premiums for small businesses. As a result, state law allows insurance companies to charge up to an additional 20 percent on premiums, based on group size.
In the TDI survey, small businesses said that one of the solutions to the problem would be to encourage small employer health purchasing alliances. Of the small employers responding to the TDI survey, 95 percent said they wanted a purchasing alliance.
History of purchasing alliances
Currently many Texas small employers purchase health insurance for their employees through a high cost, small group policy. Since 1993, however, the Texas Legislature has permitted small employers to join together in private non-profit health insurance purchasing alliances to obtain economies of scale.
According to one of the authors of the 1993 legislation, the intent was for cooperatives to form easily with little or no costs or liability. In general, however, insurers have not been eager to participate in private alliances. A study of the experiences of many states with purchasing alliances stated that insurance companies did not like being put into competition for alliance business, did not like serving small groups and realized little if any administrative savings. The insurance companies said it was not worthwhile to operate dual administrative systems (one for an alliance and one for their non-alliance small group business).
The 1993 Legislature created the Texas Insurance Purchasing Alliance (TIPA), which began accepting enrollees in 1995. TIPA, which became a nonprofit corporation in 1997, experienced significant success in the beginning but was dissolved after five years due to some complex problems that included the following issues:
- TIPA only offered three standard plans.
- TIPA initially sold directly to businesses and cut out insurance agents. When TIPA later began offering coverage through agents, their commissions were limited.
- TIPA made coverage more expensive to healthy groups and encouraged businesses with costly, high-risk groups of sick employees into the TIPA plan.
Small employer coalitions
There is currently only one purchasing alliance in the state, the Texas Health Care Purchasing Alliance, Inc. (THCPA, Inc.) with about 2,700 total employees covered. The alliance was formed after the state law passed in 1993 to allow small businesses to join forces. THCPA combines small employers into small employer coalitions, which typically have about 50 employees.
Small employers who join together may purchase standard, state-regulated small employer group health insurance plans. These coalitions may solve the problems that small employers face in purchasing insurance by allowing the coalitions of small employers to offer the benefits of a single larger employer.
Coalitions do not have to experience the problems of the now dissolved TIPA. They can purchase any plan they want from a carrier rather than only three standard plans. Insurance agents can form coalitions and participate in sales to them. Unlike TIPA, they do not require carriers to operate dual administrative systems because a coalition can be treated like any other single employer.
Coalitions of small employers could also help reduce the high costs that insurance carriers incur when they serve small groups. They can substantially reduce the small employers’ and the insurance carriers’ costs of serving smaller employers by combining very small groups into groups of about 50. A group of this size is sufficiently large to avoid the 20 percent increased rating that Texas insurance companies are allowed to charge to small businesses under state law. Coalitions of fewer than 50 employees also can qualify as a small business in state law, which means their insurance policies contain a feature known as guaranteed renewability.
A disproportionately large number of sick employees in a group is always of concern in the small employer market, because it raises premium risk and costs. The concern diminishes as the size of the group grows to more than 35 employees. To reduce the risks associated with insuring small employers, an insurance carrier may review the medical history of each individual in the small group and set the group’s premiums accordingly, a procedure known as medical underwriting.
Very small groups are screened most extensively, but as the group approaches more than 20 individuals, fewer questions may be asked. Such individual assessments are not typically performed for large employers, so the cost of medical underwriting accrues only when selling to small employers. Coalitions of small firms with close to 50 employees normally avoid this cost.
A coalition of small employers should not pose any larger financial risk for insurance carriers than larger firms. Only 1 percent of the population is thought to be both uninsured and uninsurable due to a pre-existing health condition. A GAO report revealed that individuals covered by employers with two to 50 employees in health care plans had, on average, health characteristics that were similar to those insured through large employers with more than 50.
Austin Hocker, president of Hocker, Inc., a Houston industrial supply company, explained the appeal of a purchasing coalition in a Houston Chronicle article: “We’ve always furnished health insurance. That was OK until a few years ago, when the cost was going up and up and up. We were going to have to cut the quality of insurance or make our employees start paying.” Hocker and his 11 employees joined THCPA, Inc. in 1994. The company found it received higher quality insurance for 30 percent less than what it had been paying. 
Some insurance carriers, however, have canceled their policies with coalitions of small employers organized by THCPA in spite of the Texas Insurance Code’s guaranteed renewability provisions because the carriers did not consider the purchasing alliance to be a single employer. Carriers then offered coverage to each of the small employers previously organized by THCPA at a higher rate, defeating the purpose of having a small employer alliance.
Article 26.16(b) of the Texas Insurance Code states: “A cooperative is considered an employer solely for the purposes of benefit elections under the code.” TDI currently interprets Article 26.16(b) to mean that small employer coalitions are not single employers. If TDI changed its interpretation and considered them as single employers, the cost of the health insurance to smaller employers who formed coalitions would be lower because they could avoid the 20 percent additional costs that the insurance code allows insurance companies to charge small employers. The author of the legislation that inserted Article 26.16(b) into the insurance code has stated that the legislative intent was to consider cooperatives as single employers.
Exhibit 1 provides an example that shows how a coalition of small employers could save money on its health insurance. If 10 small businesses, each with 5 employees, each purchase a policy, it will cost an estimated $210.26 per employee. (The premium is based on quotes for coverage for a small business of five employees.) If the businesses are instead members of a coalition of 50 employees, the group in this example would save nearly 17 percent based on its size, and the cost per employee drops to $175.16.
If the coalition also chooses to purchase a type of policy that lets the consumers be involved in the day-to-day decisions about their health care, the cost could drop again to $140.13. An example of this type of policy for health care is one in which consumers may choose certain types of coverage and eliminate other coverages based upon their individual need.
In this example, a coalition may reduce the administrative cost of providing health insurance in several ways. The insurance company could issue one “off the shelf” policy to the coalition just as it would to any other group of comparable size instead of ten to each of the employers. The insurance company’s administrative costs of handling one 50-employee group are one-tenth of those handling ten groups of five employees each, and it should not have the additional cost of medical underwriting.
Example of Health Insurance Savings
For Small Businesses and Their Employees
From Treating Small Employer Coalitions as Single Employers
Sources: BlueCross BlueShield of Texas and Robert Desmond.
In addition to the benefits to be derived by small businesses, which could then afford to purchase health insurance for their employees, the state of Texas also would benefit. The Comptroller’s office estimated that in 1998 Texas state and local governments and private charities spent an average of almost $1,000 on health care for uninsured Texans. In 2001, about 700,000 uninsured Texans worked at firms with fewer than ten employees. A substantial reduction in the number of uninsured Texans could save federal, state and local governments and charities substantial funds that could be used elsewhere.
The Texas Insurance Code, Chapter 26, Subchapter A, Article 26.16 should be amended to clarify that employers who join together in cooperatives to purchase health insurance should be considered single employers.
If this recommendation is implemented, small employers who join coalitions to purchase affordable health insurance would have the same access to the health insurance market as any other employer group of comparable size. This amendment would make coverage more affordable to Texas’ smallest businesses and provide access to thousands of employees of these businesses.
There would be no significant fiscal impact on state government. However, to the extent that the number of uninsured would be decreased, implementation of this recommendation could reduce costs of health care programs supported by local hospital districts and state government for the uninsured.
 Dianne Longley, Small Employer Health Insurance Survey Results, presentation before the State Planning Grant Conference, Austin, Texas, January 2002, p. 1.
 Texas Department of Insurance, State Planning Grant Division, Working Together for a Healthy Texas, Final Report (Austin, Texas, March 2002), pp. 1-2, http://spg.tdi.state.tx.us/pubs/final/index.html. (Last visited October 18, 2002.)
 Dianne Longley, Small Employer Health Insurance Survey Results, p. 6.
 U.S. General Accounting Office, Private Health Insurance; Small Employers Continue to Face Challenges in Providing Coverage, GAO 02-8 (Washington, DC, October 2001), p. 4.
U.S. General Accounting Office, Private Health Insurance; Small Employers Continue to Face Challenges in Providing Coverage, GAO 02-8, p. 14.
 Mike Pollard, executive director of the Texas Association of Life and Health Insurers, testimony before the House Insurance Committee, Austin, Texas, March 5, 2001.
 Tex. H.B. 949, 77th Leg., R.S. (2001).
 Texas Department of Insurance, State Planning Grant Division, Working Together for a Healthy Texas: Final Report (Austin, Texas, March 2002), p. 45.
 Tex. H.B. 2055, 73rd Leg., R.S. (1993); and letter from Texas State Senator Kip Averitt to Karina Casari, executive deputy commissioner, Texas Department of Insurance, March 4, 2002.
 Texas Department of Insurance, State Planning Grant Division, Working Together for a Healthy Texas: Final Report, p. 45.
 Economic and Social Research Institute, Barriers to Small-Group Purchasing Cooperatives: Purchasing Health Coverage for Small Employers, by Elliot K. Wicks, Mark Hall and Jack A. Meyer (Washington, DC, March 2000), p. 4.
Texas Department of Insurance, State Planning Grant Division, Working Together for a Healthy Texas: Final Report, p. 45; and Texas Department of Insurance, Small Business Purchasing Alliances, by Jed Perry (Austin, Texas, August 2001).
 Texas Department of Insurance, State Planning Grant Division, Working Together for a Healthy Texas, Final Report), p. 45.
 U.S. General Accounting Office, Private Health Insurance: Small Employers Continue to Face Challenges in Providing Coverage, GAO-02-8, p. 16.
 The Heartland Institute, Extending Affordable Health Insurance to the Uninsurable, by Conrad F. Meier (Chicago, Illinois, August 27, 1999), p. 5.
U.S. General Accounting Office, Private Health Insurance; Small Employers Continue to Face Challenges in Providing Coverage, GAO 02-8, p. 20.
Rebecca Mowbray, “It Takes Creativity to Fight High Costs of Insurance Plan for Employees,” The Houston Chronicle (July 21, 2000).
 Tex. Ins. Code Ann. Chapter 26, Subchapter C, §26.23.
 Letter from Texas State Senator Kip Averitt to Karina Casari, executive deputy commissioner, Texas Department of Insurance, March 4, 2002.
 Data from the Blue Cross Blue Shield of Texas Small Group Rating System, September 1, 2001.
 HealthMarket Self Directed Health Plans’ estimated quote prepared by Robert Desmond, September 2002.