Employer Health Insurance Premium Subsidies Unlikely to Enhance Coverage Significantly

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Employer Health Insurance Premium Subsidies Unlikely to Enhance Coverage Significantly

Issue Brief No. 46 — December 2001

James D. Reschovsky, Jack Hadley

Among the strategies that federal, state, and local governments have pursued to reduce the number of uninsured workers, subsidizing the cost of employer-sponsored health insurance for small businesses has attracted significant policy interest. The reasoning is intuitive: since small firms are far less likely than large ones to offer coverage, providing financial assistance to offset the cost of premiums might encourage more of them to begin offering benefits. But research from HSC by James D. Reschovsky and Jack Hadley found that premium subsidies directed at small employers would have a surprisingly modest effect on the uninsured population.

Targeting the Working Uninsured

Nearly 75 percent of the uninsured in the early 2000s lived in families with at least one full-time worker. About 38.7 million Americans lacked health insurance in 2000 according to Census Bureau data. Many of these uninsured workers were employed by small businesses. Roughly 16 million people worked for firms with fewer than 50 employees that did not offer coverage, making small-firm workers a natural target for coverage expansion efforts.

Several states and localities had launched programs to subsidize health insurance premiums for small employers, including the Kansas Small Employer Tax Credit, the Massachusetts Insurance Partnership Program, and Healthy New York. Local efforts funded by private foundations or federal disproportionate share hospital payments were underway in Denver, New York City, Muskegon, Michigan, San Diego, and Wayne County, Michigan. Enrollment in these programs ranged from fewer than 50 firms to more than 2,000. Subsidy amounts varied, but a 30 percent subsidy — slightly above the midpoint of existing programs — would have reduced the cost of an average small-firm single coverage policy from $2,732 to $1,912 and a family policy from $6,434 to $4,504.

Why Small Firms Do Not Offer Coverage

The HSC research identified two central reasons why small employers were unlikely to respond strongly to premium subsidies. First, the cost of providing health insurance was structurally higher for small firms. They faced higher premiums because insurers' marketing and administrative costs had to be spread across fewer enrollees, because adverse selection was more pronounced in small groups, and because small firms lacked the bargaining leverage of larger organizations. A hypothetical minimum-benefit HMO plan would cost $37 more per month in single-coverage premiums for firms with fewer than 10 workers compared to firms with 50 to 99 workers.

Second, small firms were more likely to employ low-income workers who were less willing or able to pay for health insurance. Twenty-eight percent of small-firm workers were classified as low income, compared with 19 percent at larger employers. These workers often had access to public insurance programs or free care through safety-net providers, reducing the pressure on employers to offer benefits as a recruitment and retention tool. Other contributing factors included the proportion of part-time workers, the availability of public coverage alternatives, and local labor market conditions.

The Negligible Impact of Subsidies

The study found that a 30 percent premium subsidy would increase the proportion of small employers offering coverage by only 15 percent, from 40 percent to 46 percent. Among firms with fewer than 50 employees, about 16 million workers lacked coverage offers. Under a hypothetical 30 percent subsidy available to all non-offering firms nationally, roughly 1.5 million workers would gain access to employer-sponsored coverage, reducing the number without offers from 16 million to 14.6 million.

But even that modest number overstated the actual coverage impact. Since 59 percent of workers at small firms that did not offer insurance already had coverage through a spouse or a public program, only about 600,000 uninsured workers would actually receive new offers of coverage. And not everyone offered coverage would enroll. Other HSC research showed that roughly one in five low-income workers who were offered coverage declined it. Taking this into account, the net effect was that approximately half a million workers — about 3 percent of small-firm workers without existing coverage offers — would actually gain insurance as a result of the subsidy.

Policy Implications

The analysis identified two fundamental weaknesses in the employer-subsidy approach. First, small employers simply were not very responsive to premium reductions; subsidies would need to be extremely large to produce meaningful gains in coverage. Second, because subsidies went to the employer rather than to individual workers, they were poorly targeted. Of the 16 million small-firm workers lacking coverage offers, only 3 million (18 percent) were both uninsured and had family incomes below 200 percent of the poverty level. An employer-targeted subsidy would inevitably benefit many workers who were neither poor nor uninsured.

Some states had experimented with subsidizing premiums only for uninsured, low-income workers within a firm rather than subsidizing the employer. But evidence suggested that low-income individuals, like small employers, were also not particularly responsive to premium reductions. The study concluded that whether subsidies were directed at businesses or individuals, substantially reducing the number of uninsured through the employer-sponsored insurance system would require very large expenditures and would remain a difficult and costly undertaking.

Sources and Further Reading

AHRQ — Federal health care quality research agency.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research.

Commonwealth Fund — Research on health care quality.