Cutting Back But Not Cutting Out

Originally published as Issue Brief No. 56 by the Center for Studying Health System Change (HSC), October 2002. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Small Employers Respond to Premium Increases

Rising premiums and a sluggish economy raised urgent questions in the early 2000s about the potential erosion of employer-sponsored health insurance, particularly for the more than 46 million Americans employed by small firms. Workers at small companies have historically had less access to employer-sponsored coverage than their counterparts at larger organizations. When the Center for Studying Health System Change carried out its third round of site visits to 12 nationally representative metropolitan areas in 2000 and early 2001, researchers found that while outright cancellation of coverage remained unusual among small employers, many took aggressive steps to contain costs. These measures included shifting a larger portion of premiums onto employees, raising copayments and deductibles, switching insurance products and carriers, and trimming benefit packages. As the national economy continued to weaken, the prospect that small employers would cut coverage even further loomed large, threatening to push affordable health care beyond the reach of millions of working families.

Small Employers Face Higher Premiums

The accelerating cost of health coverage drove small employers to make consequential changes to the insurance they provided their workforce. Premium increases hit all companies hard in 2000 and 2001, but small firms bore a disproportionate burden, absorbing an average premium increase of 14.5 percent in 2001 alone. While large employers generally responded with modest adjustments such as tweaking cost-sharing arrangements, small firms often had far fewer financial resources to absorb the blow. Across most of the 12 communities HSC studied, small employers adopted more drastic measures: boosting the employee share of premium costs, raising cost-sharing requirements, changing products and carriers, cutting the scope of covered services, imposing stricter eligibility standards, and in some cases pulling back from their traditional role in providing insurance altogether.

The degree to which individual employers relied on each of these strategies varied considerably across markets. But the overarching pattern was unmistakable: even during a period of relative economic strength, workers at small firms were shouldering a growing financial burden for their health care.

Higher Employee Premium Contributions

In more than half the communities studied, small employers began requiring employees to pick up a larger share of the insurance bill during 2000 and 2001. Many of these firms had set their premium contributions as a fixed percentage of the total cost, which automatically passed along a portion of any premium increase to workers. Some went further, reducing the percentage they contributed outright. A smaller number abandoned percentage-based contributions altogether, instead making a fixed-dollar contribution toward premiums and leaving employees to cover any costs above that amount. This approach effectively shifted the full weight of annual premium increases directly onto workers.

A particularly troubling development was the decision by some small employers to eliminate all contributions for dependent coverage. By refusing to subsidize family premiums, these companies discouraged employees from enrolling spouses and children and created the conditions for adverse selection, since healthier families might forgo coverage entirely, leaving the insured pool sicker and more expensive. In Miami, insurance brokers reported this trend was most pronounced among firms with one to 10 employees, where few workers opted for dependent coverage once employer contributions disappeared.

More Cost Sharing

Small firms across all 12 communities looked to higher deductibles, copayments, and coinsurance as tools to blunt premium increases. The rationale was straightforward: by placing a greater financial burden on employees who actually used services, employers could reduce the current year's premiums and potentially curb utilization, moderating future cost growth as well. In Syracuse, insurance brokers noted that plans had tacked on hospital-stay deductibles ranging from $200 to $500. Boston-area plans bumped office-visit copayments from $5 to $10. In Little Rock, Arkansas, some small employers pushed coinsurance levels as high as 40 or 50 percent.

The most frequently cited change in out-of-pocket costs was the spread of three-tier prescription drug benefits. Under this structure, consumers paid progressively higher amounts for generic medications, preferred brand-name drugs, and nonpreferred brand-name drugs. Some employers also replaced flat-dollar copayments for prescriptions with percentage-based coinsurance, pushing workers' pharmacy costs even higher.

Changing Plans and Carriers

Small employers generally had more flexibility than large firms to switch insurance products and carriers. As premiums climbed in 2000 and 2001, some small businesses moved to cheaper, more restrictive plan types to keep net premium growth in check. In Orange County, California, employers shifted from preferred provider organizations (PPOs) to point-of-service products, while in Cleveland some swapped PPOs for health maintenance organizations (HMOs). Other small employers discovered they could lower their premiums simply by changing carriers, and with costs rising rapidly, more firms found themselves shopping for better deals each renewal cycle.

While switching products or carriers kept coverage in place, it imposed real costs on consumers. Changing plans, especially moving to managed care options, could disrupt established doctor-patient relationships. Workers whose employers switched to HMOs sometimes found that their physicians were not part of the new network, forcing a choice between finding a new doctor or paying the full cost of visits out of pocket.

Fewer Services, Tighter Eligibility Rules, but Plans Stay In

Neither small nor large employers leaned heavily on reductions in covered services to counteract premium hikes. In some markets, however, small employers began chipping away at benefits. Some Miami plans dropped coverage for fertility treatment, and Indianapolis firms weighed scaling back mental health benefits. At the same time, both large and small employers reconsidered their eligibility criteria. Large companies discussed ending retiree coverage, and the relatively few small firms offering retiree benefits considered the same. In several communities, small employers imposed tighter rules for employee and dependent eligibility. Syracuse firms extended the waiting period before new hires could enroll, and respondents in Phoenix and Boston anticipated similar moves. Small employers in Miami and Greenville, South Carolina, went a step beyond dropping premium contributions for dependents and eliminated dependent coverage entirely, alarming policy makers concerned about a growing uninsured population.

Despite widespread speculation that employers would abandon coverage entirely, HSC found little evidence of that during the 2000-01 site visits. One notable exception surfaced in Little Rock, where some small employers allowed employees to use pretax dollars to purchase individual insurance on their own. While this arrangement sometimes served as a vehicle for sharing the cost of coverage, the Little Rock firms in question required workers to bear the entire cost of policies in the more expensive individual market.

Implications for Coverage

Even amid the prosperity of 2000 and early 2001, small employers' responses to rising premiums were making health coverage and care more costly for workers and their families. Larger employee premium shares and tighter eligibility rules amplified the financial burden of obtaining coverage, while increased cost sharing and narrower benefits strained the budgets of those who managed to remain insured. Census Bureau data confirmed a decline in the share of individuals at firms with fewer than 25 employees who received employer-sponsored coverage in 2001. Rising premiums also may have deterred some firms from beginning to offer coverage for the first time.

A fresh wave of even steeper premium increases arrived after the site visits as the U.S. economy remained weak. With financial pressures mounting, small employers were expected to cut back further on health insurance offerings. Some would likely continue the incremental changes observed during 2000 and 2001. Others, having exhausted their cost-containment tactics, might decide to drop coverage altogether, worsening the national uninsured crisis and fueling future cost increases.

Small Firms Struggle to Buy Coverage

Health insurance generally costs more for companies with fewer than 50 workers, and many lack the resources to sustain robust benefit packages. In 2001, just 62 percent of small firms offered health insurance, compared with 97 percent of larger employers. Even when small companies did provide coverage, enrollment rates lagged behind those at big firms. Workers at small companies typically earned lower wages, which made it harder for them to afford premiums even when insurance was available. Research from the period showed that only 74 percent of employees at firms with fewer than 10 workers enrolled in their company's health plan, compared with 84 percent at firms with more than 100 employees.

Sources and Further Reading

U.S. Census Bureau, County Business Patterns, 2000. | Trude, Sally, et al., "Employer-Sponsored Health Insurance: Pressing Problems, Incremental Changes," Health Affairs, Vol. 21, No. 1 (January/February 2002). | The Henry J. Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits: 2001 Annual Survey. | Cooper, Philip F., and Barbara Steinberg Schone, "More Offers, Fewer Takers for Employment-Based Health Insurance: 1987 and 1996," Health Affairs, Vol. 16, No. 6 (November/December 1997). | U.S. Census Bureau, Health Insurance Coverage: 2001.