More Small Firms Offer Health Insurance but Fewer Employees Enroll

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.

More Small Firms Offer Health Insurance but Fewer Employees Enroll

Data Bulletin No. 10 | Winter 1998

Concerns about the ability of employment-based insurance to play a central role in providing health coverage had long focused on the willingness and capacity of small firms to offer health insurance to their workers. The news on that front was encouraging: during the 1990s, small firms (defined as those with fewer than 200 employees) became more likely to offer health insurance. According to employer survey data, the share of small firms providing coverage for workers grew from 46 percent in 1989 to 49 percent in 1996. This increase was most pronounced among the smallest firms -- those with fewer than 10 employees. Health insurance also became more uniformly available across regions; in 1989, there had been greater disparities, with firms in the Northeast more likely to offer coverage than those in other parts of the country.

This positive trend was more than offset, however, by a decline in the proportion of employees actually enrolling in employer-based coverage. The net result was a decline in the rate of employment-based health coverage overall. This pattern held true for workers at large firms as well. Findings from a household survey using data from 1987 and 1996 confirmed the trend.

Enrollment Trends

The percentage of employees in small firms who enrolled in their firms' health plans dropped from 72 percent in 1989 to 66 percent in 1996. This decline was relatively uniform across all small firms and was also observed among large firms. Additional evidence of employees' diminished interest in coverage came from the employer side: when small firms that did not offer health insurance were asked for their main reasons, 33 percent in a 1996 survey said it was because employees were not interested -- up from 29 percent in 1989.

Why were employees turning down coverage? The primary factor was the sharp increase in employee contributions. This increase was driven by two forces: rising premiums and employers requiring employees to pay a larger share of those premiums. On average, the monthly employee contribution for family coverage in small firms jumped from $34 in 1988 to $175 in 1996 -- an average annual increase of 23 percent.

These contributions had been growing faster than wages. The problem was compounded by the fact that the employees most sensitive to these cost increases were those with the lowest earnings, who had also seen the smallest wage gains in recent years. For many of them, health insurance had simply become unaffordable.

Implications for Policy Makers

These findings suggested that health policy makers might need to reconsider their approach to addressing the problem of uninsurance. Much of the policy effort up to that point had focused on encouraging small firms to offer health insurance coverage, and there had been some progress on that front. But the growing gap between health insurance costs and employee earnings was taking a significant toll on coverage rates.

With most forecasts predicting that health insurance premiums would resume growing faster than incomes, this dynamic was likely to worsen. Making progress in containing health care costs was probably more important to expanding or preserving the rate of health insurance coverage than many had previously believed.

This Data Bulletin is based on data from KPMG Peat Marwick's national survey of employers of all sizes (Health Benefits in 1993 and Health Benefits in 1996) and from the Health Insurance Association of America in 1989. The KPMG and HIAA surveys used a similar questionnaire, sample design, and set of statistical weights. Survey interviews were conducted by telephone.

This Data Bulletin is adapted from "Tracking Small-Firm Coverage, 1989-1996," by Paul B. Ginsburg, John R. Gabel, and Kelly A. Hunt, which appeared in the January/February 1998 issue of Health Affairs.

Note

Cooper, P. F., and B. S. Schone. "More Offers, Fewer Takers for Employment-Based Health Insurance: 1987 and 1996." Health Affairs (November/December 1997): 103-110.

Sources and Further Reading

Ginsburg, P. B., Gabel, J. R., and Hunt, K. A. "Tracking Small-Firm Coverage, 1989-1996." Health Affairs, January/February 1998. Cooper, P. F. and Schone, B. S. "More Offers, Fewer Takers for Employment-Based Health Insurance: 1987 and 1996." Health Affairs, November/December 1997.