Trends in Managed Care Coverage in Small Firms

Small employers were slow to embrace managed care, but by the mid-1990s, managed care came to dominate the small-employer market at levels nearly equal to large firms. An analysis of health plan market shares across employer sizes revealed that 71 percent of small firms and 75 percent of large firms offered some form of managed care arrangement. For this analysis, managed care includes health maintenance organizations (HMOs), point-of-service (POS) plans, and preferred provider organizations (PPOs). The growth was dramatic: in 1988, managed care represented just 12 percent of coverage in the small-employer market.

A significant driver behind managed care's rapid expansion in small firms was the decisions made by employers themselves. In a growing number of cases, workers at small companies simply lost the option of enrolling in traditional indemnity plans, pushing managed care enrollment upward by default rather than by choice.

Options Limited in Small Firms

Although options expanded somewhat after 1988, employees at small firms still had far fewer health plan choices than their counterparts at large companies. In 1988, only 10 percent of workers at small firms could choose between two or more plans; by 1996, that share had risen to 21 percent. Meanwhile, 60 percent of employees at large firms had a choice of multiple plans in 1988. While this figure dipped to 54 percent by 1996, large-firm workers still enjoyed significantly greater selection compared with those at smaller companies.

The decline of conventional plan availability hit small firms particularly hard. In 1988, 92 percent of employees at small firms had access to a conventional insurance plan. By 1996, only 33 percent retained that access -- a stunning 59-percentage-point drop over eight years. Large firms saw erosion too, but at a more measured pace: from 89 percent in 1988 down to 57 percent in 1996.

Out-of-Pocket Costs Higher in Small Firms

Workers at small firms shouldered a substantially larger portion of their health insurance premiums than employees at large firms, and most of this gap widened during the period under study. In 1988, employees at small and large firms contributed 12 percent and 13 percent, respectively, toward single coverage premiums, and 34 percent and 29 percent toward family coverage. By 1996, the picture had shifted markedly: small-firm employees were paying 33 percent of their single coverage premium (versus 22 percent at large firms) and 44 percent of the family coverage premium (versus 30 percent at large firms).

In dollar terms, the average monthly employee contribution for single coverage at small firms climbed at an annualized rate of 21 percent -- from $12 in 1988 to $56 in 1996. Monthly family coverage contributions jumped at a 23 percent annual rate, rising from $34 to $175 over the same period. By comparison, total premiums grew at roughly 8 percent per year. The gap between premium growth and the rate at which employee contributions were increasing meant that costs were being shifted from employers to workers at small firms far more aggressively than at larger companies.

A Perspective on Trends

Small firms moved to managed care at a rapid pace, partly because they entered the shift later than large employers. The speed and nature of this transition may help explain some of the growing backlash against managed care during this period. In 1988, nearly all employees at both small and large firms could enroll in a conventional plan. By 1996, that option had shrunk drastically -- especially at small firms. The implication is straightforward: in 1988, most workers who chose a managed care plan did so because they preferred it to a conventional alternative. Eight years later, with conventional plans vanishing from the market, a substantial number of enrollees found themselves in managed care not by preference but by necessity.

People who ended up in managed care plans without choosing them freely were understandably more likely to chafe at the restrictions these plans imposed, such as limited provider networks and gatekeeping requirements. This forced migration into managed care -- particularly pronounced at small employers -- likely contributed to the mounting public frustration with managed care that characterized the late 1990s.

Sources and Further Reading

This Data Bulletin draws on data from KPMG Peat Marwick's national employer surveys, Health Benefits in 1993 and Health Benefits in 1996, as well as survey data from the Health Insurance Association of America (HIAA) from 1988. The KPMG and HIAA surveys employed comparable questionnaire designs, sampling methods, and statistical weighting procedures. All survey interviews were conducted by telephone.

This Data Bulletin is adapted from "Small Employers and Their Health Benefits, 1988-1996: An Awkward Adolescence," by Jon R. Gabel, Paul B. Ginsburg, and Kelly A. Hunt, published in the September/October 1997 issue of Health Affairs.