Small Business Health Plans

Wednesday, August 4, 2010 - 8:00pm

Legislation is being considered in the U.S. Congress (H.R. 525 and S. 406) to expand the availability of health coverage for employees of America's small businesses by allowing employers to join together through bona fide associations to buy health coverage under an small business health plan (SBHP), also known as an association health plan (AHP). By joining together, small employers will enjoy greater bargaining power, economies of scale, and administrative efficiencies. In this way, SBHPs will level the playing field and give participating small employers the advantages currently enjoyed by larger employers and unions.

  • Small businesses have little buying power and few affordable options — five or fewer insurers control at least three quarters of small group market in most states (GAO, 2002). This lack of competition is contributing to double-digit rate increases for many small businesses and a resulting rise in the number of small business employees who are uninsured.
  • SBHPs will provide more choice in the health insurance market place. In addition to self-funded plans, which will be required to comply with stringent solvency and stop-loss requirements, legislation currently under consideration will allow SBHPs to offer fully-insured plan options under a uniform set of rules across state lines. As a result, SBHP legislation will actually expand opportunities for insurance companies to serve small businesses.
  • Uniform federal regulation of SBHPs will help small businesses lower their administrative costs because, by operating under federal law, AHPs can avoid the costs of complying with 50 different sets of state benefit mandates. In addition, AHPs that are operating on a national level will be able to receive more favorable treatment from insurers.
  • SBHPs will make health insurance more affordable for small business through reduced premiums. The Congressional Budget Office (CBO) has estimated that small businesses obtaining insurance through SBHPs will experience premium reductions of 13% on average and up to 25% (CBO, January 2000). That's about $450 to $1250 saved per covered employee. Some companies might save enough on their insurance premiums to offset the increase in wages for their lowest-paid employees.
  • The smallest firms stand to save the most from SBHPs because their administrative costs, which account for a significant percentage of their expenses, will decrease. A January 2003 Small Business Administration (SBA) actuarial report shows that administrative expenses for insurers of small health plans make up 33-37 percent of claims. This compares with about 5-11 percent of claims for large companies' self-insured plans.
  • Because insurance will be more affordable, more small firms will provide it to their employees and families. According to the CONSAD Research Corporation, as many as 8.5 million previously uninsured workers would receive coverage if this legislation is enacted into law.