DOES LIMITING ALLOWABLE RATING VARIATION IN THE SMALL GROUP HEALTH INSURANCE MARKET AFFECT EMPLOYER SELF‐INSURANCE?

• Author: Erin Trish,Bradley Herring
• Date: 01 September 2018
• Published date: 01 September 2018
• DOI: http://doi.org/10.1111/jori.12184

DOES LIMITING ALLOWABLE RATING VARIATION

IN THE SMALL GROUP HEALTH INSURANCE MARKET

AFFECT EMPLOYER SELF-INSURANCE?

Erin Trish

Bradley Herring

ABSTRACT

The Affordable Care Act (ACA) imposes adjusted community rating in

the small group market, which employers can avoid by self-insuring,

raising concerns about adverse selection. We evaluate the impact of

limiting allowable rating variation on employer self-insurance across

industries with varied health risk, using cross-state variation in pre-ACA

rating regulations, the nationally representative 2008–2013 KFF/HRET

Employer Health Benefits Survey, and a triple-difference regression

approach. We find that lower risk employers subject to laws limiting

allowable premium rating variation have a predicted probability of self-

insurance that is about 18 percentage points higher than otherwise-

similar higher risk employers, suggesting that these selection concerns

are warranted.

Erin Trish is an Assistant Research Professor at University of Southern California Price School

of Public Policy, Schaeffer Center for Health Policy and Economics, Verna and Peter Dauterive

Hall 412G, 635 Downey Way, Los Angeles, CA 90089. Trish can be contacted via

e-mail: etrish@healthpolicy.usc.edu. Bradley Herring is an Associate Professor of Health

Economics at Johns Hopkins Bloomberg School of Public Health, Department of Health Policy

and Management, 624 North Broadway, Room 408, Baltimore, MD 21205. Herring can be

contacted via e-mail: herring@jhu.edu. This research was supported by Grant No. 72672 from

the Robert Wood Johnson Foundation’s Policy Relevant Insurance Studies (PRIS) initiative. We

thank Gary Claxton, Anthony Damico, and Matthew Rae of the Kaiser Family Foundation for

their input and assistance with the KFF/HRET Employer Health Benefits Survey data. We are

grateful for helpful comments by two anonymous reviewers, David Bishai, Linda Blumberg,

Chrissy Eibner, Darrell Gaskin, Mark Kelly, Sarah Miller, John Romley, Steven Sheingold

Antonio Trujillo, Chapin White; seminar participants at CCIIO, Colorado School of Public

Health, an RWJF HCFO grantee briefing, UCLA, University of Chicago, Vanderbilt University;

and conference participants at Academy Health’s Health Economics Interest Group, Academy

Health’s ARM, the American Society of Health Economists, Association for Public Policy

Analysis and Management, and Southern Economic Association.

© 2016 The Journal of Risk and Insurance. Vol. 85, No. 3, 607–633 (2018).

DOI: 10.1111/jori.12184

607

INTRODUCTION

The 2010 Patient Protect ion and Affordable Care Ac t (ACA) introduced signi ficant

changes to the regulatio n of private health insuran ce products for the nonelderly

U.S. population. While these reforms have argu ably been most pronounce d to

date in the individual m arket, the ACA also inclu des many changes affecting

the small group market. The small group market is th e portion of the market

for employer-sponsore d insurance composed of pol icies sold to employers with

typically 50 or fewer wor kers.

1

About 13.5 million worke rs and dependents

were covered by small grou p market policies in 2015 (M arkFarrah Associates,

2016). Moreover, the sma ll group market represent s the potential market for

employer-sponsored i nsurance coverage for th e vast majority of employe rs, as

approximately 96 percent o f U.S. employers have 50 or fewer workers (Kaiser

Family Foundation, 2014).

The ACA imposes new guaran teed issue and adjusted co mmunity rating

regulations on both indiv idual and small group mark et policies. As of 2014,

insurers cannot deny cov erage, cannot adjust pr emiums based on health st atus or

gender, and can only vary premiums within limits according to age, family

composition, geograp hy, and tobacco use. Additi onally, plans are subject t o new

minimum essential heal th benefits requirements, metallic tier le vels associated with

actuarial values, fede ral premium tax assessments, and risk adjustment . While

enrollment in these newly regulated policies in t he individual market has g rown to

nearly 10 million (ASPE, 201 5), the implementation of th ese regulations has largel y

been delayed in the small group market and will take effect over the next several

years.

2

1

Although we use the term “employer” rather than the term “firm” throughout this article to

avoid confusion between an employer/firm offering health insurance coverage to its workers

and an insurer/firm selling coverage to employers, there is an important distinction between

the terms “firm” and “establishment” here. An “establishment” refers to a single location,

while the term “firm” refers to a business entity that could include multiple establishments

under common ownership or control. The number-of-employees thresholds to define the

small group market use the firm’s size rather than the establishment’s size, and so our use of

the term “employer” here applies to firms rather than establishments. Moreover, our empirical

analysis primarily uses the KFF/HRET Employer Health Benefits Survey, and it is a firm-level

survey.

2

Despite the fact that these regulations were originally intended to apply to small group market

policies sold beginning January 1, 2014, most small group market plans are not yet subject to

these regulations because they are grandfathered (i.e., they existed and have not been

significantly changed since March 23, 2010) and/or because the Department of Health and

Human Services gave states and issuers the flexibility to renew noncompliant plans through as

late as October 1, 2016 (Health and Human Services, 2013, 2014). Details on states’ decisions

related to these delays are provided in Lucia et al. (2014). Moreover, issuers can effectively

delay the impact of regulations for an additional year by renewing an annual policy just before

the new regulations take effect (O’Donnell, 2013).

608 THE JOURNAL OF RISK AND INSURANCE