Small Mass. Firms Still Seeking Affordable Insurance

When Massachusetts passed its landmark healthcare reform law in 2006, some observers expected that it would lead to a drop in employer-provided coverage, especially among small firms, because the legislated penalty for not providing insurance--$295 per worker per year-was much lower than the cost of coverage. But this has not proved to be the case. In fact, the percentage of Massachusetts adults who get health insurance through their employer has actually increased 5 percentage points to 70 percent.

The biggest factor appears to be competition among employers for workers. Because everyone in Massachusetts has to buy insurance, or face a stiff penalty, employers feel they have to offer coverage to keep good employees. Yet with state unemployment at 8.8 percent, only a percentage point below the national average, Massachusetts has nearly as much slack in its labor market as most other states do. So the willingness of small companies, in particular, to cover their workers is remarkable.

All of this bodes well for President Obama's reform plan, which is largely patterned after Massachusetts'. But there's a rub: Massachusetts small business owners complain that insurance is becoming increasingly unaffordable as they grapple with double-digit annual rate increases. Massachusetts Governor Deval Patrick is hoping the legislature will approve a plan to allow small businesses to purchase insurance collectively to hold down costs.

What's confusing about this situation is that Massachusetts already has a quasi-public entity, the Commonwealth Health Insurance Connector Authority, that was supposed to make it easier for small businesses and individuals to find affordable policies The Connector does seem to be doing that for individuals. What happened to small companies?

As it turns out, the Connector is only just now pilot-testing a solution for small employers. Under the Commonwealth Choice Contributory Plan, firms will be able to make a defined contribution to help employees buy a plan off a menu provided by the Connector. If employees purchase a plan that costs more than the contribution, they pay the difference. That might help, but it hasn't happened yet. Meanwhile, small firms continue to see their premiums rise much faster than those those of big companies.

To make matters worse for small employers, the 2006 reform law combined the small-group and nongroup (i.e., individual) insurance markets in Massachusetts. While this brought down rates for individuals, it raised them for small companies. A state commission estimated that the regulatory change would increase small-group premiums by 1 to 4 percent.

Even if the state legislature does pass a bill allowing small businesses to purchase insurance through a nonprofit coalition, it should take a careful look at how similar purchasing alliances worked in California and elsewhere when they were in vogue in the mid-1990s. Unless they are carefully designed, these alliances will not provide small firms with much relief. And unless those companies can find affordable insurance, the prediction that they will drop coverage might yet come true.