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In the early 1990s, over 40 states passed legislation designed to limit a number of exclusionary practices by insurers in the small group market in order to improve the availability and affordability of health insurance to employees in small firms. In this paper, we address the effects of reform on the likelihood that workers are offered insurance, have employment-based coverage, or are policyholders of an employment-based plan. We use differences-in-differences (DD) and differences-in-differences-in-differences (DDD) estimators to evaluate the differential effects of alternative reform measures on high and low risk workers. We generally find little effect of reform on offer rates and find that, in states with the most stringent reform, employment-based coverage and policyholder rates increased for high risk workers relative to low risk workers. Our results also indicate that the effects of reform varied significantly by the extent to which states adopted guaranteed issue.

Improving the availability and affordability of health insurance to employees in small firms has been a focal point of efforts to reform the employment-related health insurance system and to reduce the number of uninsured Americans. This focus on the small group market is a consequence of the low insurance coverage rates of employees in small firms. It also reflects a concern that market failure—driven by insurer issuance, underwriting, and rating practices—has limited the availability of insurance coverage and made the costs of coverage excessive even for small groups of standard health risks. In the early 1990s, over 40 states passed legislation designed to limit a number of exclusionary practices by insurers in the small group market. Included in such legislation were measures to guarantee the issue and renewal of health insurance policies to small firms, to regulate premiums and their rate of increase, to constrain the time limits associated with preexisting condition exclusions, and to ensure the continuity of coverage for small firm employees and their families. Although such measures were intended to assure access to coverage in the small group market and to control its price, other changes that occurred during this period, such as increased employee premium sharing and stagnant real wages, may have constrained the ability of some workers to take advantage of coverage made available through small group reform. In this paper, we assess the degree to which small group market reform has affected employee health insurance coverage. We examine the effect of reform on three key aspects of insurance coverage: (1) the likelihood that a worker is offered coverage; (2) the likelihood that a worker is covered by employment-based insurance; and (3) the probability that a worker is a policyholder of such coverage. Since the expected impacts of reform are likely to be different depending on the health risk of individuals, we focus on differential effects of reform by health status. Our analysis, which uses both differences-in-differences (DD) and differences-in-differences-in-differences (DDD) estimators, exploits the variation in reform provisions across states, over time, and by firm size (in the DDD specification) to isolate the impact of reform.

Reform of the small group health insurance market represents an incremental regulatory approach designed to address a number of perceived exclusionary and selective pricing practices of insurers. At the same time, such reform has sought to target a group of employees that are most likely to lack health care coverage. Despite the intent of small group insurance reform to lower premiums and improve access to coverage for small firm employees, the ultimate effects of reform may vary across individuals depending upon whether they are at high risk or low risk to incur above average health care expenses. The existing body of research regarding the impact of reform on coverage and premium levels (e.g., Jensen and Morrisey, 1997, Buchmueller and DiNardo, 2002, Simon, 1999 and Simon, 2000), provides little evidence that reform has precipitated an adverse selection death spiral in the small group market. Although our point estimates suggest somewhat more sensitivity of insurance coverage to the features of small group reform than others have found, we still find the overall effects of reform to be relatively modest. However, our findings, along with those of Simon (1999) also suggest that the modest effects of reform found by other researchers (Nichols et al., 1997, Buchmueller and Jensen, 1997, Hall, 1999, Jensen and Morrisey, 1997, Hing and Jensen, 1999, Sloan and Conover, 1998 and Zuckerman and Rajan, 1999) may actually mask the differential outcomes experienced by specific population subgroups. Taken together, both studies suggest the importance of evaluating the impact of reform across groups of varying health risk. Moreover, our results regarding the presence of guaranteed issue of more than one health plan suggest that efforts by policymakers to ensure access to coverage for high risk employees may require additional initiatives to ensure that insurers are not engaging in risk selection. Finally, it is important to note that many of the reforms were implemented in the early 1990s. As reforms remain in existence for longer periods, and as more data become available, researchers will have the opportunity to examine adjustments to small group reform beyond the initial responses of employers and employees. For example, little is known about the effects of reform on two-worker families who may adjust their insurance choices. Additional data may also permit an evaluation of the contribution of individual reform components so that the effectiveness of specific types of reform packages can be better assessed. In the meantime, it is clear from the existing body of research that the beneficial effects of reform have been relatively modest and that small group reform may have had a differential impact on low risk and high risk workers.