Size Matters: The Health Insurance Market for Small Firms (review)

Jill Mathews Yegian, Size Matters: The Health Insurance Market for Small Firms. Brookfield, VT: Ashgate, 1999. 171 pp. $64.95 cloth.

About one-half of firms with fewer than ten workers offer health insurance coverage to their workers. Forty-three million Americans lack health insurance. These two facts are, to paraphrase Daniel Webster, "one and inseparable." About 40 percent of the uninsured come from households in which the head of household works for a firm with ten or fewer workers. In Size Matters: The Health Insurance Market for Small Firms, Jill Mathews Yegian, currently a senior program officer at the California HealthCare Foundation, provides a comprehensive and well-written analysis of the difficulties of bringing coverage to workers in the nation's small businesses. Although most of the analysis pertains to the experience in California in the 1990s, the lessons apply to virtually every state in the nation.

The book consists of three chapters, each one different in focus and addressed to a different discipline. Aimed at health policy analysts, the first chapter provides a synthesis of the performance of the small-group market. The second chapter will be of greatest interest to political scientists, as Yegian provides a history and political analysis of the adoption of legislative reforms in the small-group market in California. The final chapter is directed at economists, as Yegian undertakes an econometric analysis of employee choice in the California purchasing cooperative.

In the first chapter, Yegian synthesizes the essential reasons for the poor performance of employer-based health insurance in the small-employer market. Administrative costs for small employers constitute nearly 40 percent of every premium dollar that employers pay. Among larger employers, administrative expenses constitute less than 10 percent of each premium dollar. Commissions to insurance brokers account for nearly 9 percent of the premium dollar, whereas among the largest employers, such commissions constitute less than 0.1 percent of the premium dollar. Lack of size translates into reduced bargaining power by small firms, but greater risk variability for health insurers. One sick patient in a small firm guarantees that a health insurer will suffer a financial loss with regard to the account. Hence, the rational strategy for a health insurer is to cull out employees of small firms with serious health problems, and to price its policies to reflect the health status of workers and their families. One result of such a strategy is that those with the greatest need for coverage are precisely the people that insurers will designate as uninsurable.

The strength of this and the other chapters is not the presentation of new findings, but the ability to synthesize a lengthy literature concisely into salient points. This is clearly evident when Yegian describes the two schools of thought about the ideal way to price insurance. Yegian notes,

Economists have tended to overemphasize the ability of prices to achieve efficiency in the health insurance market and have endorsed "actuarial fairness"--premiums that reflect individual risk as surely as possible--to avoid incentive distortions. . . . Researchers from other disciplines have tended to see the proper function of health insurance as the redistribution of wealth from the healthy to the sick, advocating a single premium regardless of risk level--moral fairness over risk-adjusted premiums. (15)

I doubt if any elected official--no matter how strong his or her faith in private enterprise and unfettered market competition--would dare espouse publicly the actuarial fairness doctrine. In fairness to some economists who have advocated actuarial fairness, such as Mark Pauly, these economists would supplement actuarial fairness with a policy of income transfers from the healthy to the sick and from high-income to low-income families. To design such an administrative mechanism to carry out these income transfers offers a healthy challenge, but not so formidable as the political problem of selling such a mechanism to the public.

The first chapter offers...