January 2001

Grant Results

SUMMARY

Starting in September 1991, researchers at the Pittsburgh Research Institute, Pittsburgh, compared the health care costs and use for employees at small firms and individual health plan subscribers with employees at large firms.

The researchers sought to provide private insurers with the necessary empirical information to develop insurance products for small firms and individuals that were comparable in benefit design and price to those for larger firms.

They also sought to arm policymakers with data to evaluate the potential impact of various private health insurance market reform options.

Key Findings

  • Employees at small firms use health care services at a rate similar to employees at large firms.
  • Mid-sized firms (50 to 500 employees) actually had lower per-subscriber health care costs than either small or large firms.
  • These findings suggest that community rating — whereby insurers charge firms of all sizes a uniform premium rate based on community use of health care instead of the firm's employees' use of health care — would actually decrease insurance costs for many large firms.
  • Small firms would also see a decrease in insurance costs, while mid-sized firms, on average, would see their premiums rise.

Funding
The Robert Wood Johnson Foundation (RWJF) supported this project with two grants totaling $569,647 between September 1991 and July 1996.

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THE PROBLEM

If one employee in a firm with 15 employees incurs large medical expenses, the effect on the average cost of health care for each member of that small group is much larger than if that employee was one among 5,000.

To temper such effects, often insurers charge higher per-person premiums to insure employees of small firms (less than 50 employees) and individuals than they do to insure employees of large firms (more than 500 employees). As a result, many small firms and individuals cannot afford to purchase health insurance; employees of small firms and individuals make up a significant proportion of the uninsured in the United States.

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THE PROJECT

The objective of the project was to understand how the health care costs and utilization for employees at small firms and individual health plan subscribers compare with that of employees at large firms. Researchers at the Pittsburgh Research Institute (PRI), which was attached to Blue Cross of Western Pennsylvania, examined a database of Blue Cross of Western Pennsylvania and Pennsylvania Blue Cross. (When Blue Cross transferred control of the Institute to Duquesne University, the grant was transferred as well.)

The Blue Cross database included claims for inpatient, outpatient, major medical, and physician services for employees at nearly 29,000 firms and more than 54,000 individual health plan subscribers who were paying for their own insurance. Employees of small firms comprised 29 percent of the subscribers in the database, while employees of large firms accounted for approximately 36 percent of subscribers; 35 percent were individual subscribers.

All subscribers in the database had similar benefits. The benefits covered inpatient and outpatient diagnostic and therapeutic care, as well as ancillary services.

The researchers sought to provide private insurers with the necessary empirical information to develop insurance products for small firms and individuals that are comparable in benefit design and price to those for larger firms; and to arm policymakers with data to evaluate the potential impact of various private health insurance market reform options.

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FINDINGS

The researchers found that employees at small firms use health care services at a rate similar to employees at large firms. Mid-sized firms (50 to 500 employees) actually had lower per-subscriber health care costs than either small or large firms did. The investigators found several variables that were significant predictors of higher health care costs: age, gender, overall health status, and type of hospital used by the subscriber.

Individuals over the age of 55, women, and individuals with chronic health conditions incurred higher annual health care costs. Small and large firms employed the highest percentage of individuals over age 55, partly explaining their higher health care costs.

Contrary to popular belief, these findings suggest that community rating — whereby insurers charge firms of all sizes a uniform premium rate based on community use of health care instead of the firm's employees' use of health care — would actually decrease insurance costs for many large firms. Small firms would also see a decrease in insurance costs, while mid-sized firms, on average, would see their premiums rise.

The study team views community rating, with some form of risk adjustment that takes into account the higher costs for an insurer that covers more potentially "high-cost" subscribers (e.g., older, more chronic conditions), as a feasible approach to increasing access to health insurance while making it affordable for everyone.

The researchers also studied the effect of including firms of different sizes in community-rated pools. They found that a community-rated pool of small and mid-sized firms would have lower per-enrollee health care costs in a given year than a pool of large firms. Adding individuals who purchase insurance directly for themselves into any community-rated pool would increase health care costs significantly — from 3.4 percent to approximately 11 percent per year, depending on the size of the firms in the pool.

Wanda Young, Sc.D., principal investigator for the study, said the findings provide vital information that could help the United States. "move forward with the implementation of community rating in conjunction with risk adjustment." Co-investigator Neil Hollander, Vice President of Blue Cross of Western Pennsylvania, added that "getting coverage for employees and dependents at small companies and for individuals really requires an administrative and structural solution rather than a solution based on something inherent in the size of the company."

Communications

The study's data was provided to the Consortium for Political and Social Research, University of Michigan, on a public-use data tape.

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GRANT DETAILS & CONTACT INFORMATION

Project

Comparative Analysis of Small vs. Large Group Health Care Use and Costs

Grantee

The Pittsburgh Research Institute (Pittsburgh,  PA)

  • Amount: $ 512,607
    Dates: September 1991 to November 1993
    ID#:  018731

Contact

Project Director: Wanda W. Young, Sc.D.
(412) 255-7825

Grantee

Duquesne University (Pittsburgh,  PA)

  • Transfer grant
    Amount: $ 57,040
    Dates: June 1996 to July 1996
    ID#:  029720

Contact

Project Director: Sean McLinden, M.D.
(412) 396-4500

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Report prepared by: Karin Gillespie
Reviewed by: Marian Bass
Reviewed by: Molly McKaughan
Program Officer: Nancy L. Barrand

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