health-exchanges-simplify-insurance-payments-for-small-businesses

LIFY INSURANCE PAYMENTS FOR SMALL BUSINESSES

Heavy Doses

by Mark Henricks

Main

Pfizer Spending Big Bucks in the Beltway

Recent Blog Posts

011 8:14am EDT

National Health Plan Relieves Businesses' Insurance Headaches

The national health plan will help small businesses avoid overpaying for coverage.

Image: iStockphoto

Small businesses overpay for health insurance by 29 percent because of excess complexity, confusion, and industry pricing practices that lead small employers to frequently change carriers.

That’s the finding of a new study suggesting the situation could be eased by health insurance exchanges called for under the national health plan.

Lead researcher James Rebitzer of the Boston University School of Management said that while investigating why small businesses changed carriers so often, they found a surprising variety of policies, lack of clear information about choices, and exceedingly variable pricing. “There’s an enormous spread of prices,” Rebitzer told Portfolio.com. “It’s just unbelievable.”

The paper, which appeared in the August issue of the American Economic Review, found that search frictions—which happen when excess complexity and lack of information make it difficult to find suitable choices—are behind the high prices charged to small businesses:

A hallmark of markets with search frictions is that the law of one price breaks down. Instead of competition forcing all insurers to offer similar plans at a similar low price, frictions enable many insurers to profitably pursue high-margin, low-volume strategies. The net effect is that consumers end up paying more for their health insurance—29 percent more on average in the small-group market—and insurers spend more on marketing.

Rebitzer said that currently small businesses have limited options for better managing health insurance costs. Unlike big employers, which self-insure and hire insurance companies to design and manage their plans, small employers rely on insurers for everything. What they get, Rebitzer said, is an unreasonably confusing array of choices. “One of the things we found was that the variety of health care plans is just way more than you’d expect as an economist,” he says. “It looks like there are way too many plans.”

Business owners can either attempt to educate themselves about plan features and pricing or, as most do, rely on a broker. However, Rebitzer notes, brokers are paid by the carriers, so their advice lacks independence. “Trust, but verify,” he said of using a broker.

More substantial help may come in 2014, when health insurance exchanges are set to come into existence under the Affordable Care Act. The exchanges will likely require simpler, more standard policies, and that should lead to more standardized and lower prices, Rebitzer said. “The part of the market that’s really messed up is the part that affects small businesses and individuals,” he said. “That’s where the Affordable Care Act is going to make its biggest difference.”