Where Do the Sick Go? Health Insurance and Enrollment in Small and Large Firms

Kanika Kapur, Susan Marquis, and Jose Escarce, RAND

Small firms that offer health insurance to their employees may face variable premiums if the firm hires an employee with high-expected health costs. To avoid expensive premium variability, a small firm may attempt to maintain a workforce with low expected health costs. This results in employment distortions. This proposal will examine the magnitude of these employment distortions using the Medical Expenditure Panel Survey from 1996 to 1999. We will estimate the magnitude of distortions in hiring, employment, and separations, and consider the role of worker demand. We will also explore the possibility that employment distortions for blacks relative to whites stems from the differential expected health status for these racial groups. Finally, we will examine the effect of state small group health insurance reforms that restrict insurers' ability to deny coverage and restrict premium variability on employment distortions in small firms relative to large firms. Estimating the magnitude of employment distortions in insured small firms, and understanding the effect of small group regulation on these distortions inessential in refining reforms to the small group health insurance market.