The impact of the health insurance market on small firm employment

Small firms that offer health insurance to their employees may face variable premiums if they hire employees with high expected health costs. To avoid expensive premium variability, small firms may attempt to maintain a work-force with low expected health costs. This results in employment distortions. I examine the magnitude of these employment distortions using the 1987 National Medical Expenditure Survey and the 1996 Medical Expenditure Panel Survey. Based on the underwriting behavior of insurance companies in 1988, I classify medical conditions into three categories: conditions that led to denial of coverage; conditions that led to exclusion restrictions; and, conditions that led to higher premiums. In 1987, I find that insured small firms were less likely to employ workers with families that had conditions that led to higher premiums than insured large firms. However, in 1996, possibly due to the passage of small group health insurance reforms that restrict insurers' ability to exclude or deny coverage, insured small firms were less likely to employ workers with denial conditions compared to insured large firms. These results suggest that the pattern of employment distortions in insured small firms is consistent with the evolving small group health insurance market.