Adverse selection in health insurance markets? Evidence from state small-group health insurance reforms

The past decade witnessed major changes in state laws governing the sale of health insurance to small employers. States took measures to restrict insurers' ability to distinguish between high and low-risk customers because of concern about the low rate of coverage among workers in small firms, the high prices in the small-group market and the absence of federal health reform. Using both individual-level and employer-level data, I test predictions about the effect of reforms on the employer-provided health insurance market. I estimate these effects for small firms and their workers using large firms and their workers in the same states, as well as large and small firms and their workers in non-reform states, as comparison groups. I find the reforms decreased the rate of employer coverage on average for workers in small firms by less than two percentage points. Within small firms, low-expenditure individuals experienced a larger decline in the rate of coverage through their employer, while the coverage rate of high-expenditure individuals rose slightly in some specifications. There is also evidence that comprehensive reforms increased premiums slightly for small employers, and that most of this increase was passed on to workers through higher employee contributions.