Small businesses overpaying for health insurance, researchers say

John Egan

Small businesses are overpaying for health insurance, according to a new article in the American Economic Review.

The article highlights the difficulties that small employers have in searching for health insurance. Troubles that they encounter with comparison shopping boost average health insurance premiums for small businesses by 29 percent, the article says.

“Consumers have hundreds, sometimes thousands, of different options, and each plan has its own unique set of benefit details,” Case Western Reserve University researcher Mark Votruba says.

“In this complex environment, it’s hard for consumers to find the plan that offers them the best value. What our paper shows is that this ‘shopping problem’ has important implications for how market competition plays out. If consumers have a hard time evaluating value, competition becomes less about value and more about marketing.”

Vortuba was joined in his research by Randall Cebul, also of Case Western Reserve; James Rebitzer of Boston University; and Lowell Taylor of Carnegie Mellon University.

The researchers observed what’s referred to as “search frictions” in health insurance. Search frictions arise whenever consumers are unable to easily compare all the options available to them in the marketplace. This is exactly the case for buyers of individual and small-group health insurance plans, according to the researchers’ article.