From the April 2000 issue of Entrepreneur

When Kiersty Lombar was shopping for health insurance for the seven employees of her year-old online coffee and gourmet-foods company, she faced two challenges. "We had limited funding, yet we needed a competitive benefit package to recruit people," she recalls. Lombar, 27, worked with an online insurance broker to find the right plan. She finally settled on a Preferred Provider Organization (PPO), a form of managed care that offers more freedom and a wider range of choices than the traditional health maintenance organizations (HMOs).


Today, Lombar's company, The Perk.Com, offers generous health-care benefits. The Austin, Texas-based company pays 100 percent of its employees' costs and 60 percent for spouses. "It's important for us to take care of our employees," reasons Lombar. "We see this as a recruiting and retention tool. Even though we felt like we were at the mercy of the insurance companies, we decided it was something we couldn't cut back on."


To offset the cost of health insurance, The Perk.Com keeps tight control on salaries and other overhead. No fancy offices for this Internet start-up. "We don't have a whole lot of beautiful furniture in our offices," says Lombar. "Health coverage is more important to us."


Ellen Paris is Entrepreneur's "Management Smarts" columnist.

Stiff Competition

Lombar's dilemma is shared by millions of America's entrepreneurs, who are wrestling with one of the tightest job markets in years and double-digit annual health-care cost increases this year.

Finding and keeping good employees these days means offering plenty of competitive benefits, something small employers historically haven't had to do. "Most small businesses I represent feel helpless," observes Keith Rosenbaum, an attorney specializing in health care at Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone in Irvine, California. "They see the health-care benefit as required because they can't attract good workers without it. It's like high-tech companies not offering stock options. The health benefit has become just as important in attracting a talent pool."

The pressure for small employers to offer health-care benefits is increasing. An emerging trend as the labor market continues to tighten: Low-wage hourly workers, the largest group of uninsured, are now being offered health-care benefits by employers ranging from day-care providers to restaurant owners.

Nearly everyone wants and expects health-care benefits today, says Randy Myer, who teaches entrepreneurial policy at New York City's Pace University. "Unlike other benefits, [health insurance] is attractive to many workers because it crosses the age and gender spectrums."

Myer, 52, who founded and still owns shares in Norwalk, Connecticut-based Best Friends Pet Care, a national pet-care company, offered health-care coverage to his hourly workers to reduce turnover and to help in recruiting. It worked. "Many employees said they stayed with us because of the health-care coverage," he says.

If you're forced to shift a greater portion of the premium costs to your employees, it's better to offer some coverage than no coverage, say experts. "Even if employees have to pay a large portion of the premium, it will still be cheaper for them than individual coverage," advises Don Gasparro, managing director of Apex Management Group, a health-care consulting firm in Princeton, New Jersey.

But merely offering a health-care plan may not be enough in today's especially competitive job market. "Your plan has to be competitive with other employers, even much larger ones," Gasparro adds. "You have to see what kind of provider network is around your office and your employees' homes so your people can use it." Matching your particular employees' specific needs with a plan's benefits will save you time and money and also help your employees get the most out of a plan.

Bigger Is Better

Finding a health plan that meets your employees' needs is only the first step. You may also need to offer some of the bigger and better benefits larger companies provide, because they're often vying for the same workers. But, of course, large companies enjoy a significant cost advantage when it comes to health-care benefits, making for a less than even playing field.

The Health Research and Educational Trust says health-care costs for larger employers rose 4 percent between spring 1998 and spring 1999. "Smaller employers faced a very different experience," says Jon Gabel, vice president of the organization. The costs for small companies rose about twice as fast. "It's not that employees of small employers were sicker," explains Gabel. "Many large employers self-insure, while small ones have to purchase their insurance from health insurance companies."

Larger cost increases are on the horizon. This year health-care premiums are expected to rise 12 to
20 percent for smaller employers and 8 to 14 percent for larger ones, according to Matt Quade, a vice president at employee-benefits provider AON Consulting's Bethesda, Maryland, office.

What's behind it all? "All the [managed care] companies were fighting for market share throughout the nineties by underpricing their products. Now it's catch-up time," says Gabel. "The small employer is the one who is paying for it."

In other words, the lower-priced products many managed-care companies came into new markets with have been hurting their bottom lines in recent years. They now see from experience how much the real costs are. According to Weiss Ratings Inc., over half the country's HMOs lost money in 1998-and those combined losses approached half a billion dollars.

Small employers have few options and little purchasing power when it comes to buying their companies' health-care coverage. "Rising costs hit small employers right between the eyes. They have no control when rates go up, and there's little they can do about it," says Patricia Halo, author of Managing Health Benefits in Small & Mid-Sized Organizations (Amacom), president of Halo Associates and founder of the Wellness Institute in New York City, which provides benefits consulting services and work-site wellness programs. One sick employee in a small work force can wreak havoc on the group's rates. "Carriers look at the track record of small groups very carefully," Halo adds.

Another issue: Several states have enacted legislation that makes it illegal to deny a group member coverage. While this has helped people obtain coverage who might have been rejected before, it's added another cost factor to the mix for business owners. "Since the states got involved in legislating health insurance in the last five years, we've seen many carriers pulling out of the small-group market," explains Edith Livingstone, a vice president at AON Consulting. And typically, less choice means higher prices.

Another detail adding to the consistently growing costs are state mandates such as those requiring infertility treatments to be part of health plans. That means an employer whose work force has little or no use for certain costly treatments must still provide them. "Small businesses are the ones underwriting state mandates. They get socked with paying the additional costs of each new mandated state benefit," says Richard Coorsh of the Health Insurance Association of America, an industry trade association whose members include 290 health insurance carriers. Because many large companies self-insure and don't buy coverage in the standard marketplace, they are largely exempt from these state mandates.

Prescriptive Measures

No question about it, small employers are in a tough spot. But don't despair. "No matter what you hear, small employers are not powerless; they do have options," stresses Halo. Those options include reducing benefits, shifting more of the premium cost to your employees, requiring employees to pay higher co-payments when they visit a doctor, switching from a PPO to an HMO, and covering only employees rather than including family members.

One area ripe for possible savings is prescription drug coverage. In recent years, drugs as treatment have been winning out over more costly invasive procedures. So it's no surprise the cost of prescription drugs has risen rapidly, with insurance carriers passing those cost increases on to employers. Over the last several years, prescription-drug-plan premiums have risen as much as 50 percent, says Ivy Silver, an employee benefits broker in Jenkintown, Pennsylvania.

To offset the cost increases of drug coverage, employers are now asking employees to pay larger co-payments at the pharmacy, says Silver. "Instead of paying $5 per prescription, maybe they're paying $20. That will save some money on your monthly premium," he says.

Silver suggests a "take and give" strategy. If you feel you need to take away a benefit, give back a small one. "For example," says Silver, "if you increase an employee's co-payment, you can increase the vision-care benefit to maybe 70 cents a month per employee."

A trend in the prescription drug area is for small employers to go with a drug card that requires a $5 co-payment for generic drugs, a $20 co-payment for name brands and a $35 co-payment for any drug not on an approved list. "Patients with prescription-drug plans were pressuring their doctors to write them prescriptions for certain brand-name drugs," explains Silver. "They go into the doc's office saying, 'I only want [that brand-name drug], it's the best.' They don't have any idea of the specific differences between the drugs." In the past, says Silver, drug companies marketed almost exclusively to medical professionals, but today, with omnipresent, name-brand drugs advertising in print and on the airwaves, people regularly demand the name brands-and some doctors are giving them what they want, regardless of whether it's cost-effective or not. The drug card's purpose is to curtail that practice.

Meanwhile, the health insurance industry is bringing a variety of new products to market aimed at addressing problems faced by small employers. Aetna U.S. Health Care, for example, introduced its Affordable Health Choices last summer. This plan doesn't have the comprehensive coverage of more expensive plans. "Our intent was to put something into the marketplace to get the attention of small employers, especially ones who had not offered anything before," explains Mike Cardillo, Aetna U.S. Health Care's president.

WellPoint Health Networks, one of the country's largest health-care companies, now offers two group products for small busineses, a Premier plan for businesses offering rich benefits, and an Employee Elect plan for more affordable, employee-selected coverage. "We need to do everything possible to make plans affordable so employers can provide benefits in a price range they can afford," says David Ludwig, a WellPoint senior vice president.

Wisely managing your health-care costs may mean making tough choices in other areas, such as compensation. "I think, over time, we won't see wages grow as fast as they otherwise would because of health-care costs," says Paul Fronstin, senior research associate at the Employee Benefit Research Institute.

It's also important to review your health plan regularly-before you get that notice of a premium increase. Halo advises clients to "look five to six months ahead and anticipate cost increases so you're not surprised. You need to put the idea of rising health-care costs into the mix of your overall compensation. If you do your employee reviews and give 10 to 20 percent increases and then a few months later get stuck with a big increase in your health-care coverage, it's a double whammy."

Capitol Intervention

Health-care costs and insurance coverage have garnered lots of attention on Capitol Hill in recent years. The best-known and most far-reaching piece of legislation is the so-called Patient's Rights Bill. This bill includes a provision allowing the insured the right to sue both his or her group health plan and, by extension, his or her employer. This issue is a political football, and no one knows what, if any, bill will ultimately be enacted. At press time, House and Senate bills were on hold.

The liability issue has the health insurance industry clearly worried. If enacted, many in the insurance industry fear it would trigger an explosion of litigation. Predicts health-care attorney Keith Rosenbaum: "Suing your HMO will be the next big wave in liability lawsuits. The trial lawyers will be lining up to sue insurance companies." Many industry observers feel that patient-rights legislation could have the unintended consequence of pushing up the number of uninsured Americans because employers will simply not be able to afford health-care coverage on account of the liability exposure. Last fall, the U.S. Chamber of Commerce surveyed 769 companies on the topic and found that 25 percent would terminate their health insurance coverage if the right to sue was enacted.

Expect to hear lots of talk about health-care access and containing costs during this election year. No matter what Congress passes, keep your eyes and ears open-it will impact your business.

Contact Sources

Aetna U.S. Healthcare, 980 Jolly Rd., Blue Bell, PA 19422, (215) 775-4800

AON Consulting, (301) 280-7500

Apex Management Group, (609) 452-2488, http://www.apexmgmt.com

Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone, 2 Park Plaza, #850, Irvine, CA 92614,(949) 474-1880

The Commonwealth Consulting Group Inc., (215) 884-2600, isilver@tccgroup.com

Employee Benefit Research Institute,http://www.ebri.org

Encore Images Inc., (800) 868-4568

Health Insurance Association of America, (202) 824-1787, http://www.hiaa.org

Health Research and Educational Trust, (312) 422-2632;

U.S. Chamber of Commerce, (202) 659-6000, http://www.uschamber.com

Weiss Ratings Inc., (800) 289-9222, http://www.weissratings.com

WellPoint Health Networks,http://www.wellpoint.com