Though it hardly seemed it at the time, the mid-1990s actually were a period of relatively stable health insurance premiums, compared to the present day. In the early days of managed care, HMOs did keep costs down, premiums rose at a relatively consistent rate, and more insurers covered small businesses, says Greg Scandlen, senior fellow in health policy at the National Center for Policy Analysis, a think tank. Consequently, in the mid-1990s, more small businesses could afford to provide HMO or PPO coverage.
But in the past several years, the small-business health insurance market has changed radically, forcing entrepreneurs to make hard choices that could cost them crucial employees. According to Michael Taylor, senior health policy analyst at consulting group Towers Perrin in Valhalla, New York, doctors banding together into larger medical groups in the late 1990s were able to demand higher fees from the managed-care organizations. Meanwhile, insurers were starting to cover more expensive new health-care technologies, and loosened restrictions on pharmaceutical advertising allowed major drug companies to market prescription pharmaceuticals directly to consumers, a move that has pushed drug usage to unforeseen levels.
"The problem isn't so much the price [increases], but that we're unable to predict how much premiums are going to rise each year, so we can't develop a long-term plan," says Stacy Gore, president of Fullerton, California-based GM Packaging. To keep her company's health-care costs reasonable, Gore, 38, has doubled her employees' contributions over the past three years, while keeping the employer contribution fixed.
The average monthly per-employee cost of providing health insurance.
SOURCE: "Kaiser/HRET Employer Health Benefits Survey, 2001"
And many of the dynamics contributing to higher health costs are only going to get worse this year and next; combined with several key legislative, economic and social changes, they will create a storm that may hit small businesses with the steepest premium increases in history in 2003.
Perhaps most important, states and the federal government are introducing new mandates that various treatments be covered. Federal patients' rights legislation currently being debated also is expected to boost premiums. Meanwhile, insurance companies will increase commercial premiums to make up for reduced Medicare and Medicaid subsidies over the next five years.
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Small businesses were never able to handle premium increases as easily as large corporations, which often are self-insured and big enough to bargain for discounts. But in the past, entrepreneurs, virtually none of whom are self-insured, at least had a choice of agents and providers, who would offer minimal discounts to win clients.
No longer. "The small-group health insurance market is a disaster," says Taylor. "Large insurers are realizing that the small-business market is less profitable, and they're pulling out, leaving just a few insurers to handle all small businesses"--and possibly to jack up rates. Indeed, Gore notes it's difficult to find affordable health-care plans because so many carriers have pulled out of the California market. In Florida, the number of carriers covering small businesses has fallen from 100 to 26 since 1997. In Colorado this past March, Aetna abandoned the small-group market, leaving roughly 100,000 small businesses and self-employed workers scrambling to find new coverage.
Carolyn Fazio, chairwoman of Fazio International Ltd., a small Boca Raton, Florida-based public relations firm, has also seen firsthand how insurers fleeing the small-group market can cripple a business. "The worst thing about small-business health insurance is getting a legalese letter informing you that your insurer is dropping small groups and advising you that you have 60 days to change," says Fazio, 55, whose company was dropped by its insurer earlier this year. "I had to rush not only to get a new health plan but also to find an insurer who is linked to my doctors."
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