From the March 2005 issue of Entrepreneur

Like The Who's Pete Townshend, Alex Mann, CEO of Clicktime.com, a San Francisco applications services provider that makes products to track time sheets and expenses, could not imagine he'd ever get old.

"It's common in the high-tech business--companies never [think] about employees aging, or making any trade-offs of benefits when employees have spouses and kids," says 36-year-old Mann, who founded his company in 1995. When Mann started Clicktime.com, "we hoped to offer a corporate package in which employees wouldn't have to contribute at all to insurance premiums."

But as costs rose--10 to 15 percent per year over the past six years--and young IT employees started getting married and having children, Mann found health care was swallowing his firm's profits, even though he has just seven employees. "We ask employees to come up with higher deductibles, we shop health insurers, but still, this year we're going to have to look at the issue of coverage again," says Mann.

Mann is hardly unique. Since 2001, health insurance premiums have risen by some 60 percent, according to the Kaiser Family Foundation. In 2004, average per-employee costs for health care rose by 7.5 percent, despite companies' efforts to transfer costs to employees by raising deductibles and co-pays. Census data shows that in 2003, 45 million Americans were uninsured, the largest number since the statistics for uninsured individuals were first compiled in 1987. Many of the uninsured work for small companies, which are less able to absorb rising health-care costs. The Kaiser Family Foundation has found that only 63 percent of small firms offer health coverage, while almost all big companies do. Worse, estimates suggest that U.S. spending on health care is likely to nearly double between now and 2013.

As a result, in the 2004 presidential race, both Senator John Kerry and President George W. Bush made health-care reform a central plank in their domestic agendas. Now, with Bush's re-election and larger Republican majorities in the House and Senate, the stage is set for some of the president's health reform ideas to pass Congress. Rick Renzi, a second-term Arizona congressman focused on small-business issues, says the GOP wins mean that, over the next two years, Congress has an opportunity to really push significant change. Entrepreneurs can't wait much longer.

AHPs and HSAs

On the campaign trail, President Bush emphasized several potential reforms that he believes could lower premiums and improve access to care. For one, Bush has pushed for the expansion of association health plans (AHPs). AHPs would let business trade groups offer health insurance plans to their members. The association plans would be exempt from state insurance regulations, which can add costs to small employers' premiums; many large employers are already exempt from these state regulations. In theory, by banding together in AHPs, small employers could negotiate with insurers for better rates. Congressional staffers expect an AHP bill to pass Congress this year, since Bush is expected to push for it.

Bush has also focused on health savings accounts, or HSAs. In one presidential debate, he said, "Health-care costs are on the rise because the consumers are not involved in the decision-making process. It's one of the reasons I'm a strong believer in health savings accounts." HSAs combine a high-deductible health plan with a savings account so employees can save the money allotted if they don't spend it on care. They first became officially available in 2004. By giving consumers the ability to judge the costs and benefits of their health coverage, and to save the unspent money (HSAs can be taken with workers from job to job), HSAs may prompt consumers to use care more wisely, thereby cutting costs.

In a March 2004 study by Mercer Human Resource Consulting, nearly 75 percent of employers said they are very or somewhat likely to offer their employees a high-deductible health plan with an HSA by 2006. Employees may not welcome the news. According to a study by Washington, DC, benefit consulting firm Watson Wyatt Worldwide released in January, less than one third of workers who have health insurance know what HSAs are. Once respondents were given an explanation of the plans, 57 percent said they did not want to pay higher deductibles.

Bush plans to expand HSA utilization, partly by offering tax credits to small companies that contribute to employees' HSAs. He has also proposed extending tax credits for low-income health-care purchasers and has suggested capping the amount employers buying traditional insurance can spend tax-free--a means of encouraging them to shift to HSAs.

The Net Effect

Will these ideas actually slow spiraling costs? Opinion remains sharply divided. "Though they were reluctant at first, nearly every insurance company in the United States now has a health savings account project on the market," says Greg Scandlen, an expert on HSAs at the Galen Institute, a health policy research group based in Alexandria, Virginia. "As the market grows, you'll see competition among the insurers, and it will start to build momentum. As more companies use HSAs, you'll begin to see savings."

Some experts and entrepreneurs, however, think HSAs still have major flaws. Raymond Arth, president of Avon Lake, Ohio-based Phoenix Products, a faucet manufacturer that sells to mobile homes and RVs, believes the U.S. medical system is not yet set up to allow consumers this kind of choice. "If you're shopping for a major purchase, say an automobile, you have access to reliable data needed to make an informed choice," says Arth, 53. "If you need to have a [medical procedure], the [doctor] can't quote a price, you can't check his or her 'performance ratings,' and there is no meaningful information about the outcomes produced by the facility where the procedure will be done."

Others think the savings accounts won't help lower-income workers. "HSAs are for the healthiest and wealthiest without chronic problems," says Joel Marks, executive director of the American Small Business Alliance, based in Washington, DC. He fears sicker employees would not choose plans where they had to pay such a high deductible. Small companies with sicker employees might then find their premiums rising.

Some evidence supports Marks' claims. In a 2004 Kaiser Family Foundation study, more than three-quarters of respondents had an unfavorable opinion of high-deductible health plans, and many feared such plans would leave them vulnerable to high medical bills. And a July 2004 study by the Center for Studying Health System Change, a Washington, DC, nonpartisan policy research organization, found employers worried about how they could possibly provide enough health-care education to employees to help them make educated choices under an HSA.

AHPs have even less support in the health policy community. "AHPs are something I always shake my head in wonderment at because they don't seem to have a lot going for them," says Paul Ginsburg, president of the Center for Studying Health System Change.

Gail Wilensky, a senior fellow and health policy expert at Project HOPE, an international education foundation based in Millwood, Virginia, says AHPs don't offer the kind of purchasing power some expect because many small firms grouped together are a greater risk than one large company. "I don't think you'll find that 1,000 small groups can operate like one big company," Wilensky says.

"Large employers have centralized payroll and data systems that make enrollment and disenrollment [in insurance plans] simple," agrees Scandlen. "An association of small employers has none of these advantages."

What's more, says Wilensky, in previous state-by-state attempts at AHPs, "there have been instability problems--the groups lose or gain members who jump ship out of the AHP when they get a better individual policy." Worse, since AHPs would be run through local business groups, they could be vulnerable to fraud, already a major problem in the insurance industry.

Looking Long Term

Despite a potential flurry of activity in Congress, long-term solutions remain elusive. Employers will likely continue passing along costs to employees, but premiums probably won't level off. "In 1998, we paid $161.09 per individual for health care," says Peter Perez, co-owner of Carter Products Co. Inc., a 15-person manufacturing firm in Grand Rapids, Michigan. This year, it's $377.40. Says Perez, "We're still going to try to make sure our plan is as good as can be, but government has to do something more."

Policy experts suggest that in addition to AHPs and HSAs, the president must focus on health-care cost drivers, such as state mandates and the cost of prescription drugs and hospital care. The Employee Benefit Research Institute estimates that new medical technology is the most important long-term driver of health-care costs.

Other important considerations include how the system covers the sickest Americans, generally estimated to account for 70 percent of health-care spending, and whether employers should be able to purchase health insurance from companies anywhere in the country. A new bill in Congress, the Health Care Choice Act, would allow companies to purchase from insurers anywhere in the United States, not just in their home states. Until all this happens, Alex Mann--and other entrepreneurs like him--will just hang on. "We considered AHPs a few years ago, and there were no savings," Mann says. "We've tried hard to keep our benefit expenses down. We have hefty out-of-pocket expenses, and this problem is only going to get worse." He sighs. "We still have our goals of trying to provide as much coverage as possible. Right now, I don't care about the specifics of congressional legislation. Whatever plan actually changes things, that's the best plan for me."

Information, Please

With so much new legislation on health care coming out, and with rates continuing to rise, many entrepreneurs are unsure where to turn for information. The following resources could prove helpful:

  • For broader analysis of trends in care, try larger research organizations like the Kaiser Family Foundation, which studies issues ranging from health-care costs to access to insurance coverage. Kaiser also keeps up-to-date on news about health-care legislation.
  • For analysis of new ideas on the health-care frontier, try the Center for Studying Health System Change, a nonpartisan research organization that focuses on applied solutions to health insurance problems.

Joshua Kurlantzick is a writer in Washington, DC.