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Through the Roof

You have two options: Find a way around skyrocketing health-care costs or start keeping more Kleenex around the office.
September 1, 2002
URL: http://www.entrepreneur.com/article/54612

In the mid-1990s, Ron Hatch, 56, owner of Hatch Furniture in Yankton, South Dakota, thought his health insurance costs were horrendously high. "Our premiums were rising at over 10 percent each year and were becoming one of our largest expenses," he says.

Then Hatch learned the true definition of horrendous. In the past three years, a confluence of factors has forced the furniture company's health insurance costs into the stratosphere. "Last year our premiums jumped by about 50 percent, since some insurance companies pulled out of South Dakota and more health-care rules were written into law," he says. Co-pays were raised for the furniture business's 28 employees. Unable to afford the higher fees, 19 workers no longer have employer-funded insurance, a move that could put their health in serious peril. The strategy backfired in terms of the budget as well: As the pool of insured individuals decreased, each person's premium rose, wiping out the savings Hatch was aiming for.

Hatch is hardly alone. Nationwide, small businesses are about to be swamped by a perfect storm of changes that should prompt drastically higher health-care costs for 2002, 2003 and beyond. A recent poll by consulting firm Hewitt Associates found that 99 percent of employers are "significantly or critically" concerned about rising health-care costs, which are turning into a crisis for many small companies. In fact, warns Steve Sobiek, executive director of the Independent Business Association of Wisconsin, unless small businesses quickly address this brewing hurricane, they could soon wind up paying more in health benefits than in salaries.

Ominous Changes Ahead

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.

$227
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.

Update
Capitol Hill has its hands full debating Association Health Plans, touted as one possible solution to the health-care crisis. Are AHPs a godsend, or a recipe for disaster? Read the latest news here.

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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Searching for Options

Small companies have scrambled frantically to hold down premiums, often with little success. Fazio began using health-care Web sites to compare benefit costs and has turned more to freelance contractors, reducing the number of workers she has to cover. Other entrepreneurs have restricted health benefits to employees who have been on the job for a certain period of time.

Like Hatch and Gore, numerous employers have raised deductibles and co-pays, or otherwise boosted employee contributions, to make staff more conscious of the cost of health care. (Many small-business owners have offered employees drug discount cards, sold by private companies, to take some of the sting out of higher deductibles.)

In some cases, entrepreneurs have stopped providing health insurance, but such a move alienates some employees, especially as the economy recovers and the labor market tightens. Indeed, a Hewitt poll found that employees rank health care as the most important benefit, and many workers are willing to switch companies simply to get it.

Other entrepreneurs are using Web sites like Healthmarket.com to customize their health plans or signing up for defined-contribution plans (also known as medical savings accounts), which are gaining popularity. Most defined-contribution plans combine a catastrophic coverage policy with a personal spending account administered by the employee. You place a lump sum of money--say, $1,500--into the account, which the employee uses to pay for routine medical care and drugs.

If the employee exhausts the lump sum, he or she pays for remaining medical expenses, up to a certain cap. Above that amount, catastrophic coverage begins and pays for 100 percent of costs. "Since the employee knows that at a certain point health care will come out of his pocket, he will exhibit the kind of cost-consciousness that doesn't exist now," says Scandlen.

60%
of small businesses with three to 24 employees offer health insurance.

SOURCE: The Kaiser Family Foundation: "National Survey of Small Businesses"

Do defined-contribution plans work? Faced with spiraling costs in December 2001, Ed Treick, president of S-F Analytical Laboratories, an environmental analysis firm in Milwaukee, let his employees vote on their benefits. They chose a defined plan from Golden Rule Insurance, one of the leading defined providers. (Other market leaders are Definity Health and Vivius.) Since then, he says, "I've seen some employees researching generic drugs on the Internet, sharing information about buying drugs in Canada, and thinking about other cost-saving ideas." For 2002, Treick, 62, expects his premiums to rise by less than half their 2001 increase.

Others are not so convinced. Gail Shearer, director of health policy analysis at Consumers Union, an independent research organization, says because defined-contribution plans appeal more to healthy people, who can save some of the lump sum, they may hurt less healthy workers and their employers. In fact, after S-F went to a defined plan, one of Treick's employees quit over concerns that his chronic allergies would incur large out-of-pocket costs. What's more, Taylor argues, defined-contribution plans force employees to make complicated health-care decisions. "Many workers don't have the time or skills to do all this research," he says. "They just want a few simple choices of plans."

Next Step

For more information on health insurance, check out the following:

  • www.ehealthinsurance.com: A detailed site that allows you to view and comparison shop most major health plans available in your state.
  • www.healthmarket.com: Provides an introduction to innovative ideas like medical savings accounts.
  • www.healthweb.org: A comprehensive site with information on major diseases, workplace injuries and preventive health measures.

Bargain-Hunting

Despite the grim situation, entrepreneurs are not out of ammunition in their battle against rising health-care costs. Small businesses can focus more on preventive care, says Patricia Halo, author of Managing Health Benefits in Small and Midsized Organizations. (AMACOM). "As an employer, you have to create a healthy environment if you hope to reduce chronic and catastrophic illnesses, which eat up most health-care dollars," Halo says. Halo recommends offering healthy breakfasts rather than coffee and doughnuts, holding educational sessions that teach employees about fitness and banning smoking in the workplace. "Employers have to be clear that the privilege of health insurance comes with the responsibility of taking care of your health," she says.

Halo also suggests that small businesses seek out state-funded health-care subsidies and use "report cards" put out by organizations like the National Committee for Quality Assurance, which analyze and compare health plans. "Most small businesses don't realize that many states pay for some health care for companies with few employees, or that some of their employees may be eligible for government programs like Child Health Plus [a New York children's health insurance program]," Halo says.

71%
of small businesses that offer health insurance provide employees with just one health plan option.

SOURCE: The Kaiser Family Foundation, "National Survey of Small Businesses"

Ultimately, many business owners believe the best way to keep health-care costs stable is to join association plans, in which small-business owners band together to give themselves more power to negotiate with insurers. Two years ago, Visual Edge Imaging Studios, a three-person imaging company in Dayton, Ohio, joined an association plan offered through the Greater Cleveland Growth Association. "The association plan has been by far the best option," says Visual Edge co-owner Randy Sowash, 38. "Under the association plan, our premiums rose by only $8 last year."

As in Ohio, trade associations already organize association plans in many other states, and in the next two years Congress may allow national trade groups to sell health insurance to their members. Halo estimates that a small business could reduce health-care costs by up to 25 percent by joining an association. She says: "When you're facing the craziness that is small-group insurance today, 25 percent could mean an enormous amount."

Online Exclusive: Under the Knife
Cut your health-care costs with these penny-pinching tips.
  • Hit the books: Research customized health plans that tailor drug benefits to small companies' needs, defined-benefit plans, or insurance agents who only serve the small-group market.
  • Put your staff on a diet: Offer fruit, bottled water and other healthy items to your work force; allow your employees time to eat lunch away from their desks so they can manage their stress levels and enjoy a healthy meal.
  • Pass the buck: To encourage workers' consciousness of health costs, raise deductibles and co-pays or choose a health plan that has much lower co-pays for generic drugs.
  • Join the crowd: Research association plans offered in your state. Because of their size, many association plans are exempt from state mandates that force insurance providers to pay out more in coverage.
  • Call the government: Phone your state health insurance office to see whether your business qualifies for health-care subsidies to small employers or minority-run businesses.

Joshua Kurlantzick covers trade and international economics for U.S. News and World Report

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