Through the Roof

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.

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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.

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."

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