Health of a Nation Entrepreneurs are sick of sky-high health insurance premiums, and the government is scrambling for reform. But can Uncle Sam save the deteriorating state of health care?

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 severalpotential reforms that he believes could lower premiums and improveaccess to care. For one, Bush has pushed for the expansion ofassociation health plans (AHPs). AHPs would let business tradegroups offer health insurance plans to their members. Theassociation plans would be exempt from state insurance regulations,which can add costs to small employers' premiums; many largeemployers are already exempt from these state regulations. Intheory, by banding together in AHPs, small employers couldnegotiate with insurers for better rates. Congressional staffersexpect an AHP bill to pass Congress this year, since Bush isexpected to push for it.

Bush has also focused on health savings accounts, or HSAs. Inone presidential debate, he said, "Health-care costs are onthe rise because the consumers are not involved in thedecision-making process. It's one of the reasons I'm astrong believer in health savings accounts." HSAs combine ahigh-deductible health plan with a savings account so employees cansave the money allotted if they don't spend it on care. Theyfirst became officially available in 2004. By giving consumers theability to judge the costs and benefits of their health coverage,and to save the unspent money (HSAs can be taken with workers fromjob 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 somewhatlikely to offer their employees a high-deductible health plan withan HSA by 2006. Employees may not welcome the news. According to astudy by Washington, DC, benefit consulting firm Watson WyattWorldwide released in January, less than one third of workers whohave health insurance know what HSAs are. Once respondents weregiven an explanation of the plans, 57 percent said they did notwant to pay higher deductibles.

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

The Net Effect

Will these ideas actually slow spiraling costs? Opinion remainssharply divided. "Though they were reluctant at first, nearlyevery insurance company in the United States now has a healthsavings account project on the market," says Greg Scandlen, anexpert on HSAs at the Galen Institute, a health policy researchgroup based in Alexandria, Virginia. "As the market grows,you'll see competition among the insurers, and it will start tobuild momentum. As more companies use HSAs, you'll begin to seesavings."

Some experts and entrepreneurs, however, think HSAs still havemajor flaws. Raymond Arth, president of Avon Lake, Ohio-basedPhoenixProducts, a faucet manufacturer that sells to mobile homes andRVs, believes the U.S. medical system is not yet set up to allowconsumers this kind of choice. "If you're shopping for amajor purchase, say an automobile, you have access to reliable dataneeded to make an informed choice," says Arth, 53. "Ifyou need to have a [medical procedure], the [doctor] can'tquote a price, you can't check his or her 'performanceratings,' and there is no meaningful information about theoutcomes produced by the facility where the procedure will bedone."

Others think the savings accounts won't help lower-incomeworkers. "HSAs are for the healthiest and wealthiest withoutchronic problems," says Joel Marks, executive director of theAmerican SmallBusiness Alliance, based in Washington, DC. He fears sickeremployees would not choose plans where they had to pay such a highdeductible. Small companies with sicker employees might then findtheir premiums rising.

Some evidence supports Marks' claims. In a 2004 KaiserFamily Foundation study, more than three-quarters of respondentshad an unfavorable opinion of high-deductible health plans, andmany feared such plans would leave them vulnerable to high medicalbills. And a July 2004 study by the Center for Studying HealthSystem Change, a Washington, DC, nonpartisan policy researchorganization, found employers worried about how they could possiblyprovide enough health-care education to employees to help them makeeducated choices under an HSA.

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

Gail Wilensky, a senior fellow and health policy expert atProject HOPE, an international education foundation based inMillwood, Virginia, says AHPs don't offer the kind ofpurchasing power some expect because many small firms groupedtogether are a greater risk than one large company. "Idon't think you'll find that 1,000 small groups can operatelike one big company," Wilensky says.

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

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

Looking Long Term

Despite a potential flurry of activity in Congress, long-termsolutions remain elusive. Employers will likely continue passingalong costs to employees, but premiums probably won't leveloff. "In 1998, we paid $161.09 per individual for healthcare," 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 stillgoing to try to make sure our plan is as good as can be, butgovernment has to do something more."

Policy experts suggest that in addition to AHPs and HSAs, thepresident must focus on health-care cost drivers, such as statemandates and the cost of prescription drugs and hospital care. TheEmployee Benefit Research Institute estimates that new medicaltechnology is the most important long-term driver of health-carecosts.

Other important considerations include how the system covers thesickest Americans, generally estimated to account for 70 percent ofhealth-care spending, and whether employers should be able topurchase health insurance from companies anywhere in the country. Anew bill in Congress, the Health Care Choice Act, would allowcompanies to purchase from insurers anywhere in the United States,not just in their home states. Until all this happens, AlexMann--and other entrepreneurs like him--will just hang on. "Weconsidered AHPs a few years ago, and there were no savings,"Mann says. "We've tried hard to keep our benefit expensesdown. We have hefty out-of-pocket expenses, and this problem isonly going to get worse." He sighs. "We still have ourgoals 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 forme."

Information, Please

With so much new legislation on health care coming out, and withrates continuing to rise, many entrepreneurs are unsure where toturn for information. The following resources could provehelpful:

• For broader analysis of trends in care, try larger researchorganizations like the Kaiser Family Foundation, which studies issues rangingfrom health-care costs to access to insurance coverage. Kaiser alsokeeps 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 researchorganization that focuses on applied solutions to health insuranceproblems.

• A number of organizations have begun to provide informationon HSAs already on the market. The HSA Insiderprovides basic information about HSAs and HSA providers and alsooffers updated news articles about HSA legislation. Other sitesthat collate information about HSAs and provide information aboutthe specifics of HSA rules include www.treasury.gov/offices/public-affairs/hsa/ andwww.hsaresourcecenter.com. For up-to-date informationon the number of American businesses and American consumers usingHSAs, consult the Center for Consumer Driven Health Care.

Joshua Kurlantzick is a writer in Washington, DC.