Poor Health If you're waiting on the government or anyone else to do something about the rising costs of health benefits, face facts: If you want costs cut right, you have to cut them yourself.

When Kiersty Lombar was shopping for health insurance for theseven employees of her year-old online coffee and gourmet-foodscompany, she faced two challenges. "We had limited funding,yet we needed a competitive benefit package to recruitpeople," she recalls. Lombar, 27, worked with an onlineinsurance broker to find the right plan. She finally settled on aPreferred Provider Organization (PPO), a form of managed care thatoffers more freedom and a wider range of choices than thetraditional health maintenance organizations (HMOs).

Today, Lombar's company, The Perk.Com, offers generoushealth-care benefits. The Austin, Texas-based company pays 100percent of its employees' costs and 60 percent for spouses."It's important for us to take care of ouremployees," reasons Lombar. "We see this as a recruitingand retention tool. Even though we felt like we were at the mercyof the insurance companies, we decided it was something wecouldn't cut back on."

To offset the cost of health insurance, The Perk.Com keeps tightcontrol on salaries and other overhead. No fancy offices for thisInternet start-up. "We don't have a whole lot of beautifulfurniture in our offices," says Lombar. "Health coverageis more important to us."

Ellen Paris is Entrepreneur's "ManagementSmarts" columnist.

Stiff Competition

Lombar's dilemma is shared by millions of America'sentrepreneurs, who are wrestling with one of the tightest jobmarkets in years and double-digit annual health-care cost increasesthis year.

Finding and keeping good employees these days means offeringplenty of competitive benefits, something small employershistorically haven't had to do. "Most small businesses Irepresent feel helpless," observes Keith Rosenbaum, anattorney specializing in health care at Berger, Kahn, Shafton,Moss, Figler, Simon & Gladstone in Irvine, California."They see the health-care benefit as required because theycan't attract good workers without it. It's like high-techcompanies not offering stock options. The health benefit has becomejust as important in attracting a talent pool."

The pressure for small employers to offer health-care benefitsis increasing. An emerging trend as the labor market continues totighten: Low-wage hourly workers, the largest group of uninsured,are now being offered health-care benefits by employers rangingfrom day-care providers to restaurant owners.

Nearly everyone wants and expects health-care benefits today,says Randy Myer, who teaches entrepreneurial policy at New YorkCity's Pace University. "Unlike other benefits, [healthinsurance] is attractive to many workers because it crosses the ageand gender spectrums."

Myer, 52, who founded and still owns shares in Norwalk,Connecticut-based Best Friends Pet Care, a national pet-carecompany, offered health-care coverage to his hourly workers toreduce turnover and to help in recruiting. It worked. "Manyemployees said they stayed with us because of the health-carecoverage," he says.

If you're forced to shift a greater portion of the premiumcosts to your employees, it's better to offer some coveragethan no coverage, say experts. "Even if employees have to paya large portion of the premium, it will still be cheaper for themthan individual coverage," advises Don Gasparro, managingdirector of Apex Management Group, a health-care consulting firm inPrinceton, New Jersey.

But merely offering a health-care plan may not be enough intoday's especially competitive job market. "Your plan hasto be competitive with other employers, even much largerones," Gasparro adds. "You have to see what kind ofprovider network is around your office and your employees'homes so your people can use it." Matching your particularemployees' specific needs with a plan's benefits will saveyou time and money and also help your employees get the most out ofa plan.

Bigger Is Better

Finding a health plan that meets your employees' needs isonly the first step. You may also need to offer some of the biggerand better benefits larger companies provide, because they'reoften vying for the same workers. But, of course, large companiesenjoy a significant cost advantage when it comes to health-carebenefits, making for a less than even playing field.

The Health Research and Educational Trust says health-care costsfor larger employers rose 4 percent between spring 1998 and spring1999. "Smaller employers faced a very differentexperience," says Jon Gabel, vice president of theorganization. The costs for small companies rose about twice asfast. "It's not that employees of small employers weresicker," explains Gabel. "Many large employersself-insure, while small ones have to purchase their insurance fromhealth insurance companies."

Larger cost increases are on the horizon. This year health-carepremiums are expected to rise 12 to
20 percent for smaller employers and 8 to 14 percent for largerones, according to Matt Quade, a vice president atemployee-benefits provider AON Consulting's Bethesda, Maryland,office.

What's behind it all? "All the [managed care] companieswere fighting for market share throughout the nineties byunderpricing their products. Now it's catch-up time," saysGabel. "The small employer is the one who is paying forit."

In other words, the lower-priced products many managed-carecompanies came into new markets with have been hurting their bottomlines in recent years. They now see from experience how much thereal costs are. According to Weiss Ratings Inc., over half thecountry's HMOs lost money in 1998-and those combined lossesapproached half a billion dollars.

Small employers have few options and little purchasing powerwhen it comes to buying their companies' health-care coverage."Rising costs hit small employers right between the eyes. Theyhave no control when rates go up, and there's little they cando about it," says Patricia Halo, author of Managing HealthBenefits in Small & Mid-Sized Organizations (Amacom),president of Halo Associates and founder of the Wellness Institutein New York City, which provides benefits consulting services andwork-site wellness programs. One sick employee in a small workforce can wreak havoc on the group's rates. "Carriers lookat the track record of small groups very carefully," Haloadds.

Another issue: Several states have enacted legislation thatmakes it illegal to deny a group member coverage. While this hashelped people obtain coverage who might have been rejected before,it's added another cost factor to the mix for business owners."Since the states got involved in legislating health insurancein the last five years, we've seen many carriers pulling out ofthe small-group market," explains Edith Livingstone, a vicepresident at AON Consulting. And typically, less choice meanshigher prices.

Another detail adding to the consistently growing costs arestate mandates such as those requiring infertility treatments to bepart of health plans. That means an employer whose work force haslittle or no use for certain costly treatments must still providethem. "Small businesses are the ones underwriting statemandates. They get socked with paying the additional costs of eachnew mandated state benefit," says Richard Coorsh of the HealthInsurance Association of America, an industry trade associationwhose members include 290 health insurance carriers. Because manylarge companies self-insure and don't buy coverage in thestandard marketplace, they are largely exempt from these statemandates.

Prescriptive Measures

No question about it, small employers are in a tough spot. Butdon't despair. "No matter what you hear, small employersare not powerless; they do have options," stresses Halo. Thoseoptions include reducing benefits, shifting more of the premiumcost to your employees, requiring employees to pay higherco-payments when they visit a doctor, switching from a PPO to anHMO, and covering only employees rather than including familymembers.

One area ripe for possible savings is prescription drugcoverage. In recent years, drugs as treatment have been winning outover more costly invasive procedures. So it's no surprise thecost of prescription drugs has risen rapidly, with insurancecarriers passing those cost increases on to employers. Over thelast several years, prescription-drug-plan premiums have risen asmuch as 50 percent, says Ivy Silver, an employee benefits broker inJenkintown, Pennsylvania.

To offset the cost increases of drug coverage, employers are nowasking employees to pay larger co-payments at the pharmacy, saysSilver. "Instead of paying $5 per prescription, maybethey're paying $20. That will save some money on your monthlypremium," he says.

Silver suggests a "take and give" strategy. If youfeel you need to take away a benefit, give back a small one."For example," says Silver, "if you increase anemployee's co-payment, you can increase the vision-care benefitto maybe 70 cents a month per employee."

A trend in the prescription drug area is for small employers togo with a drug card that requires a $5 co-payment for genericdrugs, a $20 co-payment for name brands and a $35 co-payment forany drug not on an approved list. "Patients withprescription-drug plans were pressuring their doctors to write themprescriptions for certain brand-name drugs," explains Silver."They go into the doc's office saying, 'I only want[that brand-name drug], it's the best.' They don't haveany idea of the specific differences between the drugs." Inthe past, says Silver, drug companies marketed almost exclusivelyto medical professionals, but today, with omnipresent, name-branddrugs advertising in print and on the airwaves, people regularlydemand the name brands-and some doctors are giving them what theywant, regardless of whether it's cost-effective or not. Thedrug card's purpose is to curtail that practice.

Meanwhile, the health insurance industry is bringing a varietyof new products to market aimed at addressing problems faced bysmall employers. Aetna U.S. Health Care, for example, introducedits Affordable Health Choices last summer. This plan doesn'thave the comprehensive coverage of more expensive plans. "Ourintent was to put something into the marketplace to get theattention of small employers, especially ones who had not offeredanything before," explains Mike Cardillo, Aetna U.S. HealthCare's president.

WellPoint Health Networks, one of the country's largesthealth-care companies, now offers two group products for smallbusineses, a Premier plan for businesses offering rich benefits,and an Employee Elect plan for more affordable, employee-selectedcoverage. "We need to do everything possible to make plansaffordable so employers can provide benefits in a price range theycan afford," says David Ludwig, a WellPoint senior vicepresident.

Wisely managing your health-care costs may mean making toughchoices in other areas, such as compensation. "I think, overtime, we won't see wages grow as fast as they otherwise wouldbecause of health-care costs," says Paul Fronstin, seniorresearch associate at the Employee Benefit Research Institute.

It's also important to review your health planregularly-before you get that notice of a premium increase. Haloadvises clients to "look five to six months ahead andanticipate cost increases so you're not surprised. You need toput the idea of rising health-care costs into the mix of youroverall compensation. If you do your employee reviews and give 10to 20 percent increases and then a few months later get stuck witha big increase in your health-care coverage, it's a doublewhammy."

Capitol Intervention

Health-care costs and insurance coverage have garnered lots ofattention on Capitol Hill in recent years. The best-known and mostfar-reaching piece of legislation is the so-called Patient'sRights Bill. This bill includes a provision allowing the insuredthe right to sue both his or her group health plan and, byextension, his or her employer. This issue is a political football,and no one knows what, if any, bill will ultimately be enacted. Atpress time, House and Senate bills were on hold.

The liability issue has the health insurance industry clearlyworried. If enacted, many in the insurance industry fear it wouldtrigger an explosion of litigation. Predicts health-care attorneyKeith Rosenbaum: "Suing your HMO will be the next big wave inliability lawsuits. The trial lawyers will be lining up to sueinsurance companies." Many industry observers feel thatpatient-rights legislation could have the unintended consequence ofpushing up the number of uninsured Americans because employers willsimply not be able to afford health-care coverage on account of theliability exposure. Last fall, the U.S. Chamber of Commercesurveyed 769 companies on the topic and found that 25 percent wouldterminate their health insurance coverage if the right to sue wasenacted.

Expect to hear lots of talk about health-care access andcontaining costs during this election year. No matter what Congresspasses, keep your eyes and ears open-it will impact yourbusiness.

Contact Sources

Aetna U.S. Healthcare, 980 Jolly Rd., Blue Bell, PA19422, (215) 775-4800

AON Consulting, (301) 280-7500

Apex Management Group, (609) 452-2488, http://www.apexmgmt.com

Berger, Kahn, Shafton, Moss, Figler, Simon &Gladstone, 2 Park Plaza, #850, Irvine, CA 92614,(949)474-1880

The Commonwealth Consulting Group Inc., (215) 884-2600,isilver@tccgroup.com

Employee Benefit Research Institute,http://www.ebri.org

Encore Images Inc., (800) 868-4568

Health Insurance Association of America, (202) 824-1787,http://www.hiaa.org

Health Research and Educational Trust, (312)422-2632;

U.S. Chamber of Commerce, (202) 659-6000, http://www.uschamber.com

Weiss Ratings Inc., (800) 289-9222, http://www.weissratings.com

WellPoint Health Networks,http://www.wellpoint.com