Small businesses continue to struggle with the sharpening health insurance crisis. What does the future hold?

By Mark Henricks

Dennis Krueger doesn’t have it and doesn’t plan to. Genevieve Thiers didn’t think she could afford it but finally decided she needed it. And Scott Elmore spends far too much time and energy trying to make it possible for his company to keep offering it.

“It” is company-sponsored health insurance coverage, and it’s not too much to say that the rising costs, decreasing benefits and shrinking availability of health insurance are creating is one of the key issues facing small business today.

“It’s quite expensive,” says Thiers, who wants to offer health benefits to the seven employees of her Chicago online child-care referral service, Sittercity Inc., but balks at the $350-per-person monthly premiums. When her most recent hires in the expanding business kept asking for the benefit, she says, she finally decided to offer up to 80 percent health-care coverage.

Under different circumstances, Krueger made the opposite decision at St. Louis-based Krueger Pottery Inc. Costs were equally high, but his six employees weren’t demanding it. He and his wife are already covered by a policy through her employer. Providing health insurance would eat into the capital we need to operate the business,” says Krueger. “I’m not against providing the insurance. It’s really just a question of what we can afford.”

Elmore has always provided health benefits to all employees but pays 75 percent of costs at Stan’s Automotive, an 18-person family business in Lafayette, Colorado. But it’s been a constant struggle and a significant burden to continue to offer the benefit, he says. “Each year we decrease benefits and raise the rates,” Elmore says. “And next to payroll, that’s still our largest employer expense.”

The Insurance Scene
These entrepreneurs’ personal experiences with health insurance premiums accurately reflect a much larger trend. Private health insurance premiums rose 11.2 percent last year—five times the rate of inflation, according to a study by the Health Research and Educational Trust and the Kaiser Family Foundation, a nonprofit health-care research group in Menlo Park, California. That followed a 13.9 percent increase in 2003 and was the fourth straight year of double-digit annual hikes.

Last year, the average premium for a family was just under $10,000, or $829 per month, and single coverage ran nearly $3,700, or more than $300 monthly. Four percent fewer workers were covered by employer-sponsored plans than as recently as 2001, when 65 percent had the benefits.

The costs of insurance are becoming insupportable for many companies large and small. A recent survey of more than 500 big U.S. employers found that they anticipated cost hikes of 12 percent for 2005. But the companies, which covered more than
6 million employees and dependents, say they could afford no more than an 8 percent increase, according to Lincolnshire, Illinois, global outsourcing and consulting firm Hewitt Associates, which conducted the study.

How big a deal is it? The biggest, according to a report from the Society for Human Resource Management in Alexandria, Virginia, in which top executives were asked about their primary concerns for 2005. Topping the list was the rise in health-care costs, cited by 57 percent of respondents.

To make matters worse, the impact of costlier health insurance falls disproportionately on small companies because the insurance industry charges them higher rates. The best coverage for the best price is frequently available in group plans sold by large commercial insurance companies, explains Loretta L. Worters, vice president at the Insurance Information Institute in New York City. If a company has fewer than 10 employees, insurance carriers change the way they calculate premiums. For small groups, they set rates based on health histories of individual employees rather than looking at the work force’s overall health. “The larger the group, the fewer the health questions that are asked,” Worters adds. These practices, in effect, reduce choices and increase costs for small businesses that try to provide company health plans.

As a result, fewer small companies offer employees coverage. Ninety-nine percent of companies with 200 or more workers offered health benefits in 2004, according to the Kaiser Family Foundation. But only 63 percent of companies with three to 199 employees had coverage, the foundation found.

The basic problem small businesses face, according to Kaiser vice president Gary Claxton, is that health-care and insurance costs are both rising much faster than inflation—and most other bench marks. “Health insurance premiums are far outstripping the rate of increase in wages,” he says. “The cost of providing health insurance to workers is probably going up faster than productivity, so it’s increasingly hard for businesses to offer the same level of benefits.”

The trouble multiplies for small companies. Since they have to come up with more money for health coverage, they’re more likely not to offer the benefits. “Better employees expect these benefits and choose to work for employers who offer them,” notes Worters. “Not surprisingly, employers who do not offer health insurance experience a greater rate of employee turnover.”

Solutions for Small Businesses
For many years, small businesses’ basic approaches to dealing with this problem has been to push more of the burden onto employees by decreasing benefits and increasing the share of the premiums paid for by the workers. They stop covering some expenses, such as vision and dental and prescription drugs, and reduce the amount they will pay on other expenses while asking employees to kick in some of the premium.

When it comes to reducing benefits, many have increased the amount of the deductible, which must be met before insurance begins paying. For instance, deductibles may be raised from $500 to $1,000 or $2,000 or more. Higher deductibles are often used in combination with raising the amount of the co-pay an insured worker has to come up with out of his or her pocket. Doctor’s office visits that once cost a worker $10 or $15 might be raised to cost $25 or $40, with insurance paying the rest.

Employers also save money on premiums by decreasing the percentage of total annual health-care costs that the plan will pay. The difference between a so-called 80 percent plan that pays $4 out of every $5 of costs can be significant compared to a plusher 90 percent plan.

Part of the rationale behind redesigning plans in this manner is that it forces employees to think more carefully about how they’ll use the benefits. “We got into this mentality that going to the doctor shouldn’t cost more than $5 and prescriptions ought to be $10,” says Elmore. “We’ve demanded the moon, wanted to pay for dirt and expected that to be sustainable, but it’s not.”

Employees accurately perceive such plans to be less valuable, and often resist changes. One way employers are trying to make redesigns more acceptable is through buy-up plans. These offer to pay the full premium for employees who opt for basic coverage. Those who want more coverage have to pay the difference in the premium. “Say the core plan costs $300 a month per employee and the buy-up is $500, the employee is going to have to pay the extra $200,” explains Garland Cole, partner of Austin, Texas, insurance brokerage Ashley Cole Benefits LLC.

Hybrid plans take another approach. With these, employers try to save premium costs by providing plans with high deductibles, but then offer to reimburse employees directly for part of the higher deductible. For instance, a hybrid plan might call for the company to pay the first $500 or $1,000 of a $2,000 deductible.

Health Savings Accounts, or HSAs, offer an alternative that allows workers to save money for medical expenses in tax-advantaged accounts. To take advantage of the tax benefits, employees must accept plans with high deductibles—currently $2,000 for individuals and $2,500 for families. The idea is that employees will be able to draw money from the tax-advantaged accounts to pay for uninsured expenses. Employers, meanwhile, save money because premiums on high-deductible plans are lower.

HSAs also provide valuable added flexibility, notes Janet Trautwein, vice president of government affairs for the National Association of Health Underwriters, a trade group in Arlington, Virginia. Employees can spend HSA funds for a wider range of medical treatments than are commonly covered by health insurance. “If an employer sets up an HSA and the high-deductible plan to go with it, that plan may not cover acupuncture or it may limit chiropractor visits to 10 times a year,” she says. Other plans may exclude dental or vision services that are important to individual consumers. “The Health Savings Account allows them to have choices,” Trautwein says.

HSAs have received a lot of attention, including plugs from President Bush, and almost 500,000 people signed up for them through September 2004. “That’s an outstanding start and it will mushroom,” says Trautwein.

A different twist on health accounts is the Health Reimbursement Arrangements, or HRAs. Unlike HSAs, which are funded by employees, only employers are allowed to put money into HRAs. You don’t have to have a high-deductible plan to set up an HRA, and the employer doesn’t have to put money into the plan until a claim is presented. “Not all employees will go through their deductibles,” notes Trautwein. “So if [a company has] 20 employees with $1,000 deductibles, they don’t really spend $20,000. It’s been real attractive to employers for that reason.”

Still another approach is to change the way health services are delivered. The percentage of health plan enrollees covered by traditional insurance—also called indemnity or fee-for-service—which pays for covered people to receive care at virtually any health-care provider, has declined from 73 percent in 1988 to 5 percent in 2004, according to the Kaiser Family Foundation. Meanwhile, Preferred Provider oganizations, or PPOs, which save money by requiring insured people to be treated by a smaller group of providers with which the insurer has negotiated discounts, have grown from 11 percent in 1988 to 55 percent today.

Health Maintenance Organizations, or HMOs, grew rapidly in the 1990s, expanding from 16 percent of enrollees in 1988 to a peak of 31 percent in 1996. They save money by generally restricting care to doctors and other care providers who are employed by the health plans. They have been largely supplanted by the less restrictive PPOs and an HMO variant called Point of Service, or POS, which allows members to get some coverage even if they use providers outside the plan. By 2003, Kaiser reports, HMOs had just 24 percent of enrollees, while POS plans, which had no market share in 1988, had 17 percent.

HMOs can still offer significant savings for businesses that have tried other options. Elmore said that after cutting benefits to the minimum allowed under Colorado law, he still needed more savings, and found them by switching from a PPO to an HMO last year. “Switching to an HMO pretty much binds us to a few specific providers,” he says, “but the cost savings were enough that that was the best option.”

Educating Consumers
Many of these modifications fall under the umbrella of consumer-directed plans, which attempt to rein in health-care costs by making consumers more responsible for spending—and paying for—health-care dollars. The idea is that when they have to spend their own money, even if it is from a tax-advantaged account, they’ll be more careful about how they do so. But as Elmore pointed out, employees don’t necessarily like the plans. And by themselves, they don’t necessarily change consumer behavior.

That’s why many in the health insurance industry are talking about education as a critical component in the struggle to slow the rise in costs for health care and insurance. “People have to become better consumers,” says Cole. “They have to understand that the day of the $10 office visit is no longer.”

More than simply accepting higher costs, however, employee education efforts aim to teach workers to shop around to save money on doctors, medicines and other costs, and to generally be more me more careful about how they spend their health-care dollars. “Once we become better consumers, we’re not going to run to the doctor every time we have the sniffles,” says Cole. “Then, our prices should go down.”

Some employers hold brown-bag seminars to instruct workers on the best way to make the most of health-care outlays. Others deploy more sophisticated tools, such as internal websites that inform employees about low-cost health options and even health advice hotlines staffed by registered nurses.

The insurance industry itself is a good source of information for employers who need to learn about the topic, as well as materials and instruction for employees. Many insurance companies provide handouts and other information on such topics as using generic drugs instead of more expensive, trademarked varieties. Brokers and agents, too, are generally happy to put on workshops about saving on health costs. Says Trautwein, “There are a lot of educational tools.”

Knowing the Limits
Clearly, there are a lot of initiatives aimed at controlling runaway health insurance costs. Just as clearly, they’re not working so far. Why not? One reason is that health care is vast: Total costs in the United States topped $1.7 trillion in 2003. It’s also complex, involving everyone from sick kids and worried parents to multinational pharmaceutical and medical equipment companies fielding armies of sales reps to lobby physicians to prescribe the latest high-tech—and high-cost—drugs and devices. Untangling the conflicting interests of this massive system has simply proven to be beyond the efforts of any single measure or combination deployed to date.

To give an example of this complexity, while HSAs are regarded as potentially important by some ob-servers, not everyone agrees. Many employees, used to plans with low deductibles, are uncomfortable with high deductibles, Cole says. And so far, insurance companies haven’t offered big enough premium cuts in exchange for accepting higher deductibles to make HSAs a really good option, she says. “If you’re only going to save 5 percent by having an HSA, that’s not significant when you have a much higher deductible,” Cole says. “The price breaks are going to have to be much higher to make it worthwhile for small employers.”

The significance of the number of people who have signed up for HSA accounts is likewise open to interpretation. While HSA fans such as Trautwein call the early figures encouraging, others insist the new accounts haven’t attracted any significant numbers of people so far—and aren’t likely to. “Our survey still finds very low prevalence,” says Kaiser’s Claxton. “There’s some amount of high deductible plans, but few of them offer Health Savings Accounts.” Claxton also says that, so far, HSAs are much more likely to be adopted by large employers than small ones, who need the most help.

Even if HSAs are widely adopted, Claxton is skeptical about how much impact they’ll have on small-business health insurance coverage. While premiums are likely to be lower on the high-deductible plans required for HSAs, the money to fund the accounts still has to come from somewhere, he notes. “While it may make things cheaper,” he says, “I’d be shocked if
it made a huge change in the number of small businesses that offer health insurance.”

Future Shock
Unfortunately, one thing almost everyone agrees on is that the health insurance situation is likely to get worse before it gets better. The Insurance Information Institute projects national outlays for health services and supplies will top $1.85 billion this year, up 7 percent from $1.7 billion last year, and will reach $3.2 billion by 2013.

Government administration and net cost of private health insurance outlays alone should reach $134.7 billion this year—but that’s just a down payment on the nearly $234 billion in premiums that will be paid out in 2013. With that in mind, it’s only natural that small businesses remain extremely concerned about the rising costs of providing health benefits to their employees. “Maybe they can do it this year or next year,” notes Trautwein. “But if it increases at this rate, can they do it in three years?”

With the help of better-informed employees who are smarter about health expenditures, they just might be able to, suggests Elmore. “Three or four years ago, when I started educating my guys about this, their eyes glazed over,” he says. “Now, they’re bringing in newspaper articles and asking how changes will affect them. I wish more small-business owners were doing it.”