Small companies are caught in a vise: They?re hit by steep increases in their health insurance costs at a time when their revenues are down and the economy is listless.
Unfortunately, a growing number of small firms find they have no choice but to drop health insurance. In fact, people working for companies with 25 or fewer employees are losing their health insurance faster than any other group, according to the U.S. Census Bureau. Fewer than one-third of employees at these small firms have health insurance, compared with two-thirds of those at companies with 100 or more workers.
What?s causing these desertions? Almost 70 percent of entrepreneurs who don?t provide coverage say high premiums are the culprit. The average monthly premium for single and family coverage in 2002 was $255 and $663 respectively, according to a survey by the Kaiser Family Foundation. Over a year, covering a family can cost almost $8,000.
What?s worse, while premiums for large employers increased 14.7% in 2002, small businesses saw their insurance costs rise by 18% on average, according to a survey by Mercer Human Resource Consulting.
And costs will probably keep rising at double digits for the next few years, experts say.
Fortunately, there are steps employers can take to hold the line on spending. Innovative firms are rethinking how they set up benefits, creating programs that give employees more incentive to be cost conscious?a radical concept in our age.
These new ?consumer-driven? health care alternatives include Medical Savings Accounts, touted by President Bush in his State of the Union address; and Health Reimbursement Arrangements. Both are available to entrepreneurs right now.
Medical Savings Accounts?Medical Savings Accounts (MSAs) are available to self-employed individuals and to companies with fewer than 50 employees. Instead of paying premiums for standard health insurance, employers creating MSAs start by purchasing high-deductible, lower-cost major medical coverage.
Because premiums are lower for a policy with a deductible between $1,650 and $2,500 for an individual and $3,300 and $4,950 for a family, the employer can deposit the money saved on premiums into a tax-free savings account for the employee. The savings account can be financed by the employer or the employee (but not both) and can be used by the employee to pay for routine medical expenses. (See next page for names and phone numbers of some companies offering MSAs.)
Employees actually own the money in the MSAs, and can roll over tax-free any money remaining in the accounts from year to year to allow it to grow for future medical expenses. MSA holders also can withdraw unspent money at the end of the year for other needs by paying taxes and a 15 percent penalty.
The accounts make health care more economical because employees with MSAs have a financial incentive to shop wisely for health care services; they benefit from the savings. Many companies that are offering MSAs have found that employees continue to get the care they need and that they like the opportunity to save money for future health needs. At the same time, employers find that their health costs rise much more slowly, often less than 5% a year.
Unfortunately, MSAs aren?t available to everyone. They were created in 1996 by an act of Congress that severely limited their availability and put significant restrictions on them. President Bush recently called on Congress to relax the MSA rules and make them available to millions more Americans.
Still, they?re an ideal option for many entrepreneurs.
Health Reimbursement Arrangements?Recently, the Internal Revenue Service created a new type of health insurance account that is similar to an MSA, but without as many rules and restrictions. The best thing about the new plan is that it makes employees partners rather than adversaries in spending health care dollars wisely.
Called a Health Reimbursement Arrangement (HRA), it allows employers to make a tax-free deposit, say $1,000, to a special ?personal care account? that the employee can use to pay his medical care costs. The company can also purchase an insurance policy to cover major medical expenses.
The plan often pays for preventive care such as doctor?s visits, screening tests and immunizations?without any charge to the employee. Any money remaining in the employee?s personal care account at the end of the year rolls over to cover the next year?s health expenses, even after the employee retires or leaves the company.
All nine million federal workers and dependents were given the option of choosing an HRA for 2003. While they?re currently being marketed primarily to large and mid-sized companies, insurers are working to offer them to small enterprises soon.
If demand grows?and it just might, since many businesses want to control costs and may like a solution that gives employees an incentive to spend wisely on health care?more and more HRA programs are likely to be customized for small businesses.
Another, less optimal way employers are cutting their medical care costs is by having employees share in that expense. This may include requiring them to pay a higher share of premiums or higher co-payments for office visits and prescription drugs?or both.
?I know some small employers that paid 60 percent of the premium two years ago, but it?s 40 percent now,? says Evarist Milian, president of Insurance Marketers, Inc., a Hispanic-owned company.
What?s interesting is that small employers actually are less likely to make their employees pay a bigger share of health care expenses. While about 55 percent of large companies increased employee cost-sharing in 2002, only 29 percent of small employers did.
One possible explanation: ?A lot of manufacturing companies have borderline minimum wage people who can?t afford the increase,? says Milian.
Employers considering such a move also need to realize that the hike could cause employees to stop participating in the health plan?or quit the job altogether.
Many small businesses are also looking at ways to join up with other companies to increase their buying power. That way companies can share their exposure to the risk that one of their employees may contract an expensive illness. For a small business, such an event can drive up the premium costs for the whole company.
Labor Secretary Elaine Chao has called for Congress to allow just such groups, called Association Health Plans, to give small businesses the same purchasing power and protection from expensive state regulations and mandates that large employers have.
?By allowing small businesses to join together through trade associations, employers will enjoy greater bargaining power, economies of scale and administrative efficiencies,? Chao says.
A recent survey by the National Association for the Self-Employed found that 78 percent of small business owners said they would ?very likely? or ?somewhat likely? buy coverage through an Association Health Plan if it would help them save on health care costs.
Another study by CONSAD Research Corporation estimated that as many as 8.5 million of the 41.2 million uninsured Americans could be newly insured through Association Health Plans.
Cost is the culprit
A long, steep road has brought health care costs where they are today. Some of things contributing to the increases are expensive new technologies, rising doctor and hospital costs, greater use of prescription drugs, a growing number of state insurance mandates and soaring medical malpractice costs.
Through most of the 1990s, employers held down costs by switching to managed care programs such as Health Maintenance Organizations (HMOs). But that strategy has run its course, at least for small employers.
While big corporations have been able to negotiate good deals with HMOs, small businesses are being hit with even bigger rate hikes: Companies with more than 500 employees have held HMO premium increases to 8.1 percent, while smaller firms have been hit with HMO hikes of 25.9 percent.
What?s worse, employers have realized that they have distorted their employees? perception of the true cost of health care services by requiring just a $10 copayment for a doctor?s visit, for example. Some employees believe that this is how much it actually costs to see a doctor, and therefore tend to over-use services.
Other key sources of the problem are:
A march of mandates. State laws that dictate what and who health insurance policies must cover result in higher costs, especially for small businesses with no escape routes.
Some states actually have made it illegal for businesses to purchase basic, no-frills policies; if companies provide health insurance, they must comply with state mandates that require them to provide expensive benefits such as hair transplants, in vitro fertilization, and cleft palate repair.
Through the years, federal and state legislators have been piling more and more requirements on what health policies must cover, with more than 1,500 mandates in place now. The bigger companies can escape these mandates by insuring themselves, but small firms seldom can.
Some state legislatures are considering ways to halt this ?march of mandates? by requiring cost analyses before any bill can be considered. It would be a small step to demonstrate that government dictates for health insurance are not free.
Other states have passed legislation allowing small businesses and individuals to purchase mandate-free health insurance policies, as Oklahoma and Utah did in 2002. Also called ?bare-bones? policies, these plans provide cheaper premiums while still protecting individuals financially against catastrophic health events.
New tax subsidies. The other part of the story of why premiums are rising so rapidly involves the federal subsidy for health insurance that more than 160 million Americans receive through the workplace.
Since the subsidy is invisible to the employee (it is received by the employer), as is the value of the health care, he or she has no incentive to consider the costs involved in his or her health care choices.
Providing a subsidy directly to individuals in the form of a tax credit is one way to solve this dilemma.
Refundable tax credits
The good news is that our national leaders appear to recognize the health care trap many small businesses and their employees are in.
A main goal of President Bush?s health care agenda, for example, is providing refundable tax credits to individuals to purchase private health insurance. His proposal would provide tax credits worth up to $1,000 to individuals and $3,000 to families to purchase private health insurance that they can own and keep.
The proposal targets the uninsured, who are disproportionately Hispanic and from small businesses. While 14.6 percent of the overall population was uninsured in 2001, a whopping 33.2 percent of the Hispanic Americans were uninsured, according to the Census Bureau.
A small number of workers displaced by trade agreements, as well as some retirees, are already eligible for credits enacted in the Trade Act of 2002. Key members of Congress plan to introduce legislation this year that would allow these credits to be extended to millions more Americans.
Tax credits would give individuals more choice as to where and how they obtain medical care, and they would create new incentives for a competitive, consumer-driven market for health insurance and medical services.
Empowering individuals to become more involved in their health care decisions has the added advantage of taking some of the burden off small businesses while making the health insurance market more competitive. But this isn?t the only solution that?s needed.
In a system as complex as our $1.4 trillion health care economy, there?s no single answer. But getting individuals involved in making smart decisions about their health coverage is a fresh and workable start.
Grace-Marie Turner is president of the Galen Institute, a not-for-profit research organization focusing on health reform. She can be reached at P.O. Box 19080, Alexandria, VA 22320 or firstname.lastname@example.org.