BUSINESSWEEK ONLINE : JULY 10, 2000 ISSUE
FRONTIER -- FEATURES The Health Care Crisis Why small companies are getting hit so hard and what you can do about it It was almost like reading her own obituary. One morning last October, as Rochelle Balch, owner of a computer programming company in Glendale, Ariz., perused the front page of her local newspaper, she was shocked to learn that her health insurer was going bankrupt. She would have to find another insurance carrier for RB Balch & Associates Inc., her 20-employee company. One insurer quoted a rate of $45,000 a year, about what she had been paying before. Then they reviewed her employees' medical records. The bid jumped to $245,000 because one worker had a child on a medication that cost $30,000 a year. Another insurer wanted $130,000 because of a pregnant employee. Meanwhile, doctors from her existing plan were refusing to schedule appointments with her employees although the insurer, Premier Insurance Inc., was contractually obligated to cover claims for another 90 days. In a low point of the whole mess, one employee's wife had to pull an intravenous line out of her own arm when a home nurse refused to come change the medicine bag, says Balch. ''I was still paying the premium,'' Balch marvels, ''but I was paying for no care. I felt like I was getting walked all over as a small-business owner, and there was nothing I could do about it.'' If Balch's saga sounds shocking, it's only by degree. All small businesses are suffering from a feverish rise in premiums these days. Back in 1996, companies with fewer than 200 employees faced average increases of just 2% in their rates, says the Kaiser Family Foundation. From 1998 to 1999, however, premiums rose 7%, vs. just 4% for big companies. And that's the average; it's not unusual to hear of hikes topping 15% or even 20%. In fact, the smaller your company, the harder you get hit. The National Federation of Independent Business says surveys of its 600,000 members, who average about six employees, show they're experiencing premium hikes as steep as 25% a year. Deloitte Consulting predicts no relief in sight: Health insurance for small companies will keep climbing at 8% to 12% annually for at least the next two years. No wonder, then, that many small companies are dropping health care altogether. Despite the tight labor market and worker demands for health insurance, the percentage of small companies offering coverage has fallen to 51% from 63% just in the past two years, according to a small-business survey released last month by Arthur Andersen. The study says small-business owners now rank health care as their No. 1 priority for legislative reform. A decade ago, the picture seemed less bleak. Managed care contained costs for a while by reducing inefficiencies. But now a new explosion is being fueled by a raft of pressures: pricey prescription drugs, expensive medical technology, and an aging population. And analysts say that the decline in Medicare and Medicaid reimbursement will place additional burdens on the privately insured. To be sure, this is a crisis of national proportions. The U.S. already spends more than $1 trillion a year on health care, a figure expected to double by 2008. That's bad for everybody but worse for small businesses because they can't wield the bargaining clout of their corporate brethren when negotiating rates. What's more, small companies are a natural target for higher rates, actuarially speaking. Fewer people produce fewer premiums to cover administrative costs, and one serious illness could wipe out premiums from your entire staff--hardly an attractive risk to an insurance carrier. ''It's going to hit small companies the hardest because they have very limited options to respond to the increase,'' says Paul Fronstin, senior research associate at the Employee Benefits Research Institute in Washington. ''If they were to drop benefits because of the rising cost, they would lose a lot of workers. And they'd also find it difficult to shift costs onto employees.'' Hopeless? Well, you can't solve the health-care crisis yourself, but there are strategies you can use right now to fight back. The five prescriptions that follow may be your best bets. But we won't kid you: They're no more than a Band-Aid until there's meaningful system-wide reform. Meanwhile, small-business owners are muddling along, often settling for poor or inadequate solutions. TAKING CHANCES Some are playing what amounts to Russian roulette--offering no insurance at all. That was the case for Kerren Biggs, owner of Cookies by Design, a 12-employee specialty bakery in San Diego. It was bad enough that employee productivity suffered because workers didn't seek medical attention for chronic infections. Then, real tragedy struck when longtime employee Kelly Underwood learned her six-month-old baby had cancer. Employed but uninsured, Underwood had to go on Medi-Cal, a state-funded medical welfare program, to pay for her daughter's treatment. Unhappy accepting public assistance, Underwood said she would have to quit if Biggs couldn't provide health benefits. ''She'd been with me a long time, and I didn't want to lose her,'' says Biggs. Last November, Biggs hooked up with FOCUS, a health-insurance program subsidized by the Alliance Healthcare Foundation in San Diego. It provides low-cost health insurance on a sliding scale for local companies with low-income employees, defined as those earning no more than 300% of the federal poverty level--about $50,100 a year for a family of four. All of Biggs' employees, who make $10 an hour or less, qualify. Now, Biggs pays $30 a month per employee, the employees kick in around $15 a month, and FOCUS picks up the rest. Underwood stayed at the bakery, her daughter's cancer has gone into remission, and Biggs has a powerful new recruitment tool. ''I was interviewing someone for a job,'' recalls Biggs. ''He said, 'So I guess you have no medical benefits at a place like this.' And I said, 'Oh, yes we do. We have great medical benefits.''' TOUGH CHOICES Going without insurance probably isn't an option if you're competing for skilled workers. To afford it, you can freeze wages, skimp on your marketing budget, or raise your prices--but at what cost? For Steve Salem, owner of Rudy Salem Staffing Services in Sioux City, Iowa, the only way to cope with his 20%-a-year premium hikes for the past few years has been to cut back on tech upgrades and advertising. He can't hold his own against the national staffing agencies if he raises prices, he says, ''and if I shift the costs on to my employees too much, I scare them off because instead of health insurance being a benefit, it becomes a burden to them.'' Still, some companies do try to reduce coverage or make employees pay more. DcVast, a 29-person computer-services firm in Chicago, opted to cut its maternity benefits, which its older workforce didn't need. But then the growing company went on a hiring spree and younger prospects began asking why maternity coverage wasn't included. So back into the plan it went. To cover rising costs, President Don Swanson has raised DcVast's prices by 50% over the past two years. That worked, as his services were underpriced. But future price hikes could hurt. ''We're still looking for benefits to trim, but we haven't found any yet,'' he says. CARRIER CAROUSEL Other companies, such as BAMnet in Hamilton, N.J., are choosing another bad solution. They switch insurance carriers every year to take advantage of typically lower first-year rates. CEO Michael Meighan, who has enrolled his company in four different plans in four years, says employees hate constantly switching systems and doctors. This tendency of small companies to play musical insurance carriers also helps drive up costs by making them even less attractive business prospects, says John Nail, CEO of Digital Benefits, an Internet health-insurance portal. That's because insurers don't recoup their marketing costs if you leave after the first year, and, often they're left with a risk pool of generally sicker employees. Fortunately for Rochelle Balch and her employees, she finally found an affordable insurer that put her company into a community-risk pool. But she still expects her rates to rise next year, based on the experience of other companies in the plan. For now, she's paying the full premium for her employees and their families, but she says she can no longer afford to offer new hires the same deal. ''I'll grandfather-in the employees that have been with me,'' she says. ''I don't want to sound corny, but I feel a moral and ethical obligation to them. I don't think it's right for me to break that promise.'' A noble sentiment, to be sure, but one that doesn't leave an employer a lot of wiggle room. It's a safe bet, unless something is done soon, that many more small companies will be forced to choose between the health of their employees and the long-term survival of their business. Is there a doctor in the house? By Alison Stein Wellner with Joshua Kendall For more on choosing a health insurance plan and controlling costs, click Online Extras at smallbiz.businessweek.com _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Health Care Crisis CHART: Ouch! The Nation's Smallest Companies Faced the Biggest Hikes in Health Care Premiums TABLE: Remedy #1: Medical Savings Accounts TABLE: Remedy #2: Self-Funding with Stop-Loss TABLE: Remedy #3: Split Funding TABLE: Remedy #4: Association Health Plans TABLE: Remedy #5: Consumer Choice Health Purchasing Group CHART: Who's Covered Commentary: Search for a Cure INTERACT E-Mail to Business Week Online

Copyright 2000-2008, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice