Small Biz Purging: When Companies Lose Health Care

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Not all entrepreneurs are equally vulnerable to the whims of insurers. In about a dozen states, where some form of "community-rating" prevails, regulations prohibit insurance companies from setting premiums for firms with 50 or fewer employees based on workers' health status, forcing insurers to spread risk among their smaller accounts. But in roughly three-fourths of the country, "rating bands" allow for considerable flexibility in pricing. In states with "loose rating bands," such as Texas and Nevada, one small firm can be charged nearly 70% more than another. Moreover, in Pennsylvania and Virginia, there are no ratings restrictions at all, encouraging insurers to try to turn a profit on each individual business. And no matter what state you're in, ratings bands don't apply to companies with more than 50 employees, which means that those such as Biotest are left unprotected.

Little Leverage for Small Companies

Compounding the problem is that entrepreneurs slapped with hefty premium increases often have few other options. According to a 2008 survey by the Government Accounting Office, the median market share of the largest carrier in the small group market is 47%; in Alabama, one carrier insures 96% of all small businesses. As Senator Olympia Snowe (R-Me.), the ranking member of the Committee on Small Business & Entrepreneurship, which commissioned this study, notes: "Such consolidation is an alarming trend."

In the absence of major state or federal policy changes, small companies have little leverage. "All any individual entrepreneur can do is to become more knowledgeable and to take the time to shop around for coverage," advises Amanda Austin, the director of federal public policy at the National Federation of Independent Business. However, President Barack Obama's health-care initiative holds some potential to help level the playing field. The bills now bouncing around Congress all call for the creation of a health-insurance exchange, which, besides offering small businesses more affordable choices, would provide protection against sudden rate hikes. But even this measure might exclude small firms with more than 20 employees. Says Nichols: "I'm very concerned about this. It will leave a lot of small businesses unprotected. The size really should go up to protect all firms that are not big enough to self-insure"—a number Nichols pegs at about 300 employees. But the current proposals leave Biotest and thousands of other similar companies out in the cold.

Joshua Kendall is a contributor to BusinessWeek SmallBiz.

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