There's nothing "fringe" about fringe benefits anymore. Even small businesses, which are  historically laggards in providing health and retirement benefits, have to offer them now if they want to hire and keep good workers. Unfortunately, lacking big- company purchasing power, entrepreneurs have little leverage when insurance companies raise premiums astronomically as health-plan providers are doing now. And the situation doesn't promise to get any better soon.

With that in mind, Business Week Online's Dennis Berman talked with Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, a nonpartisan Washington (D.C.) group that studies U.S. health care and retirement plan trends. They discussed the health-care cost crunch; President Bill Clinton's advocacy of community purchasing groups to help small businesses buy health coverage in bulk; and the potential impact of Clinton's proposal to put some Social Security funds into the stock market. Here's an edited transcript of their conversation:

Q: What's the outlook for health costs in 1999, and how do they compare to 1998?

A: Current projections are for a 7% to 12% increase, depending on the age of the covered population and geography. In 1998, it was in the 3% to 5% range. So it's up quite a bit.

Q: What will be the effects of these cost increases on small businesses? Will we see more companies drop plans entirely?

A: We're more likely to see a redesign of the plans and a shifting of who [companies] have the plans with, as opposed to employers dropping coverage all together. But if you end up with four or five years of cost increases, then you'll start to see [employers dropping coverage].

Q: Are there, in fact, going to be four or five years of increases?

A: It's probably at least in the 5% or 7% range per year for the next four or five years. The greatest cost pressure right now is from pharmaceuticals. They are great things and do wonderful things  -- look at Bob Dole and Viagra -- but they are also very expensive. So you're going to see efforts at cost control there and more and more plans requiring individuals to use generic drugs.

Q: What's your advice to a small company that gets a letter saying its costs are going to rise 12%?

A: EBRI is itself a small employer. When we get that type of notice, we immediately call the insurance company and say: "We know you already have a list of 20 things that we can pick and choose from to reduce our premiums. Let's sit down and go through that list and talk through what it is we can change to help our premium costs." Normally, that can mitigate a substantial proportion of the increase.

Q: With such a tight job market, will employers be able to pass those costs onto their employees or will they have to eat the difference?

A: Small employers are more apt to pay more of the expenses for their employees and fewer of the expenses for their [employees'] dependents and the families. Larger employers have a tendency to pay the same for the whole family. So you're again far more likely to see small employers adjust by saying: "You're going to have to pay more to have your kids or your husband covered, but we're going to hold your cost constant."

This also creates more pressure to move to managed care. When you move to the managed-care realm, the projected increases are down in the 2% to 3% range. You'll see continuing pressure on small firms to move to managed care, to move to higher deductibles, to move to higher co-pays. Health insurance for small businesses tends to be quite expensive. The marketing and distribution costs can represent as much as 50% of the total premium charged to small business.

Q: How else is the unemployment situation affecting the level of benefits being offered?

A: Very readily, you're seeing more and more companies add ancillary benefits. You see them issuing stock options -- even non-publicly held companies that are incorporated.

Employers are more readily allowing people to adjust their hours. That is becoming far more common than it used to be. With unemployment as low as it is, you basically have to beg people to take a job. In the process of begging them, you have to try and be flexible, and small businesses most particularly have to be that way if they want to hire people up to their education standards and language standards.

Q: President Clinton is advocating a move to community health-purchasing groups. Is this good or bad for small business?

A: Community purchasing groups have potentially a very negative impact on the market. In essence, they are self-selection devices. Take a given community that currently has a pool of small businesses. That includes many people in high-risk occupations, and then a whole lot of businesses in low-risk occupations -- let's say sales clerks in a store -- get together and say: "We're paying all this money for all these accidents, the sheet metal workers, the bricklayers, people unloading trucks. Let's create our own group...I bet we can get a whole lot better rate if we create our own group."

The bad news is that the average cost in all the pools you just pulled people out of goes up. So you end up with other small businesses that had insurance before suddenly who can't afford any.

Q: Let's get to retirement. Not an easy subject, especially when you consider the alphabet soup of available plans, SEP-IRAs, 401(k)s, SIMPLE plans, and Keoghs, for example.

A: Employers are extraordinarily confused about the rules. Many, many small employers think that in order to create a plan, you have to be willing to contribute a lot of money. In fact, they can create a plan that just their workers contribute to, but they can essentially assist in the process. Small employers greatly overestimate the cost of putting a plan in place. With some of the newer examples -- the SEP-IRA -- you can basically establish it at no cost whatsoever. But small employers don't tend to know that.

Q: President Clinton is also proposing putting part of the Social Security funds into the stock market. By his plan, that would mean the government would help create 401(k)-style investing accounts, which employees could direct into --  say -- different mutual funds. Will businesses have to bear any of the logistical burden?

A: The majority of small businesses think this is a fine idea. Where that gets to be a problem is when you ask the same small businesses: "Have you thought about the idea that you might help administrate them?" Two-thirds of them say, "No, that never occurred to me."

In a 401(k) model, actually, the small employer would have to regularly send the money to somebody with [employees names] attached, which is more administration than they want to do. We then asked them: How much [money] are you willing to spend to do it? Eighteen percent said none. A third said, "I don't know." Only 5% said $5,000 or more. And very high mobility is very expensive to deal with in terms of record-keeping.

There's a way to design individual accounts so that small businesses don't really have to do anything, which is by rewriting the Social Security payroll process. But that [means] you'll have relatively long time delays before the money is actually deposited. That has a substantial effect because there is a period where you may not have investment earnings, and that compounds on itself over time.

You have 10% of small businesses that offer pension plans. Under the Clinton plan, that goes to 100%. You look back between 1978 and 1981, at proposals to mandate a universal pension plan -- small businesses were in upheaval over the concept of a mandated requirement. Ironically, in the current debate, it has not sunk through to enterprises that this in essence the same.

To: STAFF & BENEFITS