If an employee needs expensive care, the insurer will often jack up its premium—far beyond what the employer can pay
When it comes to health insurance, entrepreneurs are in a state of sticker shock. And it's not just the initial quote that has the power to astound. It's the wild premium increase that can accompany a single employee's unfortunate diagnosis. Wendell Potter, the retired director of media relations for Cigna (CI), says those increases aren't always intended merely to cover insurers' costs. Instead, he says, they're sometimes levied with the aim of forcing a small company to drop its health insurance policy.
In June testimony before the Senate Commerce Committee, Potter said insurers "dump small businesses whose employees' medical claims exceed what insurance underwriters expected. All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year's premiums so high that the employer has to cut benefits, shop for another carrier, or stop offering coverage altogether—leaving workers uninsured. The practice is known in the industry as purging." In a February conference call with analysts, Cigna President David Cordani said: "In 2008 we were essentially actively decreasing our posture in several markets, particularly the under-50 book of business [companies with fewer than 50 employees]. You could use the term 'purge' if you'd like."
Few industry watchers are surprised. Says Len Nichols, director of the health policy program at the nonpartisan Washington think tank New America Foundation, of purging: "It's always gone on. It's the way business is conducted."
On Aug. 5, Senator John D. "Jay" Rockefeller IV (D-W. Va.) sent a letter to Cigna Chairman and CEO H. Edward Hanway requesting an explanation of Cordani's use of the word "purging" in the call, as well as the specific methods the company used to "decrease its posture" in the small-business market and how much money it has saved by doing so. Cigna has until Sept. 4 to respond. Cigna spokesperson Christopher Curran says that for small employers, "Rates are often based on claims experience. While we try to work with all our customers, when medical costs are higher than premiums, we may need to requote."
Joy Mosley, COO of Biotest Laboratories, a 77-person medical testing company in Minneapolis, recently got such a "requote" from her insurer, Medica, after an employee was diagnosed with pancreatic cancer. Medica covered the million-dollar treatment, but then said the large claim warranted $156,000 in additional premiums—a 72% increase. Larry Bussey, a spokesperson for Medica, says: "We don't purge. We try to keep our customers." Still, Mosley is terrified of the prospect of opening her next renewal letter, due any day. "We can't afford another exorbitant increase," she says.
Not all entrepreneurs are equally vulnerable. About a dozen states prohibit insurers from basing premiums for businesses with 50 or fewer employees on workers' health status. But in roughly three-fourths of the country, so-called ratings bands allow for considerable flexibility in pricing. In states with loose ratings bands, such as Texas and Nevada, one small company can be charged nearly 70% more than another. In Pennsylvania and Virginia, there are no ratings restrictions. No matter what state you're in, ratings bands don't apply to companies with more than 50 employees.
Compounding the problem is the fact that entrepreneurs, if slapped with hefty premium increases, may end up with fewer alternatives. In half of the states in the country, according to a 2008 survey by the Government Accountability Office, the largest small-business insurer has 47% or more of the market; in Alabama, one carrier insures 96% of all small businesses. "Such consolidation is an alarming trend," says Senator Olympia Snowe (R-Me.), the ranking member of the Senate Committee on Small Business & Entrepreneurship, which commissioned the study.
In the absence of major 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," says Amanda Austin, director of Federal Public Policy at the National Federation of Independent Business.
A health insurance exchange, should it become part of a reform package, would provide protection against sudden rate hikes. However, even such a measure might exclude small companies 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"—those with about 300 employees, he says. But the current proposals leave Biotest and thousands of similar companies out in the cold.