Health Insurance Costs: Solutions for Smaller Businesses
Small and medium-sized businesses can reduce health insurance costs by sharing some expenses with employees and raising deductibles and co-pays.
Phillip M. Perry, Staff Editor, Area Development (Web Exclusive/Feb 09)
If you're like most employers, you're seeking the perfect solution to the health insurance puzzle: a benefits package that keeps your employees happy and productive without taking a big bite from your bottom line. Looking's not finding, of course. Commonly, a policy starts out looking great - then suddenly gets too expensive when premiums skyrocket.

How can you keep a lid on costs? Some answers are contained in reports just released by Mercer and the Kaiser Family Foundation - two organizations that have tracked employer-sponsored health insurance for decades.

First, some good news: Employers held premium increases to 6 percent in 2008 for a fourth straight year, according to Mercer, a New York City-based consulting firm. That's a welcome change from the double-digit increases earlier this decade. On the down side, premiums are still increasing at more than twice the rate of inflation. Even worse, employers are expected to face higher costs in 2009 and beyond as a stubborn recession combines with an aging population to exert more upward pressure on premiums.

Troubled Times, Higher Costs
The nation and the world are shifting into low economic gear. That can mean higher expenses in the benefits area. "In each of the last two recessions, employers experienced a huge spike in health insurance costs," says Joan Smyth, a principal in Mercer's health and benefits practice. "Premiums peaked at 14.7 percent between 2001 and 2003 and at 17.1 percent between 1990 and 1991."

Why do slow times drive higher costs? "Employees who believe their companies are likely to reduce benefits, or who fear being laid off, often decide to undertake discretionary procedures such as knee surgeries and hip replacements," says Smyth. For the same reason, she says, employees who lose their jobs and are eligible for a continuation of health insurance under COBRA also tend to engage in costly medical procedures before their coverage lapses. And the stress levels that come with difficult economic times can create health problems that require medical care.

Demographics, too, come into play. Older individuals often require more care. "As the population ages, the problem of health insurance costs will not go away but only be enhanced," says Sally Natchek, senior director of research at the International Foundation of Employee Benefit Plans (IFEBP) in Brookfield, Wisconsin.

Whatever the cause, higher demand for medical services translates into steeper premiums. "We expect carriers to be quite aggressive in terms of premium increases," says Smyth.

Small Employers Face More Challenges
Finding the right health insurance is tough for all businesses. Those with fewer workers face a special challenge because they lack the leverage to negotiate favorable deals. "The folks that are really at a disadvantage are the very small employers," says Andrew Webber, president and CEO of the National Business Coalition on Health in Washington, D.C. "The cost of health insurance can be exorbitant, particularly if the employers have a couple of people with chronic conditions." It's little wonder, then, that only 62 percent of firms with fewer than 200 employees, and 49 percent of companies with fewer than 10 employees, offer health insurance, compared with the 99 percent of larger firms that offer the benefit, according to The Kaiser Family Foundation, a Washington, D.C.-based research group.

Given the costs of health insurance, it's tempting for smaller employers to reduce benefits or even do away altogether with the benefit. That can be counterproductive: "If you want to attract and retain good people you need health insurance," says Webber.

Burden Sharing Equals Cost Cutting
What can you do to save money on your own health insurance plan? Consider having employees shoulder more of the health insurance burden. That's long been the most powerful method of controlling costs. The trend held in 2008 when premiums would have increased 8 percent absent cost shifting, according to Mercer.

You may want your employees to increase their financial contributions in three areas:

• Premiums: At small firms, workers contribute $4,101 - or some 34 percent - of the average annual premium of $12,091 for family coverage. They contribute $624 - about 14 percent - of the average annual premium of $4,586 for single coverage. (For the purposes of their surveys, Kaiser defines a small business as having fewer than 200 employees).

•  Co-pays: Today, $20 co-pays are pretty much the norm and are starting to inch higher. While higher co-pays help reduce medical costs as employees think twice about seeing their doctors, Smyth cautions against making employees pay more than $5 to $10 for their generic prescription drugs. "You don't want people to stop taking their maintenance drugs," she says. "That's a false economy that can lead to costly medical conditions down the road."

• Deductibles: Perhaps the most dramatic change has come in the total amount that employees pay before insurance takes over. At small firms, the percentage of covered workers with a deductible of at least $1,000 has increased from 16 percent to 35 percent, according to Kaiser. The average deductible is $917 for single coverage and $2,367 for family.

Employers are increasing out of pockets as well. Kaiser says that for small firms, out-of-pocket maximums are $4,634 for family coverage and $2,207 for single.

Another cost control tactic is a waiting period for new hires. Extending the period from 30 to 90 days, for example, will save an employer a couple of month's premiums. That can also help avoid the problem that arises when employees work for a short time but are then eligible for COBRA coverage. Although they need to pay their own COBRA premiums, the medical procedures they receive can still result in a premium hike.

Coalitions Can Lower Expenses
Acting alone, the single employer has limited negotiating clout with healthcare providers. For groups of employers, the story is much different. Healthcare coalitions can often help reduce the expenses associated with such programs as drug and vision benefits, dental plans, and disease management. In some cases, coalitions offer health insurance itself at a reduced rate by bidding their employer members as a block to carriers.

"There is a simple dynamic in any marketplace," says Webber. "If you can aggregate your purchasing power, then whoever is producing a good or service is willing to reduce the cost of that service."

Coalitions offer another benefit besides lower cost: the greater choice otherwise available only to large organizations. Employees of the 160 member organizations of the New York Business Group on Health (NYBGH) can select the plan they want from 26 healthcare options, plus dental, long term disability, life insurance, and accidental death and dismemberment coverage. "We allow the small business to offer big business benefits," says Laurel Pickering, the group's executive director.

Informed Employees Are Healthier
Shifting costs, cutting benefits, and joining coalitions can help tame the health insurance monster. Change can be frightening, though, and employers need to maintain open lines of communication with workers to avoid affecting morale.

"It's a mistake if employers do not adequately communicate health benefit changes to employees, along with the reasons why changes are being made," says Natchek. "People need to feel they are partners. They need to understand the true cost of health care, how their actions can make a difference and how they can become healthier individuals."