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Rising Healthcare Costs Put Small Business Owners Under Pressure

By Mike Anthony

The cost of employer-sponsored health benefit plans jumped 11 percent last year, the largest one-year jump since 1992. The increase pushed the average annual premium for employer group health insurance to $2,650 per employee for single coverage, and $7,053 per employee for family coverage. With the economy slowing to a snail’s pace and sales significantly down in many industries, rising premiums may force many businesses to drastically change their coverage.

According to an annual survey of employer health benefit plans conducted by the Kaiser Family Foundation and the Health Research and Educational Trust, Menlo Park, CA, group insurance premiums jumped for employers of all sizes and in all segments of the country.

On average, larger employers (200 + employees) experienced a 10.2 percent increase in premiums this year; smaller employers (three-199 employees) experienced a 12.5 percent increase. The smallest employers (three-nine employees) were hit the hardest with an average increase of 16.5 percent. New Jersey employers saw their premiums jump even higher. And more increases are expected in 2002.

Paul Sylvester, president of Charon/ECA, a Newark-based health care consultancy, said he expects New Jersey premiums to rise 40 percent over the next 13 months. Michele Guhl, president of the New Jersey Association of Health Plans, said she feels New Jersey employers will face premium increases of 15-25 percent starting January 2002.

The increase will be particularly hard on smaller businesses, since they have fewer financial resources to fall back on, but are required to pay higher premiums. "Many smaller employers are being pushed to the wall by these unrelenting increases in premiums," said Robert J. Tartaglia, New Jersey Director of the National Federation of Independent Business (NFIB). Tartaglia cited one of his members, whose business employs seven, has already been notified of 29 a percent increase for 2002.

Many employers are in panic mode over soaring premium hikes, because they don’t see any end in sight. "I can not simply absorb a double digit increase in premiums," said Carol E. Boyd, owner of Newark-based Branford Press and employer of four, "with the economy in freefall and sales down, it would crush my bottom line."

Why are Premiums Rising?

There are a number of factors driving premiums up in New Jersey. "Traditionally, to contain costs, managed health plans have been very restrictive, offering limited benefits and few options," Sylvester explained. "Ultimately these limitations caused a consumer (beneficiary/employee) and consequentially a political backlash that compelled providers to become more liberal with their plans, cover more claims and offer more options. But there is a cost attached to these additional services and the in the end the cost will be paid by the employer through higher premiums. You also have to factor in improved medical care and enhanced technological innovation into the cost equation."

"Medical costs, in general, are going up," Guhl said. "One of the primary drivers of higher premiums is the increasing cost of out-patient care in hospitals. Another is the skyrocketing cost of prescription drugs." Guhl also noted the baby boom generation is getting older and beginning to require more medical care.

Regulations, legislative activity and mandated coverage are also driving premiums higher within the State. For example, in August, then Acting Governor Donald T. DiFrancesco signed a bill that makes infertility treatments a mandatory health benefit at companies with 50 or more employees. Guhl pointed out that one in-vitro fertilization procedure, when a woman’s egg is fertilized outside the womb and then implanted, can cost $15,000 and the New Jersey law allows a "qualified" woman to have up to four in her lifetime. Although the cost factors are still being worked out, Guhl believes this mandate will increase premiums another three or four percent. While Sylvester believes the state has done a good job mandating certain types of health coverage, he emphasizes the basic business reality that "someone has to pay for it."

Guhl, whose organization represents 97 percent of the health care plans in the State, warned that as legislation restricts a health plan’s ability to negotiate the best price and then mandates additional treatments they must cover, the entire inherent concept of managed health care begins to unravel.

In some cases, premiums are rising in excess of medical costs as health plans try to build a cushion to absorb anticipated higher medical costs in the future.

Ultimately, health care plans will shift the additional cost back to the buyer (employer) at a time many smaller employers are already struggling with the cost of maintaining their health plans. Tartaglia believes the best thing a smaller employer can do right now is shop around for the best deal, although he admits, "they’re all pretty high right now."

According to Sylvester, smaller employers are left with few choices. Either they will simply absorb the extra costs themselves, pass on more of the expense to employees through higher contributions and/or co-pays or offer a less extensive program. According to the Kaiser study, employees who contribute to their plan, pay on average, $30 per month (15 % of premium) for single coverage and $150 per month (27% of premium) for family coverage. In the most extreme cases, employers will drop employee coverage all together, pushing more Americans into the ranks of the uninsured. The number of uninsured Americans has declined the last few years, but rising premiums and a slowing economy could reverse that trend.

Dropping coverage entirely is not always an option. For some employers offering health benefits is a moral imperative, for others it’s simply good business; however, rising premiums are forcing employers to look for solutions.

"I cannot see dropping my employee’s health coverage," said Boyd, "but if premiums rise as much as they’re expected to, I will be forced to ask them to make larger monthly contributions."

In an effort to lower their annual health plan costs, a Newark-based manufacturing firm offered its employees a monthly bonus for dropping their health coverage, if they were covered under a spouse’s plan.

A Springfield man dropped the group health insurance policy that covered his company’s eight employees. Then he gave them raises to cover the cost of purchasing individual coverage that offered lower premiums.

Some firms will turn to Defined Contribution Plans. Under such a plan, an employer allocates a specific sum each year that the employee and/or the employee’s family can use to purchase health insurance. While many industry insiders feel this is the way the industry may go, there are several problems with this approach. Most notably, the employer has to pay a lump sum upfront, rather than in monthly installments, and sacrifices certain tax breaks in the process.

Others may consider self-insuring. Tartaglia does not see self-insuring as an option for smaller businesses. He said, "it’s simply too expensive." While Sylvester acknowledges that employers with 50 employees are at the threshold of being able to self-insure, he does not recommend it. He feels working with such a small pool of employees is "very risky."

Help from Trenton

Many are looking to the State and federal government to stem the tide of rising premiums. "The new administration in Trenton should make addressing the high cost of health care one it’s top priorities," Tartaglia said.

New Jersey business owners have enjoyed one success this year. On August 24, 2001, Acting Governor DiFrancesco signed a bill that will allow smaller employers to form "Small Employer Purchasing Alliances." The bill, which goes into effect February 2002, allows businesses with between two and 49 employees to band together in buying coalitions to, hopefully, negotiate lower premiums and administrative fees based on the total number of employees covered.

At their national headquarters in Nashville, TN., the NFIB is considering whether they should form such an alliance through their New Jersey chapter. Tartaglia believes they are in the preliminary phase of talking with health care plans regarding volume discounts. Citing she has not seen any numbers or cost models, Guhl declined to comment on the impact purchasing alliances may have on premiums.

While the bill doesn’t mandate that insurance companies work with these alliances, the free market system dictates that if one or two health plans come on board, others will follow.

On the federal level, the NFIB and other business organizations are pushing for a similar law. The Associated Health Plans, if passed, will allow smaller employers to cross state lines to form purchasing alliances. Tartaglia believes it could help small businesses reduce premiums 25 to 30 percent annually. Although Sylvester believes some savings may occur, he questions such high numbers. "Generally, there are only two factors that drive insurance premiums – the cost to administer the plan, which can range from 12 to 22 percent of premium, and claims and profit. Since claims within any group represent 70-80 percent of annual premiums, health care plans will only negotiate things on the fixed (expense) side. That limits an employer’s negotiating range."

For example, if an employer is paying $4,500 annually for employee family coverage and administrative costs represent 15 percent of the premium, only $675 is up for play. Under favorable circumstances, you may negotiate a 20 percent reduction for an annual savings of $135 per employee, which actually represents a three percent savings.

While desperately looking for relief from rising premiums and coping with a stagnant economy, smaller employers have some tough decisions to make.

Sylvester pointed out, "As Americans we expect the best medical care available, and that’s fine. We just have to remember when it comes to health care there is no free lunch and at the end of the day we all, employees and employers, will have to share the cost."

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