NFIB

Is There a Cure?
05/ 28/ 2004

by Karen J. Bannan

Small-business owners everywhere are struggling with the same painful decisions: Should you swallow the increases this year? Pass more of the cost to your employees? Or drop coverage all together? There is no fix-all formula for this crisis, but we've found some solutions that won't make you feel as sick.

Last year, all 29 of Craig Anderson's employees were covered by Blue Cross Blue Shield medical insurance. It was a benefit that Anderson, the president of Rolling Meadows, Ill.-based Sumer Inc. (www.sumer.com), which represents electronic component manufacturers, says was one of his most important expenses -- and one of his biggest. So when Anderson got his insurance renewal bill, he was shocked to see that it had gone up for the third year in a row.

"With the 2003-2004 policy renewal, our rates had gone up 100 percent in four years. We typically like to stay with vendors for a long time, but we couldn't afford to stay with Blue Cross anymore and we didn't see any relief in sight," says Anderson. "We would have had to make one of two decisions: Increase the contribution by employees, or if the employees rejected that plan, let someone go."

Not happy with either option, Anderson told his broker to conduct what he categorizes as one of the most extensive searches possible. In the end, he and his employees looked at more than 20 programs, but went with a new but little known health-care option: A high deductible insurance plan in conjunction with Health Savings Accounts (HSAs) to offset out-of-pocket fees.

Sumer's employees are among the first Americans to take advantage of HSAs, which were part of the Medicare reform legislation passed by Congress in December 2003. The accounts, which became available on Jan. 1, 2004, are designed to make insurance more affordable, especially for small businesses and the uninsured.

"The fully loaded rate with Blue Cross was $162,000 per year. Our portion of that was $139,400. But now our contribution falls to $106,800 with the new plan," says Anderson. "This year we'll be able to make new investments in the company with that money -- get a couple more people on board or increase wages for the others."

Alphabet Soup:
As any small-business owner knows, there are only a handful of health-care choices available to self-employed folks, and most are cost-prohibitive. This creates a serious problem. Many small businesses are forced to think about giving up health benefits. Others must make difficult choices about new hiring or salary increases for existing employees.

"We found that 43 percent of employers offering insurance said that it affected other parts of their businesses," explains Paul Fronstin, Ph.D., director of health research and education with the Employee Benefit Research Institute in Washington, D.C. "They reduced or eliminated pay raises or benefits and put off capital equipment investments or other purchases. It's not just about what health-care costs, it's about the other trade-offs that come along with that cost."

HSAs may change that, according to experts. The real savings from an HSA-qualified plan come from the fact that an insurance company's risk is lowered when the deductible is raised. This in turn allows them to offer reduced premiums to businesses.

"If you turn around and change your deductible from $1,000 to $2,000, your rates might drop 40 percent," says Aaron Gander, a registered health underwriter with Henderson Brothers, an insurance agency based in Pittsburgh. "Over the course of the year, you can be in a cash-positive position even after paying the extra $1,000 deductible."

Lower insurance rates aren't the only benefit. HSAs let small-business owners and their employees save money on taxes. HSAs are funded -- and all medical costs are paid for -- with pre-tax dollars. And since many people never hit their deductible, there are usually funds left over at year-end that can be rolled over. This money accrues and can be used for future out-of-pocket medical costs. Since the maximum 2004 yearly HSA contribution is $2,600 for individuals and $5,150 for families, over time, the account can build up enough to pay for long-term nursing home care, catastrophic illnesses or a child's braces.

"You can use your HSA to pay for any qualified medical expense such as prescription eye glasses, contact lens solution or certain non-prescription drugs," says Employee Benefit Research Institute's Fronstin.

Getting Funded
And now for the bad news: Since HSAs are so new, there aren't that many on the market. Many banks and financial institutions are still working on their own offerings. Some companies offer both health insurance and plan administration while others take care of the actual plan administration, which can cost $10 to $25 to set up and $3 to $5 per month.

If you are considering an HSA, take note: The idea of larger deductibles may frighten employees, especially if you're paying the majority of health insurance costs right now. You can either pass your premium savings directly into employees' HSAs or ask for an employee contribution, which is something advocated by Darren P. Grant, Ph.D., director of the health-care administration masters program at the University of Texas at Arlington.

"When employees are paying for health costs out-of-pocket they become better consumers," says Grant. "They aren't as likely to engage in risky behavior or neglect preventative care because they see the money in the account as their own."

Changing Mindshare
If HSAs seem like the right choice for your employees, you might be smart to take a page from Sumer Inc.'s Anderson. "Before we switched, I went over all the plan's options with employees and made sure they understood everything and that they were comfortable with it," he says.

When discussing the HSA, make sure employees know that as with any change of insurance, they may end up having to delay expenses such as pregnancy or pay out-of-pocket for drugs that treat chronic conditions. And unless funds are deposited into the HSA, employees will pay for their entire deductible out-of-pocket.

But be forewarned: Even in the best of situations, there will be a learning curve. Jeffrey C. Illes, who opened an HSA early this year for his own family learned this first-hand. The president of The Craig Group, a consulting firm in Highland Park, Ill., says even with the HSA in place he and his wife are waiting a year before they conceive their third child.

"Insurance costs and issues with insurance are definitely making me reconsider my decision to own my own business," says Illes. "I worry that as an independent contractor I have to fight with my insurance company to get things paid for."

Illes' experience punctuates what one expert says isn't likely to change in the immediate future, even with the introduction of HSAs: The insurance crisis isn't over and may get worse before it gets better.

"Markets evolve over time. Absent a structural change in the market or a fundamental change, I don't see our health insurance problems going away in the near future," says University of Texas at Arlington's Grant.

What is an HSA? Health Savings Accounts, which took effect earlier this year, are tax-free savings accounts for medical expenses, allowing taxpayers (or their employers) with a high-deductible insurance plan to contribute up to $2,600 a year -- or $5,150 for families. The new law not only lowers costs for small-business owners who offer health insurance, but it also helps small-business owners who couldn't previously afford health insurance for themselves or their employees to purchase high-deductible insurance and pair it with an HSA. While funds from an HSA can be withdrawn for any purpose, non-qualified withdrawals will be taxed and could be subject to a 10 percent penalty fee. Learn more about how this option might help your small business in the "Understanding HSAs" section of the Business Toolbox at www.NFIB.com/toolsandtips.

Join the Fight One way to lower health insurance costs is for Congress to pass Small-Business Health Plan legislation. NFIB has been leading a coalition of more than 160 organizations in support of a bill that would allow you to join together with other small-business owners to offer affordable health care to your employees and their families.

This bill would give you and your employees access to the same benefits enjoyed by those in big business, labor unions and government employees. Join NFIB's petition drive that calls on the U.S. Senate to pass legislation to create Small-Business Health Plans this year. Add your name to the growing list by going to www.NFIB.com/petition or calling (800) NFIB-NOW.

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This article originally appeared in the June/July 2004 issue of MyBusiness magazine.

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