Benefits for Small-Biz Healthcare

January 30, 2007

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Health insurance is not only the most sought-after employee benefit; it's also the most expensive one. As this is especially true for small businesses, many such employers and their employees cannot afford healthcare coverage today. Here we look at why this is the case, how to pick a plan, and new legislation that aims to improve the health benefits of both employers and employees alike.

It's a nasty choice: Offer an attractive benefits package and forgo profits, or cut back on bennies and risk losing your best employees? There is no avoiding this hairy calculation as healthcare costs continue to escalate. It also doesn't help that most entrepreneurs simply do not have the time or the expertise to feel out the right formula.

Since World War II, employment-based health benefits have been the foundation of health insurance for the under-65 population, providing the primary source of coverage for the vast majority of workers and their dependents. In recent years, however, employer-sponsored health insurance has been eroding, noted Paul Fronstin, Ph.D. and senior research associate with the Employee Benefit Research Institute, last year. An increasing number of working adults are without health insurance coverage, and forecasts indicate continuing declines in coverage.

Indeed, all data sources show increases in healthcare premiums in recent years for both small and large firms. Yet data has found that increases have been higher for small firms. Consequently, it is even more daunting for the self-employed and those working in small businesses, which, almost as a rule, are less likely to offer health insurance.

In fact, healthcare costs and availability consistently rank as the No. 1 concern of small-business owners, who with their employees number among the 46.6 million Americans who are uninsured, according to Census Bureau data. The Bureau of Labor Statistics' 2006 National Compensation Survey said that 60 percent of firms with fewer than 100 workers offer health benefits. Health insurance is currently a blend of federal, state, employer and individually purchased coverage.

Health insurance costs will vary depending on a company's size, industry and location. Companies with fewer than 50 employees tend to get "whacked" based on the demographics of the workforce, Charlie Stevens, an employee benefits attorney at Wisconsin-based Michael, Best & Friedrich, recently told Forbes.

For example, employers with older workers will pay higher rates. For companies with more than 50 employees, carriers charge rates more in line with state averages.

Forbes noted:

While health insurance is the most sought-after benefit, it's also the most expensive one. Expect to allot between 10 percent and 15 percent of payroll costs for health care, says Principal Financial's Ripperger. According to the American Health Insurance Plans' 2006 survey, the average 2006 premium for small-group coverage was $312 per month for single coverage and $814 per month for families.

Most employers are concerned about the health of their employees. After all, healthy employees typically are more productive and take fewer sick days. For small businesses, however, health insurance is a high cost, in part because of the administrative costs of running a health insurance policy.

Insurance companies are likely worried about adverse selection. Katherine Swartz, professor of health policy and management at Harvard's School of Public Health, explained to BusinessWeek in August:

The risk for the insurance companies is greatest in the disproportionate share of the people in small companies applying for health insurance who for some reason think they will have medical problems down the road. This means getting a larger number of people who have extremely high costs. And by extremely high costs, I mean annual expenditures above $50,000.

Molly Brogan, the director of government affairs for the National Small Business Association, said at Small Biz Resource: "If you have a pool of employees and their average age is in their 30s, and one employee is in his 60s, that raises the costs. Insurance companies require annual renewals with certain statistics. If the average age goes up, costs go up significantly."

This means higher premiums for the small-business owners.

However, recent legislation may potentially be a bright spot in this dark discussion.

Before heading home for the Christmas holiday, the 109th Congress passed legislation to improve the benefits of health savings accounts (HSAs) for both employers and employees significantly. The Tax Relief and Health Care Act of 2006, signed by President George W. Bush on Dec. 20, makes several business- and employee-friendly changes to HSAs — tax-free savings accounts designed to help small businesses and their employees save for qualified health expenses — that increase the affordability and accessibility of health care for independent businesses, according to the National Federation of Independent Business.

During a Senate committee hearing on the merits of these accounts, Republicans reiterated their case for why HSAs are good for both small-business owners and their employees.

Here's what you should know about the legislation:

• Money from flexible spending accounts and health reimbursement accounts can be rolled over one time, penalty-free, into health savings accounts; • There is no longer an annual plan deductible limitation on HSAs, meaning that in 2007, individuals will be able to contribute $2,850 to an HSA and families will be able to contribute up to $5,650, regardless of the size of their health insurance deductible; • It allows people to fully fund their HSA account, regardless of when during the year they became covered under the plan; • Employers may contribute more for lesser-compensated employees; and • A one-time rollover from an IRA to an HSA is allowed.

HSAs, signed into law by President Bush in December 2003, offer small-business owners and their employees a new option for affordability, portability and freedom in healthcare coverage. According to the United States Small Business Administration, HSAs can save small-business owners up to 40 percent in healthcare costs, and some small-business owners, who previously were unable to offer healthcare to their employees, can do so now through HSAs. Small businesses switching to HSAs from other, traditional healthcare coverage plans can save money to buy new equipment and grow.

When it comes to picking a health insurance plan, small firms have a choice: traditional health insurance or "managed care." Traditional plans, according to Forbes, typically come with high premiums and a wide selection of doctors and hospitals, while managed-care plans carry lower premiums but offer a smaller menu of service providers.

In addition to suggesting HSAs, Forbes noted:

No matter which breed of insurance you choose, you'll probably want to offer a high-deductible plan. These plans save a bundle on premiums, because employees shoulder more of the treatment costs up front before insurance payments kick in. Employers can also save money in the long run by adding a "wellness component" — counseling, fitness programs and the like — to their health plan. Some insurance plans include a wellness program for free or at a minimal cost, around $150 to $200 per employee per year.

Ultimately, high turnover is expensive. And if an employer is losing staff because there are no healthcare benefits, he or she could be losing the money saved by not offering benefits.

Additional

U.S. Chamber of Commerce: Top 10 Helpful Health Care Tips for Small Business Resources

Workers' Health Insurance Trends, Issues and Options to Expand Coverage by Paul Fronstin Employee Benefit Research Institute, March 2006

The Best Benefits Package For Small Biz by Maureen Farrell Forbes, Oct. 6, 2006

Health Insurance: A Plan to Help Small Businesses by Douglas MacMillan BusinessWeek, Aug. 30, 2006

Health Care Benefits For All? by Naomi Grossman Small Biz Resource, Jan. 10, 2007

Congress Passes Legislation Improving Health Savings Accounts National Federation of Independent Business, Jan. 5, 2007

Small-Biz Health Care Watch by Maureen Farrell Forbes, Sept. 27, 2006

The President's Health Care Reform Agenda United States Small Business Administration

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