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Small companies will be forced to make tough decisions if they are to survive another round of health-care cost increases.
Joseph McCafferty, CFO Magazine
February 1, 2003
Companies are singing the health-care blues again, thanks to another year of double-digit premium increases.
This year's hike will be particularly stiff — the average company expects health-care costs to rise 14 percent, according to the National Survey of Employer-Sponsored Health Plans 2002, by Mercer Human Resource Consulting. Although the burden is felt at nearly every company, small companies will be hit especially hard. Premiums, which soared 18 percent last year for companies with fewer than 500 employees, are again expected to outpace those for large companies.
The simple truth is that small companies have fewer options for managing health-care costs. They lack the clout with insurers to carve out portions of the plan, such as prescription drugs or mental-health services. And they can't self-insure — one catastrophic claim could bankrupt them.
In general, "small companies feel a lot more pain from health-care costs," says Ed Kaplan, national health practice leader at Segal, a New York-based employee-benefits consulting firm. "They have higher administration fees and higher premiums, and they are forced to use off-the-shelf plan designs." He adds that underwriting managers often heap higher margins and loads on premiums for small companies to compensate for high volatility in their claims experiences.
In the past, employers shifted costs by increasing copayments and raising the penalties for seeking care outside a preferred provider network. Now, though, businesses are simply asking employees to pick up a higher percentage of premium costs. "There are fewer employers that pay the full cost of coverage," says John McDonough, associate professor at The Heller School for Social Policy and Management at Brandeis University.
Some small employers have been forced to reduce benefits or, worse, shutter plans entirely. "More and more evidence suggests that companies are moving to drop coverage completely," confirms McDonough. In fact, according to the Mercer report, the percentage of businesses with 10 to 49 employees that sponsor a health plan fell from 66 percent to 62 percent last year. A separate survey by The Henry J. Kaiser Family Foundation and The Health Research and Educational Trust found that 5 percent of large companies are considering dropping their corporate-sponsored plan this year.
While these trends are not encouraging, the vast majority of companies are opting to shift more costs to employees rather than give up on the plans completely. For them, the question is, how much are employees willing to pay? Workers already paid 27 percent more for health care in 2002 than they did in 2001, according to the Kaiser report. And while passing the buck has been easier since the labor market has eased up, when the economy recovers it will be more difficult to ask employees to pay more. Indeed, even now there are protests: nearly 20,000 workers at General Electric went on a two-day strike in January to protest an increase in copayments.
"It has reached a crisis level," says James Murphy, executive vice president and CFO of TruSecure, an IT security company based in Herndon, Virginia, that provides health care for 200 employees. "You need to ensure that the increases don't have a material effect on your ability to do business," he warns.
TruSecure wrestled with that possibility when it considered making changes to its health plan last year. Faced with premium increases ranging from 20 to 50 percent, the company needed to rein in costs. One option was to switch to a cheaper plan that offered significantly fewer benefits. This option was discarded because TruSecure feared it might prompt employee defections. (There is still intense demand for people who specialize in IT security.) "We couldn't justify the disruption to employees," says Murphy. Or the expense — the administrative cost of changing plans is a deterrent for small companies.
Instead, TruSecure decided to ask employees to pay roughly 25 percent of the $200,000 increase in the premium from 2001 to 2002. In the past, the company paid 100 percent of the premium for individuals, and asked only a small percentage for additional dependents.
Like many companies, TruSecure is working hard to make employees aware of the high cost of health care. "You have to impress on them the cost of these services," says Murphy. He adds that many employees were surprised by the real cost of their health care. When the company outlined how much of the increase it would cover and how much employees were expected to contribute, "they understood," says Murphy. "They didn't push back."
While TruSecure was able to avoid making wholesale changes to its health plan for 2003, Murphy is not so sure that, given the economic climate, the company will be able to escape them in the future. "We'll review the plan next year," he says. "If this continues, we'll probably have some harder decisions to make." Still, adds Murphy, closing the plan will not be one of them.
"I'd be hard-pressed to think we would ever reach that point," agrees Christine J. Cox, CFO of MetraTech Corp. The Web-based billing-software provider, located in Waltham, Massachusetts, was forced to raise the annual employee-paid portion of its health plan from 20 percent to 34 percent, or $1,200 per year, after the overall cost of its BlueCross BlueShield plan rose 14 percent in 2002. (Cox expects an additional 20 percent increase for 2003.) The company had already increased copayments from $5 to $15 for routine doctor visits. "It's been a difficult few years for us in this area," she says.
Like Murphy, Cox worries that asking employees to take on additional health-care costs could prompt some of them to look elsewhere for work. "Cutting costs tends to test the boundaries of loyalties," she says. To offset the cutbacks, Cox says MetraTech is offering more soft benefits that cost less, but are valued by employees. For example, the company has increased tuition reimbursement, and added more on-the-job training and more holidays.
Solutions Are Few
Small companies are anxiously awaiting the answer to spiraling costs, but solutions, unfortunately, are few. Buying coalitions, once the great hope for controlling health-care costs for small companies, haven't really panned out. "They've had mixed results," notes Kaplan. One of the problems is that companies have too many individual needs: one size does not fit all. Then there is the cost of running such a coalition, which can cut into the savings.
Health care is likely to be the subject of vigorous debate on Capitol Hill this year. But if small companies are waiting for Washington to solve their health-care problems, Brandeis's McDonough says they'll be waiting a long time. The early indications are that Congress will consider passing legislation that will create tax credits for uninsured individuals. Other items on the agenda include expanding medical savings accounts and increasing prescription-drug coverage for seniors.
Some Democrats are talking about universal health care again, but the plans are short on details, and few of them offer much hope for small companies. According to Judith Feder, professor and dean of public policy at the Georgetown Public Policy Institute, "It's like throwing them a 10-foot ladder to get out of a 20-foot hole."
The great unanswered question is whether pushing costs back on employees will depress consumer confidence. The additional portion employees are being asked to pay for health care could well negate the tax decreases that President Bush is counting on to restart the economy.