Solutions for small businesses: companies with fewer than 100 employees are learning to think big - buying employee health insurance - Cover Story

Business & Health, Oct, 1993 by Geoffrey Leavenworth

"I find it ironic that the lion's share of the growth in the U.S. economy occurs through the efforts of small companies," bemoans Steve Barnhill of Houston. "And yet small businesses are left picking up the tab for all kinds of things--one of which is the highest per capita cost for health care."

Small businesses can expect to pay 25% to 40% more for health care than large companies, according the National Federation of Independent Business, an advocacy group in Washington. Steve Barnhill, owner of Steve Barnhill & Co., a Houston advertising and corporate communications firm with three employees, thought he had solved the problem of escalating health insurance premiums--scheduled to increase by 22% in 1992--by slashing benefits. "By raising the deductible and having employees shoulder the entire cost of the first day of hospitalization, we were able to reduce the increase to only 11%," says Barnhill, who pays 100% of the health plan's cost. However, he received notice of a rate increase two days after our interview. The bad news: a 19% increase to $13,225 annual premium for the coming year.

Health insurance benefits are a growing concern for small and mid-sized businesses. Forty percent of small and mid-sized employers responding to a survey by National Small Business United, in Washington, say health insurance is one of their most significant challenges. That compares with 22% that identified health insurance as a significant challenge last year. The average health care cost increase for survey respondents was 22%.

What are small employers supposed to do? In a nutshell, they are learning to think and act like large employers.

Health care insurance experts report that of the 36% of small employers that offer health care benefits, many are struggling to recast their self-image away from that of benevolent provider. Small employers are learning to become health care tacticians, wringing the most effective mix of benefits and price controls from plans paid for by employer and employee. For employers that have long since shifted cost to the employee, the emphasis is on designing smarter plans that encourage employee, insurer, and provider alike to stretch benefit dollars farther.

For example, the National Small Business, United Survey points out that 31% of the small and mid-sized employers surveyed have changed to policies with higher deductibles in 1992, 22% have changed insurance companies, and 19% have changed to policies with higher copayments.

Meanwhile, trade groups and insurers are overcoming obstacles that keep small employers from adopting the more sophisticated cost saving techniques used by large companies. The most common and most obvious strategy is for small employers to pool their resources and buying power.

Strength in numbers

In New England, for instance, the Connecticut Business & Industry Association (CBIA) manages a buyers' group for 4,800 small businesses, almost all of which have fewer than 100 employees.

"We are using our mass purchasing power to get competitive rates while we're streamlining expenses," says Phil Vogel, senior vice president of CBIA. "We process all our own billing and transmit it electronically to the insurer. We've also streamlined the marketing of the plan." Although Vogel says this strategy has drastically reduced administrative costs, he did not have precise figures. In addition, CBIA negotiates managed care savings guarantees for members and calculates, with the insurer, the renewal rates for all participants.

Bell Foods Services Inc. of Glastonbury, Conn., spent approximately $259,000 in 1991 to insure its 85 employees under a conventional indemnity plan, explains Mike Campbell, president. Facing a 12% increase in premiums the next year, the company instead joined the CBIA buyers' group and restructured as a partially self-funded PPO administered through Aetna Life Insurance & Casualty Co., with indemnity coverage for employees who live outside the network. Its 1992 health insurance costs fell by more than 23%, to $198,000. That figure is somewhat distorted by the lag time in claims submission experienced in the initial year of any plan. This year, the company's premiums increased to approximately $247,000, still below its earlier level. The company, a vending machine and cafeteria operator, pays 75% of the premium for health care, and employees contribute the rest.

"We have a relatively young population of employees," says Campbell. "We were paying a lot of premium that wasn't being spent on health care. We felt we'd be better off buying administrative services and paying our own bills." The company reinsures to cap annual losses.

Employees pay $10 for doctor visits and $3 for prescriptions within the network. "At first, employees complained if their doctor wasn't included in the network. But now the majority of our people think the PPO plan is a real plus. If they have to pay only $10 to see the doctor, they get treated a lot faster when they're sick. That's good because when an employee gets sick, I want him to get treated, get well, and get back to work," says Campbell.