Vital statistics: the cost of health insurance shows healthy signs of improvement

Entrepreneur, June, 1996 by Janean Chun

Ironically, now that the health-care buzz has died down to somewhat of a whimper, the health insurance ailments of small-business owners are finally getting treated. Thanks to a surge in managed-care programs, small businesses are in the enviable position of being wooed by HMOs. And, as HMOs compete for the small-business market on the basis of price, employers are enjoying their own little medical miracle: a decrease in health insurance costs.

In 1995, the average cost of HMO coverage declined nationally for the first time in at least 10 years, from $3,385 per active employee in 1994 to $3,255, according to a survey by A. Foster Higgins & Co. Inc., a New York City-based benefits consulting company. The survey determined that this decrease was driven mostly by an 11.9 percent reduction in HMO costs among smaller employers.

"Many HMOs, realizing the tremendous opportunity, have gone after small businesses, using low price as the hook," says John Erb, a Foster Higgins principal and the survey's chief analyst. "This [trend] isn't an accident; it's the result of some pretty canny marketing."

And small businesses are gladly responding. The study found 1995 had the largest increase in managed-care enrollment of the decade, especially among smaller firms, whose enrollment rose from 58 percent of covered workers m 1994 to 67 percent in 1995.

"There's evidence the small businesses themselves are creating a demand for managed-care products because they know they have to offer health insurance to get and keep good employees," says Erb, who points out the benefits are twofold. "For those small businesses already offering insurance, this is a way to hedge the inflation in health-care benefits, which had been running 20 percent to 50 percent a year through the early '90s. And because the savings now are so significant, the HMOs are also enticing small businesses that have never offered coverage before."

This turnaround is especially impressive considering the Hay/ Huggins Co. Inc. 1995 benefits report, which revealed that medical premiums have increased at more than double the rate of inflation in seven of the past 10 years. Michael Carter, a senior vice president at the Philadelphia benefits consulting firm, attributes the recent drop in costs to the growth in managed care plans and to the federal government health-care debate. "Obviously, [health-care companies] preferred to, solve the problem themselves rather than having things thrust upon them by the federal government," Carter says.

On a micro level, "your health-care cost increases should be between zero to 5 percent [annually]," says Carter. "If it's more, you need to shop around for other coverage."

Yet Erb warns that this may be a remission rather than a cure. "There are definitely cycles in health-care costs, and we're in a down cycle right now," he says. "But the upswing will come again, as providers get more leverage with HMOs."

The prognosis? Healthy rates for small business--yet it never hurts to take some preventive medicine. Erb advises joining a plan through an association, chamber of commerce or purchasing alliance, or enlisting the insight of a trustworthy insurance agent. "Small-business owners don't usually know anything about health insurance," says Erb. "They need someone to help them get through the maze."