BENEFIT NEWS – NOVEMBER 2005

“There is a major earthquake coming,” says Paul Zane Pilzer, author of The New Health Insurance Solution: How to Get Cheaper, Better Coverage without a Traditional Employer Plan. “The individual insurance market showed up overnight. If you explain the cost savings to small employers, they immediately stampede for them. This can be the ultimate defined contribution health care rather than defined benefit.”

By Kevin Sweeney

Battered year after year with double-digit medical expense increases, many small businesses are reaching a critical impasse in the decision to offer employees a group health insurance plan.

Unlike larger counterparts better positioned to withstand increases and negotiate for better rates, small employers are taking unique measures to get a handle on costs. And the individual insurance market is raising many eyebrows throughout this employer segment.

“The small employer is looking at disproportionate costs, depending on their employee population,” says Terry Hunter, chairman and CEO of ConnectYourCare, a benefit delivery platform that helps employers transition to consumer-driven health care models. “What we’re seeing now is owners and chief financial officers taking a stronger stance on doing something different.”

Research by Salary.com finds that 90% of small companies are paying more to provide basic medical to their employees in 2005 than in 2004. Nearly one-tenth of these companies are being hit with increases of 30% or more.

Individual policies on the rise
The U.S. Census Bureau reports that the number of people who bought health insurance on their own rose by 475,000 in 2004 to number some 30 million people. The Bureau indicates that the largest jump within this group came in the form of individual insurance.

Though it is hard to know just how many of these people opted for individual insurance due to employer issues, the Bureau did report that the percentage of Americans covered by employment-based health insurance fell from 60.4% in 2003 to 58.8% in 2004.

“The individual market is playing a vital and increasingly important role in our nation’s health care system,” says Karen Ignagni, president of America’s Health Insurance Plans (AHIP).

Research by AHIP finds that in the non-group insurance market, the average premium in 2004 for single coverage was $2,268 and $4,424 for family coverage. Employer-sponsored health plans, meanwhile, averaged $3,696 and $9,948 in the same categories, respectively.

But the subsidy that employers provide absorbs as much as 85% of the premium cost, AHIP reports. While that cost breakdown favors the employee, many small businesses struggle to assume this financial responsibility.

To counter this consumption of cost, individual insurance plans are increasingly landing on the radar of small employers.

“We see small employers looking to see if they are better off stuck within a small group or better off looking at individual insurance,” Hunter says. “In many states, individual insurance is a better option.”

Premiums vary state to state in the non-group market due to underwriting rules, consumer preferences, demographics and health care costs.

While small employers are evaluating the potential benefits of individual insurance options to their bottom lines, questions also linger around administration and employee acceptance. Having communication in place and an educated broker on your side are potential hurdles to implementation of individual insurance plans.

Easing the burden
Roger Schultz, vice president of employee benefits for the broker firm J. Smith Lanier & Co., points out that companies can issue individual medical policies through insurers so that employees can take coverage with them from job to job.

“It seems to me that the health policy ought to be tied to the person, not the employer,” Schultz says. “The current model is out of date. I think employers in general are fed up with health insurance. Group plans aren’t valuable. The conclusion is obvious – let the individuals buy their coverage.”

Schultz points out small companies can help shoulder the burden by handling Section 125 payroll deductions to provide tax savings that reduce employee medical premiums. He also contends that the employer role could be to pay some of the plan cost and promote flexible spending accounts and health savings accounts.

Proponents of individual insurance correlate the anticipated shift in health care to that of retirement plans. No longer will the transition from defined benefit to defined contribution only be associated with pensions and 401(k)s.

“We’re moving toward a consumer-directed health plan with a high deductible,” Shultz says.

And with insurers on board, some forecast rapid growth in the individual insurance market.

“There is a major earthquake coming,” says Paul Zane Pilzer, author of The New Health Insurance Solution: How to Get Cheaper, Better Coverage without a Traditional Employer Plan. “The individual insurance market showed up overnight. If you explain the cost savings to small employers, they immediately stampede for them. This can be the ultimate defined contribution health care rather than defined benefit.”

Staying the course
Not all are convinced that the small business market is straying from group coverage toward individual models. Those in this camp say small employers are still using strategies that help them absorb rising costs.

“I think small companies are trying to do whatever they can to cope with rising costs and continue to provide quality health care coverage,” says Chad Moutray, a chief economist with the U.S. Small Business Administration. “They are not looking to get out of the benefits business.”

Some small employers that insist on keeping group coverage in place are providing incentives to workers to opt out of employer-sponsored coverage or join a spouse’s health plan.

Fourteen percent of small businesses offer employees lump-sum salary increases and cash rebates not to participate in their company plan, according to Salary.com. These businesses believe such strategies will lead to greater savings when compared with offering health care coverage.

Almost two-thirds of small companies (64%) say they have tried one or more strategies to contain health care costs. Not surprisingly, an increase in employee co-payments was cited as the most common strategy.

Though implementation of association health plans has been largely sporadic, Salary.com reports that many small businesses are considering this measure to leverage power at the negotiating table with insurers.

“Administrative costs are significantly higher for small businesses, and they can’t get insurance companies to talk to them,” Moutray says. “Small companies are looking at ways of banding together. Advocates of Association Health Plans argue that they are economies of scale that pool their workers. Unfortunately, most small businesses have had to get it on their own.”

Wherever the road leads, it seems pretty clear that small companies that resist getting out of the group plan will have some high cards stacked against them.

“Clearly, the small business doesn’t have the options the large business has,” Hunter says. “To a certain extent, they are dependent on brokers to be their eyes and ears. When it comes to health plans, it’s not necessarily just a question of costs. It’s about the comfort level for both the individual and the company.”