To Keep Health Plans, Many Firms Shift Costs

September 25, 2007

FRAN HAWTHORNE

Health insurance premiums have been rising faster than the rate of inflation for years. Lack of health coverage has become a major issue in the presidential race. Yet somehow, 59 percent of small businesses provide some kind of insurance, according to a recent survey by the Kaiser Family Foundation.

True, that percentage was down from 68 percent just six years ago, says the foundation, a health policy research group that conducted the study of more than 3,100 employers. But many businesses still offer coverage, especially professional firms, mostly because of competition for employees, said Gary Claxton, a vice president at Kaiser.

How do they afford it? By cutting benefits and shifting more costs onto their workers. There are also newer insurance products geared to this market:

HIGH-DEDUCTIBLE PLANS These are sometimes called "consumer-driven plans," not because consumers are driving the demand, but because they must pay such a high share of the cost that, managers hope, they will use fewer services.

The main cost is a superhigh deductible. Where a standard deductible might be $1,000 a person, it could be $2,500, or even $5,000, in these plans. That reduces the employer's share of annual premiums down to an average of $5,770 a person, about $1,000 lower than for other plans, according to a survey of nearly 3,000 companies by Mercer Human Resources Consulting last year.

Many employers then give back all or part of those savings to their staff by financing a secondary medical benefit. One is to put money into an employee-controlled health savings account, which works somewhat like a 401(k), with employees using the money for medical expenses rather than for retirement.

Alternatively, Scott Martin, president of a benefits consulting firm in New York City that specializes in small professional firms, prefers a health reimbursement account, because the company controls it and keeps any unused cash. Managers at small businesses, he said, probably have a good idea as to how many employees will need expensive care over the year, based on history. So they can figure out how much they need to increase the deductible and how much to put into the reimbursement account to lower their premiums and still save money.

"The employer is taking on a calculated risk," Mr. Martin said.

Employees may come out better with reimbursement accounts too. The Mercer survey found that deductibles tend to be about $300 lower per person and the benefits about $80 higher than in employee-run savings accounts.

Because they favor healthier employees, all these high-deductible plans are controversial. Less than 10 percent of small businesses use them.

BARE-BONES COVERAGE One way to pay less is to cover less. Group Health Inc. of New York has a "catastrophic care" option that covers hospitalization only and no routine care, cutting premiums by about two-thirds. Or a company might pay for a limited number of routine checkups but not hospitalization. Other variations impose tight caps, perhaps paying a maximum of $50,000 a year, versus $1 million for a standard plan, said Kerry Finnegan, head of the small-employer group at Mercer's health and benefits unit.

"Whether or not you would consider that health insurance is another question," said Mr. Claxton of Kaiser.

VIRTUAL INSURANCE Even more minimalist is companies' paying nothing, leaving employees with the whole premium. Mr. Finnegan says companies can offer coverage through a payroll deduction and might be able to arrange group rates.

PREVENTIVE-CARE PLANS "If you really want to impact health care costs, you have to impact the health of the people you're insuring before they need medical care," said Jerry Ripperger, director of consumer health at Principal Financial Group, a Des Moines firm. But small companies have historically shunned so-called wellness plans, like smoking-cessation classes.

Yet the Mercer survey found more interest among small companies. Principal Financial has started pitching to this market with a plan that gives each employee 30 minutes of face-to-face counseling a year, for about $100 a person.

GOVERNMENT HELP States are trying various approaches to supplement the employer's role.

Through its Healthy NY program, New York subsidizes basic benefits at businesses with 50 or fewer eligible employees (within income limits) that have not offered coverage in the last 12 months. Tennessee has started a bare-bones plan called CoverTN, with a coverage cap of just $25,000 and the state paying one-third of the premium. California and Pennsylvania have proposed plans that would require most businesses either to offer health insurance or to pay into a state fund.

Federally, Senator Michael B. Enzi, Republican of Wyoming, introduced a new version of his bill this summer that would let small businesses join insurance pools across state lines. To resolve one problem, he has agreed that if a majority of states require certain coverage, the pools would have to as well. Yet many health care experts doubt that the measure will get any further than its predecessors did.