Small-business owners whacked by double-digit premium increases in 1998 should expect more of the same in 1999.
"We're seeing increases of 7% to 10% for large-business renewals. For the small-group market, you need to add two to three points," said Tom Beauregard, principal with Hewitt Associates, a Lincolnshire, Ill.-based benefits consulting firm.
Such jumps would be in line with increases in 1998-when companies with 100 employees or fewer, which make up most of the small-group market-experienced average premium increases of 13%, according to a Dun & Bradstreet Corp. survey.
Among the reasons Beauregard and other experts cited is that companies with fewer employees have more difficulty gaining leverage with health plans.
In addition, many small companies cannot self-insure, a process whereby businesses set up reserves to pay their claims. "By not being able to self-insure, you get a quicker pass-through" on premium increases, said Neil Carrey, a healthcare attorney in the Los Angeles firm of Jenkins & Gilchrist.
In addition, small businesses that cannot self-insure are on the hook for charges such as state premium taxes and carrier risk fees, which are paid to insurers to allow businesses to walk away from deficits if claims exceed premiums. Those two charges can add 5% to 6% to a premium, Beauregard said.
In New York, self-insured employers escape some statutory taxes that insurers must pay for extras such as graduate medical education and charity care. Empire Blue Cross and Blue Shield's assessment was $10 per enrollee per month for 1997, but the insurer had projected only $1.83 per enrollee per month. As a result, annualized rates announced in October 1998 averaged 15.1% higher for its 140,000 small-group enrollees.
"Without the increase, we would be looking at a loss of $15 million," said Empire spokeswoman Deborah Boren.
Small businesses are less attractive to health plans because such companies are more likely to shop for lower rates. In addition, the risk must be spread among fewer employees, which can cause plans to refuse to cover employees with serious pre-existing conditions.
In some cases, small businesses would be grateful to get just a 10% or 15% increase. In Arizona, renewals for businesses with 50 or fewer employees will increase by an average 20% to 25% for 1999, according to Dutch Baker, vice president of sales for Phoenix-based insurance broker Black Gould.
"A lot of the health plans in the state are trying to get back to profitability and are also trying to get their medical costs down. As a function of that, they have to raise their prices," Baker said.
Similar increases are being reported by some brokers in Texas and in Florida, where only 10 of 39 HMOs in the state reported a profit in 1997.
Managed care predominates in California more than in any other state, but HMO premium increases there are a mixed bag. In response to mounting losses, Oakland-based Kaiser Permanente began passing double-digit increases to its small-business customers in mid-1998. A company spokeswoman said similar increases will continue this year.
"Although there is a lot of variation among our small-group customers, double-digit increases are the way it's going," said Kaiser spokeswoman Beverly Hayon. "Our rates have been much lower than they should have been, and we have to make up for that," she added.
At Woodland Hills, Calif.-based Health Net, businesses with 50 employees or fewer are facing an average jump of just 4.5% for 1999, but a second increase may kick in July 1, according to Gary Morgan, the HMO's vice president of small-group and mid-market sales. Morgan acknowledged that some of Health Net's competitors have instituted larger increases.
"We've made a significant effort to cut our costs," said Morgan, adding that reimbursements to medical groups in Health Net's network have been cut.
Opinions are mixed about how the increases will affect coverage. Small companies that provide health benefits for their employees are the exception rather than the rule: Only 39% provided healthcare coverage in 1997, according to Dun & Bradstreet.
Anecdotal evidence suggests that higher premiums will force more small companies to drop coverage. According to the U.S. Chamber of Commerce, 41% of 1,604 businesses polled in 1998 said if increases hit 10% to 20%, they would drop coverage.
But another study, by the Kaiser Family Foundation and Harvard University, found that 45% of small-business owners polled said they would be willing to absorb a $20 per month premium increase per employee, and only 9% said they would consider dropping coverage at that point.
Indeed, in a tight job market, employers are not necessarily willing to eliminate employee perks, according to Roger Ruhl, vice president of marketing and membership development at the Cincinnati Chamber of Commerce. A recent membership poll concluded that only 9% ranked rising healthcare costs as their top concern compared with 32% who rated hiring and retaining qualified employees at No. 1. While the number of members worried about healthcare costs is higher than in 1996-when only 5% listed it as their top concern-it is still far below the 20% who said those costs were their top concern in 1993.
Regarding long-term solutions to rate increases, experts anticipate that small businesses will form purchasing pools even though larger pools, such as the Health Insurance Plan of California, could not avoid double-digit increases from many of its members' insurers.
One option might be to mix and match networks and insurers. In Phoenix last month Principal Finance Group "leased" the HMO provider network of Cigna HealthCare of Arizona, said Michael McGinn, a principal at Segal Co., a New York-based benefits consulting firm that helped engineer the deal. The result: Principal's subsidiary Admar will be able to cut its PPO premiums by 20% because of Cigna's capitation expertise.