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Small firms scrapping, scaling back health plans

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DAVID A. LIEB
November 18, 2009
— Faced with high health insurance costs, a North Carolina brokerage passed the buck on to its employees, a Texas public relations firm switched from group insurance to stipends, and a Missouri travel agency let its workers walk away instead paying for insurance.

Across the country, businesses already strapped by the economy to turn a profit are sacrificing or scaling back employee health insurance plans because of their escalating costs. The crunch has particularly socked smaller employers, who have become a centerpiece in the debate over how to overhaul the nation's health care system.


In recent weeks, small business owners have pleaded their case to the White House and Congress. Top Democrats in both the House and Senate have announced probes into how health insurers price their policies for small businesses. And lawmakers have proposed a variety of insurance rating changes, mandates and tax breaks to try to control costs.


That comes against a backdrop of some stark statistics:


Small businesses are paying an average 18 percent more than the largest firms for comparable health insurance policies, according to a study financed by the Commonwealth Fund.


Many small businesses are facing double-digit rate increases for insurance coverage this fall. Insurers are requesting small group rate hikes of 10-15 percent in Ohio, an average of 15-16 percent in Maryland and as much as 20 percent in Washington state, according to an informal survey by the National Association of Insurance Commissioners.


The number of businesses with three to nine employees that offer health insurance has shrunk from 58 percent in 2002 to 46 percent this year, according to the Kaiser Family Foundation.


"There's no way that (small businesses) can go another 10 years like the last 10 years," said James Gelfand, senior manager of health policy for the U.S. Chamber of Commerce.


Small companies lack the leverage of their bigger counterparts to negotiate with insurers. So when health insurance rates rise, they often look for a new insurer a time-consuming task for firms that lack a human resources department. Many small businesses seek to soften rate hikes by asking employees to make higher co-payments, offering high-deductible plans, switching to less generous benefits or simply dropping their coverage.


Cooper Smith tried each of those options over the past several years while straining to offer health benefits at his four-person public relations firm in Dallas. He dropped dental coverage, doubled the employees' yearly health care deductible from $1,500 to $3,000 and raised co-payments for doctor visits and prescription drugs.


"Every year I just saw it go up and up and up, like 18 to 20 percent, and every year we did what everyone does we tried to figure out ways to get the cost of the plan down," Smith said.


Finally, Smith's firm decided to drop its group health insurance plan in favor of a $125 per month stipend that each employee can put toward an individual insurance policy. Smith was surprised to discover that insurers wouldn't sell him an individual plan because of a diagnosis of psoriatic arthritis. So he now pays about $425 a month for a $5,000 deductible policy through Texas' high risk insurance pool.


About three-fourths of states allow insurers to vary their standard rates by demographics such as age and gender, geography, industry and the cumulative health status of the people covered in the group. A small business with more older workers or women of childbearing age is likely to pay more than one composed mainly of young males. Employees with pre-existing health conditions or an unexpected big medical expense also drive up premiums for a small group, making it hard for small business owners to plan for their health care costs from year to year.


Classic Travel Tours & Tanning in Jefferson City, Mo., sought to provide health insurance when one of its fewer than a half-dozen employees developed breast cancer, said owner Linda Bax. But there weren't enough other employees wanting to purchase a policy for the company to be able to afford it. Eventually, the employee with cancer quit.


"We've had some great employees who have had to leave" for other jobs, Bax said. "Even though they took a cut in pay to go someplace else ... it provided them the benefits they needed."


Proposals in Congress would prohibit the insurance industry from adjusting rates based on the health of employees, though some variation for age would still be allowed. Small businesses also could more easily shop for policies through a new health insurance exchange.


Both the House and Senate versions would offer temporary tax credits to offset a portion of the health insurance costs for businesses with fewer than 25 employees and average wages of less than $40,000.


Those provisions could make health insurance more affordable for small businesses currently priced out of the market. But others not now offering health insurance could find themselves forced to do so.


Legislation passed by the House would impose a tax penalty on businesses with payrolls of more than $500,000 that don't offer health insurance or fail to pay at least 72.5 percent of the premium costs for a health plan with federally mandated benefits.


The National Federation of Independent Business estimates that payroll threshold would get triggered for businesses with about 17 employees. The group lists the mandate to offer insurance and the corresponding tax penalty as its top two reasons for opposing the legislation.


"It's a roadblock to job growth," said NFIB tax counsel Bill Rys. For a business near that payroll threshold, "the cost of adding one or two workers isn't just the cost of hiring the employee, it's the cost of complying with the mandate."


Ashley Ascott, whose 12-person brokerage firm sells commercial, home and car insurance, says her Morrisville, N.C., company faces the same financial pressures her customers are facing. She's laid off one employee, cut another to part-time and has two people working four-day weeks.


Yet her insurance company still is struggling to provide its workers health coverage.


Last year, the company paid 60 percent of the health insurance premiums. This year, Ascott switched to a flat $100 monthly contribution, amounting to about 40 percent of the cost for an individual plan and less for family coverage.


"We still need to provide it, but we just couldn't keep paying the 60 percent," she said.


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Associated Press Writer Tom Murphy in Indianapolis contributed to this report.



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