Small Companies Test Innovative Ways to Cut Health Care Costs

As health costs continue to rise faster than inflation, some small firms are dropping coverage, but more are experimenting with new ways to provide it for less.

By Martha Lynn Craver, Associate Editor, The Kiplinger Letter

October 14, 2008

The results of ever increasing employer health care costs are most apparent at small businesses -- only 62% of firms with fewer than 200 workers still offer insurance. That's down from 68% in 2000, according to a recent survey by the Kaiser Family Foundation, a nonprofit research group. Among those not offering benefits, nearly half (48%) cite high premiums as the most important reason for not doing so. "Many small businesses struggle just to provide any health benefits for their workers, and when it is offered, their workers on average pay more for family coverage and face higher deductibles than those working for big employers," says Gary Claxton, a Kaiser vice president.

Firms that still offer insurance are doing their best to keep costs down. One option is self-insurance. More small employers are going that route, though it is considered too risky for businesses with fewer than 50 employees. A company that self-insures usually buys a stop-loss policy to protect against catastrophic illness while tapping its own resources for most other health care claims. Companies that self-insure may not save a great deal on premiums, but there are other advantages. One is that self-insured employers aren't subject to state mandates on coverage. In addition, policies can be tailored to the particular needs of a firm's workforce -- skipping maternity care and adding checks on high blood pressure, for example, if most workers are older.

High-deductible plans are also gaining with small employers. Many small firms are pairing these plans with HSAs (health savings accounts) or HRAs (health reimbursement arrangements). These account-based products are similar, but there are differences in the fine print. Both allow employees and/or employers to set aside pretax income to cover medical expenses. Deposits in HSAs and HRAs may accumulate from year to year. Businesses can deduct contributions to HSAs and HRAs, and their accompanying high-deductible plans, just like traditional insurance, and employees can use the funds tax free to pay out-of-pocket medical expenses.

Employers should also check into plans offered by associations or trade groups -- rotary clubs, medical associations, chambers of commerce, etc. But don't assume these plans are cheaper than those offered by a local broker, says Paul Fronstin of the Employee Benefit Research Institute. Association-sponsored plans may have more options for small employers, but before signing up, employers should check out any plan with the National Association of Insurance Commissioners at https://eapps.naic.org/cis.

Public-private partnerships are showing promise. Premium subsidy programs in Oklahoma and Arizona are increasing the number of insured workers, although further expansion may be hindered by tight budgets. Insure Oklahoma provides premium assistance to small employers with two to 50 low-wage workers. The employer pays 25% of the premium, the employee pays up to 15% and the state pays the remainder. It's funded by a tax on tobacco and a federal Medicaid match. The two-year program currently provides coverage to about 10,000. What's more, 56% of enrollees were previously uninsured. "The program has a multiplier effect. For every one person who is subsidized, 1.4 persons can get insurance because the employer didn't offer it before," says Bert Marshall, president of Blue Cross and Blue Shield of Oklahoma.

Arizona has a similar, but smaller program, with nearly 5000 workers covered. In the program, which just began in 2007, small firms with two to 25 workers are eligible for up to three years. The employers are issued discount certificates that they use to buy private insurance.

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