Finding small business health insurance

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Think it’s difficult for big companies to shoulder rising health insurance costs? Try doing the same thing on a small-business budget.

“For our very small businesses, it’s probably the most challenging circumstance under which people buy insurance,” says Kim Holland, an executive committee member of the National Association of Insurance Commissioners and state insurance commissioner for Oklahoma.

In fact, most of the nation’s uninsured are small business employees or their families, Holland says.

While 99 percent of large companies offer health benefits, the number falls to 49 percent for companies with three to nine employees, according to a 2008 survey by the Kaiser Family Foundation and the Health Research & Educational Trust.

That’s no surprise when you look at the numbers. Health premiums for small business plans have doubled in the last eight years, according to the National Federation of Independent Business. And for smaller companies, those dollars comprise a larger share of their revenues. On top of that, small businesses pay an average of 20 percent more for their health insurance, says Amanda Austin, senior manager of legislative affairs with the federation.

Caitlin Friedman, partner in the boutique New York public relations firm YC Media, has seen her group premiums increase 16 percent this year. She estimates that it now takes the entire revenues from one client to cover the company’s health insurance premiums every month.

“If you’re a small business, that’s a lot,” says Friedman, who is also the coauthor of “The Girl’s Guide to Starting Your Own Business.”

Geography makes a difference

Since states regulate insurance, the landscape for business owners seeking coverage can vary widely by geography. Some states subsidize small business insurance plans. Others allow small businesses to band together to take advantage of group buying power. In addition, in some states, sole proprietors are guaranteed group coverage, (the so-called “group of one”), while others require at least two people to qualify.

For very small businesses, “the good news is that almost every state has adopted some sort of group reform law that ensures small businesses can get insurance for employees,” Holland says.

For individuals, states may have or may be developing pools that “allow individuals to access coverage on a more affordable basis,” she says.

A smart move for small business owners: Brush up on the rules in your state. Talk to several insurance agents, preferably those who work with a number of different carriers, to find out what kind of coverage is available for your business. And call the state insurance department to learn more about the rules and options in your area. Another source: your local chamber of commerce, says Eric Tyson, coauthor of “Small Business for Dummies.”

Want to learn more about health insurance options in your state for groups or individuals?

State health insurance options

“Everybody right now is price conscious,” says Scott Leavitt, president of the National Association of Health Underwriters. Regarding health insurance, that means some employers are eliminating jobs, switching plans or carriers, dropping coverage, raising deductibles or asking employees to pay more of the costs themselves.

Business owners fear that, without a good insurance package, they can’t compete for top talent, says Norman Scarborough, coauthor of “Effective Small Business Management: An Entrepreneurial Approach” and professor of business and entrepreneurship at Presbyterian College in Clinton, S.C. At the same time, with costs increasing, “a lot of them are saying ‘we just can’t do it,’ and cutting it,” he says.

For many small businesses, unlike large companies, health insurance costs affect more than just the bottom line. In some cases, it affects whether they can afford to hire additional people.

To justify even the cost of adding another employee, Friedman says, the person has “to be stellar.”

Go it alone or buy for a group?

Other than price, the options have changed little in the past few years, says Robert Laszewski, president of D.C.-based Health Policy and Strategy Associates, a consulting firm. “The market is fairly fixed.”

For sole proprietors, the answer to the health insurance question often means going to an agent or broker for an individual or family policy.

“There are individual health insurance options in all states,” Holland says. “That would be the option available” for sole proprietors, she says.

But the entrepreneurs face some challenges if they have any pre-existing conditions. In those instances, their coverage options may be limited, more expensive or virtually nonexistent.

“If you’re moderately healthy, there’s a good possibility you can get a good rate in the individual market,” Austin says. “If you’re sick, it’s expensive.”

Healthy business owners likely will find a wide range of choices. But even with a good rate, if they’re used to someone else footing the bill, they’re probably in for sticker shock.

Depending on the state, the process may not be that different for group buyers. In some states, the age or health of your group will matter more than in others. Often, coverage for small groups is just as expensive as the individual market.

“We’ve never had a problem finding insurance,” Friedman says. “But since we’ve been in business, the cost keeps going up every year.”

A group of employees will have definite needs and preferences. And, in a small company, where each person plays a vital role, meeting those needs is even more important.

“You have to take everyone’s needs into account,” Friedman says. “And that can get tricky.”

When you’re deciding how to meet your employees’ needs, that’s also a good time to ask them about their expectations on premiums, Tyson says. “You should get a feel for how much of your premium cost they are willing to pay,” he says.

The cost of insurance is a bigger problem for small business employees, too. Sixty-one percent of employees at small companies shoulder at least a quarter of their premiums (or more), compared to 40 percent of employees at large firms, according to the Kaiser/HRET survey.

Be an expert shopper

Another way to approach the health insurance conundrum is to work backward. Draw up a budget, then talk with several agents to find out what kind of policies you can afford. Of those plans, which comes the closest to meeting the needs of you and your employees?

But don’t make the mistake of looking solely at price, says Pat Halo, a family nurse practitioner and author of “Managing Health Benefits in Small and Mid-Sized Organizations.” Instead, she says, ask “what are the better plans and what do they offer?”

When Friedman and her business partner launched their business nine years ago, “a family plan was important and we needed something that had a higher deductible and lower monthly payments because we were just starting out and had to keep costs down,” she says.

At the same time, she says, “we were entrepreneurs married to entrepreneurs, so health insurance was a priority for us.”

Most small business owners will find a wealth of products on the market. But all of that choice is a double-edged sword, Halo says. Small business owners “have to be expert shoppers,” she says.

Unfortunately, for small business owners, keeping up with health plans is an ongoing process. Even with the same plan, coverage can change from year to year. “A health plan is not a static product, but a field in motion,” she says.

“You have to really understand the plan you’re signing on and really understand the fine print,” Friedman says. To control costs, Friedman and her partner reconfigure coverage at least every other year — sometimes more often. And they’ve switched carriers once.

But all that constant premium shopping is tedious and takes a toll, and sometimes it can backfire, Halo says. Coverage may be cheaper because certain items, like maintenance drugs for chronic conditions, are not covered, she says.

“You don’t want to be penny-wise and pound-foolish,” Halo says. It does no good to switch to a cheaper plan if it means employees can’t afford the drugs they need to stay healthy, she says.

A not-so-secret agent

One secret weapon for many entrepreneurs is an agent or broker who understands insurance and small business.

“For now, an agent is the preferred way to go,” says the business federation’s Austin. “There’s more of a relationship there,” she says. And that’s especially important to small businesses without a human resources person.

“Look for a specialist in small business,” Laszewski advises. The best way to find one is through a referral from another small business owner.

It’s vital to find out exactly how the person is compensated, Tyson says. While some will represent many different carriers, they may be compensated more for some than others. “And agents may push those with commissions,” he says.

Just raise the question, he says. Ask “how does your commission vary with the plans that you work with?” Tyson says.

And, if you’re buying group insurance, talk to your agent about pooling opportunities that spread the insurance carrier’s risk across a larger number of people – and often lower your cost, Scarborough says.

No matter how you do it, “plan on spending a lot of money,” Friedman says. “Insurance is expensive.”

Are HSAs still practical?

Several years ago, many insurance industry insiders and business boosters believed health care savings accounts were one big answer to the health insurance cost problem for small businesses.

The idea pairs lower cost catastrophic policies (coverage with a high deductible, designed to cover high-cost health crises) with accounts in which employees (and sometimes employers) save amounts equal to those high deductibles. For many, they were seen as a tool to help small business owners bridge the gap between the desire to protect employees and the need to stay in the black.

But the concept has one major flaw. It only works if someone funds the HSA account. Otherwise, the insured is just left with a high deductible plan.

“A high deductible health plan with an HSA works well if the savings feature is funded,” Holland says. “Frequently it is not, however, leaving people with large unreimbursed medical bills.

“To reduce costs, employers are going to high deductible options and not funding the savings account,” she says. “And routinely, employees are not doing so.” The end result is that too many times, those employees rack up a $5,000 to $10,000 medical bill even with an insurance backstop.

“As much as half of HSAs are not funded or are not funded properly,” Leavitt says.

One solution some businesses have found is health reimbursement arrangements, Leavitt says. Business owners buy coverage with a high deductible (say $2,000), then fund a portion of that in the HRA (say $1,500). The result is a lower deductible for employees and a premium that the business can afford.