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Health insurance for small business: Only proposals but no relief

May 04, 2004
By: Gaurav Ghose
State Capital Bureau
Links: SB 728, SB 756

JEFFERSON CITY - It is no secret that when it comes to health coverage among businesses big is beautiful.

And that holds true for bigger of the small businesses. Having between 50-99 employees, these businesses are in better position to get the preferred health plans.

Environmental Dynamics, Inc. (EDI) of Columbia, a 68-employee company which started its operations in 1975, is big enough to share risks, a crucial element in being offered an acceptable health plan for its employees.

The acceptable plan, though, is a shared one. The employees bear 30 percent of the premium costs, with the company paying 70 percent. The rising premium costs in the range of 8-10 percent over the last three years have been split up in the same ratio between the company and the employee.

"We have been pretty fortunate as far as how we have adjusted the rise," said Mark Weaver, Human Resources Director of EDI.

Smaller of the small businesses, on the other hand, have a hard time and, in a majority of cases, say they simply cannot afford health insurance for their employees. In some cases, in this segment of small business, even sole proprietors cannot afford insurance for themselves.

Diggit Graphics, a company specializing in custom printing, graphic and web design and embroidery, is not in a financial state to provide coverage to Beau Ottofy, who works as manager.

Asked about his uninsured status, Ottofy calmly said, "I eat lots of fruits, brush my teeth and do regular exercise."

Owner of Diggit Graphics Kelley Sly himself did not have insurance in the first three years of his business.

"In the last two years, my premium costs have almost doubled, going up from $80 to $130" a month, Sly said.

Sly, however, is considering providing health insurance to two of his employees, one of whom is Ottofy.

Checking quotes for single coverage plans, he found "one company is going to cost me $400 per month and I probably can't afford it."

Nationally, according to the 2002 Census Bureau, of the 43.5 million uninsured Americans, more than 16 million either own, work for or are dependent in some ways on small businesses with employee strength fewer than 100.

Though the number of uninsured in Missouri is less than the national average, the number is rising and stands at 646,012, according to the 2003 Current Population Survey. And in sheer numbers, about 189,000 or 42 percent of the total uninsured workforce are connected to firms with fewer 10 employees.

In recent years, small businesses in Missouri, as elsewhere in the country, have seen double-digit increase in health premium rates.

In fact 62 percent of the members of Missouri unit of National Federation of Independent Business (NFIB), a national coalition representing small businesses, acknowledged, in a ballot survey, premium increases in 2003. Between 21-30 percent of the members who participated in the survey said their insurance bill was up by 14 percent and 11-20 percent said the increase was as high as 28 percent.

And of those surveyed, about 5 percent dropped coverage and about 6 percent switched carriers.

And nearly 38 percent of small business employers absorbed the additional costs and 13 percent passed it on to their employees.

"The smaller the size, the employer has the most problem as far as purchasing health care," said Brad Jones, Missouri State Director of NFIB.

"I would like to equate it with buying your suit off the rack, that's the price," Jones said."There is no negotiation and you have no power whatsoever in the marketplace."

Admitting affordability is the main issue in the small business group size, regional sales manager of Blue Cross Blue Shield Wendy Wiederhold echoed what is evident nationally and in Missouri that majority of the uninsured lies in the 2-9 employee firm size.

And according to the latest Missouri Blue Cross Blue Shield Disenrolment Study, Wiederhold said, approximately 25 percent of their members have terminated without replacement, which means they have dropped coverage and not opted for another carrier.

"Increasing costs of physicians' services, rising costs of prescription drugs, hospital in-patient and out-patient costs, and mostly increase in healthcare spending and utilization," lead to the double-digit increase in premium every year, Wiederhold said.

Add to that legislation, Wiederhold said, where typically every year there has been addition to the state mandate in Missouri.

"That obviously impacts the bottomline," she said.

What the lawmakers have been doing?

Federal and state lawmakers searching for solutions to the rising uninsured population have come up with different proposals.

Over the past two years, President Bush has proposed refundable tax credits for individuals and families, expansion of health savings plans and association health plans (AHPs) as ways to solve the growing crisis.

Since 1994, Missouri has had a program, the Small Employer Health Insurance Availability Act, which requires an insurance carrier to accept all small employers applying for coverage. But the act has failed to rein in the annual escalation of the costs of a policy to a small employer.

"This supposedly sets one in terms of how much a small buuiness can be charged in relationship to other small businesses, but the way the law has been written, it is so vague and has so many exceptions in it, that it does not really compress rates as much as we would hope," said Randy McConnell, the chief spokesman for the Missouri Insurance Department.

During his term, Tim Harlan, former Democrat representative from Columbia, tried to obtain medical coverage for small employers, with 50 or fewer employees, through the Missouri Consolidated Health Plan. The pooling arrangement under Harlan's proposal would have remained under state control that would have had the attractiveness of allowing the small employers to be part of a big group and enjoy the advantages that large employers have. The proposal failed to pass the Senate.

Association Health Plans (AHPs):

AHPs, which have garnered the most attention at the federal level, would allow small businesses to band together under any national trade association across state lines to purchase health insurance, which they cannot otherwise afford. Oversight of AHPs would shift from state insurance regulators to the US Department of Labor.

Embracing the philosophy big is beautiful in order to play the game with more clout, NFIB has been an ardent advocate for the passage of the bills promoting AHPs in the US House and Senate.

"The more you got, the more you have the buying power, and the more you spread the risk," Jones said. And by pooling risk, he said, small businesses could bargain to get a lower rate for a quality health plan.

A Congressional Budget Office analysis estimated that about 2 million people would be positively affected if this proposal were to come to fruition. Missouri's U.S. Senator Jim Talent has been a leading proponent of AHPs. The US House has passed the AHPs legislation that is now pending in the Senate.

Opponents of the AHPs include insurance companies and various state insurance departments, including Missouri's.

The National Association of Insurance Commissioners have come out openly against the AHPs.

According to Scott Lakin, Missouri Insurance Department director, AHPs not only fragment, but also destabilize the small group market and that can result in lot higher premiums in many of the small businesses.

"Also what the AHPs do is that they are excepted from a solvency requirement. If an AHP is formed and ends up going insolvent they also would be protected by the guarantee fund," Lakin said.

Back in the late 1980s and early 90s, he said, that they had the MEWAs (Multiple Employer Welfare Arrangement) and had a lot of insolvency problems and "that was pretty much a disaster."

Also, lack of state regulation could exclude coverage for certain medical conditions which are mandated by the state in order to keep costs down, providing inadequate consumer protection.

Insurance companies complain of what is known as "adverse selection."

"What typically happens in those type of plans is, over time, you have individuals who leave that pool and go to more affordable option, because they are healthy and eligible for more affordable option and those that remain, the older and the less healthy, end up with a higher cost plan," Wiederhold said.

And that could lead to the opposite results: spiralling premiums and an increase in the number of uninsured.

Weaver of EDI, a member of NFIB, said he would be resistant to joining an associational plan.

Concerned about the entry and exit points, he asked "What happens to the plan if it starts escalating and becomes so expensive that you want to go back and shop for smaller plans?"

Tax Credits:

Money received from refundable tax credits would help individuals to buy their own insurance. A government analysis estimates that this proposal would bring in about 4 or 5 million Americans into the insurance net.

Then there are bills to provide tax breaks to small business owners who would provide health insurance to their employees. Six state-Kansas, Oklahoma, Kentucky, Oregon, Maine and Massachusetts-have gone in for and enacted such a legislation.

During the last several years, legislations have been filed in Missouri providing tax credits to employers for offering health insurance for their employees.

Sen. Sarah Steelman's, R-Rolla, 2004 proposal creates a tax credit of up to $2,000 per eligible employer for 10 percent of the contribution made toward a health reimbursement arrangement per eligible employee. Certain farmers will also qualify as eligible employees.

Under Steelman's bill, an eligible employer would cover any business with 75 or less employees working for a minimum of 30 hours per week.

"It is a dollar for dollar reduction tax credit," Steelman said. "I know many businesses that would be willing to take advantage of it."

The credit, under this proposal, could be carried forward for five years. Unlike many other business tax credits, Steelman's proposal would prohibit a business from selling its health insurance tax credits.

The other proposal, sponsored by Sen. Charlie Shields, R-St. Joseph, is on similar lines, but targets the smallest business segment which has the majority of the uninsured.

Shield's bill establishes Small Business Health Insurance Assistance Program under which all employers with 25 or less employees would get a tax credit of 25 percent of the amount paid in premiums for all employees who work for 30 hours.

Blue Cross's Wiederhold said she thinks a tax credit is an attractive incentive to small business employer to sponsor health insurance for the employees.

"Especially with all of the insurance options available in the market at this point, they would be able to afford some medical coverage," Wiederhold said.

However, a 2001 study authored by James Reschovsky of the Center for Studying Health System Change in Washington D.C. concluded that tax credits would have to be substantial, at least 30 percent, to increase the proportion of small firms offering coverage from 40 to 46 percent.

"I think the results would hold even now," Reschovsky said. "Labor market is a lot weaker. There has been a reduction of non-healthy population and there are now fewer working people. It is possible that small firms are less likely to offer health insurance than in 2001," given that health costs have not stopped rising, he said.

The main barrier to the passage of such proposals in Missouri is the cost to the state's tax collection. While Sen. Steelman's proposal has a projected cost of $15 million a year, Shield's bill has an aggregate cap of $10 million.

NFIB's Jones, agreed that a tax credit plan is a good idea but costly.

"Yes, it costs the general revenue, but my theory is we give tax credits for a lot of things and this is a big problem for small employers and employees," Steelman said. "This would be the way to encourage them to do this to get a kind of arrangement going and in the end it might save money on other state insurance programs like the Medicaid."

In Kansas, which had enacted a tax credit legislation in 1999, there was a concern about the fiscal impact, said Sandy Praeger, state insurance commissioner, "but it was very hard to measure because we did not know how many would take the advantage. I don't remember we had a specific dollar amount."

And that was why, she said Kansas proposal had a "sunset" date which meant the program had a limited life, to be terminated within a specific number of years. This sunset limit was later repealed, Praeger said.

"The fact that tax credit phases out for the company after five years, it keeps the fiscal impact under control," she said.

The response has been less than enthusiastic, if not lukewarm, with 33 companies claiming a total of $40,000 in 2001, 46 companies claiming $95,000 and 65 companies at just about $100,000 in 2003.

"It is increasing, but we are a little disappointed that more are not participating."

More than anybody, Sly of Diggit Graphics understands the importance of such a proposal.

"The cash flow is just not there to keep it going," Sly said. "Any break is welcome."

Professional Employer Organizations (PEOs):

Clay Bethune started Americas Cash Advance, Inc. in 1999, managing all his operations, including payroll and human resources. But after two years Bethune hired Moresource, a professional employer organization, to take over the critical human resources functions, employee benefits and payroll side of the business.

Bethune said doing payroll is very time consuming and it is difficult to make sure that the reports are done accurately and on a timely basis. Also, he wanted to provide different benefits to his 11 employees.

"We were able to get a cheaper cost associated with 401 (K) and health insurance and they were able to manage it all for me to allow me to spend more time in my business rather than spend on what they do," Bethune said.

Kat Cuningham, owner-founder of Moresource with clients ranging from one employee group to Fortune 500 and Fortune 1000 employers, said the costs are contained based on management by her PEO. She said that there is an ongoing dialogue with my clients as to what their needs are, to continually search for new value added benefits.

"Also we are able to provide coverage to those who cannot get it in the private market place," Cunningham said.

However, Bethune is under no illusion when it comes to yearly escalation in health insurance plans, saying that last year there was a 30 percent increase.

"This is something as a small business owner company, something that you have to realize that if you are going to be in the health insurance benefits game, you are just going to have to eat those costs," Bethune said.

And here comes in Moresource that is able to shop Americas Cash Advance group around and able to provide them with a reasonable deal.

"Like next year we are actually, already planning on switching we know that tremendously would lower rate than what we are paying now," he said.

No Ray of Hope?

Missouri's small businesses, particularly the smaller segment, are waiting for some relief. And would that be an endless wait?

"It's going to be pretty tough to do anything this year, but hopefully as revenues improve it would be possible to have tax credits," Shields said.

Lakin, the Insurance Department director, said he thinks none of the problems will be solved until a more comprehensive approach is taken.

"I think we have got enough money in the system being spent now but not spending in the right places," he said.

According to him, the present incentives for the insurers are not probably put in place very well.

"The way insurance companies make money is by getting sick people healthier rather than excluding people from their plan," Lakin said.

The health changes proposed in the state in 1994, he said, would have dramatically helped the market place. The bill had proposals like modified community rates and not allowing companies to exclude coverage based on pre-existing conditions. The bill had passed the House and came within a day of passing the Senate.

"I am not sure we have the political dynamics right now in the state to get back to the point where we were in '94. But until we ratchet down the politics a little bit and sit down and really discuss serious public policy in the area of health care, I am not sure much is going to get done," Lakin said.

Echoing Lakin, Kristoffer Hagglund, co-director of the University of Missouri's Center for Health Policy, said the problem has no one big solution.

"Maybe we want compromise on AHPs...some kind of compromise that would protect consumers, that would not compromise insurance laws or have some kind of programs that there could be some modest tax breaks to small business that does not reduce significantly impact state revenue," Hagglund said.

"And you might have a solution there that would require additional discussion and compromise by all parties," he said.

And so like past years, the problem in 2004 has been answering the question of who ultimately pays the price -- employers, employees, consumers or the tax payers.