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Not much is insured

Monday, May 24, 2004 | 12:00 a.m. CDT; updated 12:52 a.m. CDT, Sunday, July 20, 2008

Finding health coverage continues to be a big hurdle for small businesses, despite the efforts of some legislators and employers. Since 2001, with health insurance premiums seeing double-digit increases, small businesses — defined by the Bureau of Labor Statistics as employing fewer than 100 people — have been the hardest hit. Legislative proposals — state and federal — have had mixed results and have not succeeded in resolving the growing crisis.

Of the 43.5 million uninsured Americans, more than 16 million own, work for, or are dependent in some way on small businesses, according to the 2002 Census.

Though the percentage of uninsured people in Missouri is less than the national average, the number is rising and stands at 646,012, according to the 2003 Current Population Survey. Among small businesses, size matters.

About 189,000, or 42 percent, of the total uninsured work force in Missouri are connected to firms with fewer than 10 employees.

“The smaller the size, the more problems the employer has as far as purchasing health care,” said Brad Jones, Missouri state director of the National Federation of Independent Business.

It’s like buying a suit off the rack, Jones said: “There is no negotiation and you have no power whatsoever in the marketplace.”

Environmental Dynamics Inc. of Columbia, a small business by definition, is big enough to share risks, a crucial element in offering an acceptable health plan for employees.

The company, which started its operations in 1975, has 68 employees. The acceptable plan is a shared one. Employees bear 30 percent of the premium costs, with the company paying 70 percent. Premium costs have risen 8 percent to 10 percent over the past three years and have been shared in the same ratio.

“We have been pretty fortunate as far as how we have adjusted to the rise,” said Mark Weaver, human resources director of Environmental Dynamics.The smaller small businesses, on the other hand, say they simply cannot afford health insurance for their employees. In some cases, even sole proprietors cannot afford insurance for themselves.

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Diggit Graphics — a Columbia company with two full-time employees 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 said, “I eat lots of fruits, brush my teeth and do regular exercise.”

Diggit Graphics owner Kelley Sly 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 is considering providing health insurance to two of his employees, including Ottofy.

In recent years, small businesses have seen, on average, double-digit increases in health premiums.

Sixty-two percent of the surveyed members of the Missouri unit of National Federation of Independent Business, a national coalition representing small businesses, acknowledged premium increases in 2003.

Five percent of the members said they dropped coverage and about 6 percent said they switched carriers.

And according to the latest Missouri Blue Cross/Blue Shield Disenrollment Study, about 25 percent of its members have dropped coverage and not opted for another carrier, said Wendy Wiederhold, regional sales manager of Blue Cross/Blue Shield.

“Increasing costs of physicians’ services, rising costs of prescription drugs, hospital in-patient and out-patient costs, and mostly increases in health-care spending and utilization” lead to average double-digit increases in premiums every year, Wiederhold said.

Costs also increase when the state mandates, almost every year, coverage to more ailments. “That obviously impacts the bottom line,” she said.

What have lawmakers been doing?

Since 1994, Missouri has had 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 (regulations) in terms of how much a small business 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.

At the federal level, President Bush signed a bill last year creating health savings accounts, which are open to individuals covered by a high-deductible insurance plan. Either an employer or an individual can contribute to these tax-free savings accounts to pay for routine medical expenses. If a fund is not used, it rolls over to the following year. It is too early to measure the law’s impact.

The two most talked-about proposals at both state and federal levels deal with the creation of association health plans and refundable tax credits for individuals, families and employers.

Association health plans have garnered the most attention at the federal level. President Bush has been pushing for these plans that would allow small businesses to band together under any national trade association across state lines to purchase health insurance. Oversight of association health plans would shift from state insurance regulators to the U.S. Department of Labor.

Sen. Jim Talent, a Missouri Republican, has been a leading proponent. The House has passed the association-health-plans legislation that is now pending in the Senate.

Embracing the big-is-beautiful philosophy to play the game with more clout, the National Federation of Independent Business has been an ardent advocate for passage of bills promoting association health plans.

“The more you got, the more you have the buying power, and the more you spread the risk,” Jones said.

By pooling risk, he said, small businesses could bargain to get a reasonable rate for a quality health plan.

A Congressional Budget Office analysis found that about 2 million workers would gain employment-based coverage under the plan. Consad Research Corp. puts the figure at about 8.5 million workers.

Opponents of the association health plans include insurance companies and the Kansas City-based National Association of Insurance Commissioners.

According to Scott Lakin, Missouri Insurance Department director, association health plans fragment and destabilize the small group market, which can result in higher premiums for 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.

Also, lack of state regulation would exclude coverage for certain medical conditions mandated by the state.

Insurance companies complain of what is known as “adverse selection”: As younger, healthier people leave a plan for more affordable options, pool of those who remain are less healthy and must pay higher premiums as a result.

And spiraling premiums could lead to the opposite result: an increase in the number of uninsured.

Weaver of Environmental Dynamics, a member of the National Federation of Independent Business, said he would be resistant to joining an associational plan.

“What happens to the plan if it starts escalating and becomes so expensive that you want to go back and shop for smaller plans?”

The other major proposed change, tax credits, comes in two types — those that would help individuals and families and those targeted to employers.

President Bush’s proposal to establish a refundable and advanceable tax credit of up to $1,000 for individuals and $3,000 for families is expected to help low-income workers buy health insurance coverage. Money received from refundable tax credits would help individuals buy more affordable insurance. A government analysis estimates that this proposal would bring about 4 million to 5 million Americans into the insurance net. Critics say that even with tax credits, individuals and families would hardly be able to afford insurance from the private market.

Then there are bills to provide tax breaks to small-business employers who would provide health insurance to their employees. Six states — Kansas, Oklahoma, Kentucky, Oregon, Maine and Massachusetts — have enacted such legislation.

Similar legislation in Missouri moved past the committee stage in each of the past few years but was not taken up by the House or Senate.

This year, Sen. Sarah Steelman, R-Rolla, proposed a tax credit of up to $2,000 for an employer who pays 10 percent toward reimbursing an employee’s health expenses.

“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 other proposal, sponsored by Sen. Charlie Shields, R-St. Joseph, required employers to pay 25 percent of the premium and targeted the smallest businesses — those with fewer than 25 employees.

Wiederhold, of Blue Cross, said she thinks a tax credit is an attractive incentive to small business owners to provide coverage to their 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 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 percent to 46 percent.

“I think the results would hold even now,” Reschovsky said. “The labor market is a lot weaker. There has been a reduction of nonhealthy 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).”

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

Jones, of the National Federation of Independent Business, agreed that a tax credit plan is a good idea but is 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 enacted tax-credit legislation in 1999, there was a concern about the fiscal impact, said state Insurance Commissioner Sandy Praeger.

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

The response to the Kansas tax credit plan: 33 companies claimed a total of $40,000 in 2001. By last year, there were 65 companies claiming about $100,000.

“It is increasing, but we are a little disappointed that more are not participating,” Praeger said.

However, more than anybody, Sly of Diggit Graphics understands the importance of a tax-credit proposal.

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

What are small businesses doing?

To deal with human resource issues, including employee benefits, small businesses are employing a variety of strategies.

One method is hiring a professional employer organization. Though the employees are on the rolls of the professional employer organization, which pays for their salaries and benefits, their day-to-day functions are directed by the small-business employer. Usually the small-business employer pays an annual fee to the professional employer organization to cover overhead costs.

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

Bethune said 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 it on what they do,” Bethune said.

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

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

Therefore, a company like Moresource comes to play an important role in shopping around to provide Bethune’s employees a reasonable deal.

“Like next year, we are actually already planning on switching,” Bethune said. “We know that would be a tremendously lower rate than what we are paying now.”

Another strategy employed by some small businesses — consumer-driven health plans — still has a low enrollment. Under such plans, the employer sets aside a specific amount of money under a savings account, which the employee can use to cover deductibles and other medical costs when they exceed the covered amount. The unused amount can be rolled over to the following year. It is a high-deductible medical plan that would keep the premium low. Such plans make the insured workers in charge of their own plans, making them more responsible for their medical spending.

Is there hope?

Missouri’s small businesses, particularly the smaller segment, are waiting for relief. Will that be an endless wait?

Steelman said she is disappointed and is unable to fathom why legislation never makes it when members of both parties know that it is a serious problem afflicting small business.

“I think the reason is political, I don’t know,” she said.

Shields said proposed tax credits would be difficult to pass without state revenue situation improving.

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 we’re not spending in the right places,” he said.

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

“The way insurance companies should 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 marketplace. The bill had proposals such as modified community rates and not allowing companies to exclude coverage based on pre-existing conditions. The bill had passed the House but fell in the Senate on the last day of the session.

“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,” Lakin said. “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.”

Kristoffer Hagglund, co-director of MU’s Center for Health Policy, said the problem has no one big solution — every proposal carries no simple answer, and all will require compromises.

The ultimate question is: Who pays the price — employers, employees, consumers or the taxpayers?


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