Heath insurance proving tough nut to crack for small businesses

The rising costs of providing health insurance are pinching everyone, but small businesses are finding it particularly hard to meet the exorbitant costs in the midst of declining profits.

“We are very concerned at the situation,” said Reese McFaddin, president and owner of Workplace Benefits on Daniel Island. “It’s been an uphill task for us to maintain status quo.”

With daily layoffs, furloughs, and pay cuts ruling the roost, companies are seriously harboring second thoughts about providing health insurance to the employees, according to Paul Thomas, area manager for the Small Business Administration office in Charleston.

“The managers are looking at their options to cut costs. There are fixed costs and variable ones. Though you can do little with the fixed costs, but variable costs can be reduced. And health insurance forms a major chunk of variable cost of any company,” Thomas said.

Recession has had the most profound impact on small businesses, with very few options available to cut costs and stiffen their spending. Moreover, small businesses do not have any group purchasing power, as do some larger corporations.

“Companies have finally realized the need to save money, and are trying to explore different means and strategies,” said Reese McFaddin, president and owner of Workplace Benefits.

The percentage of firms offering health benefits increases with the increase in employee size, according to a 2008 annual study conduced by the Kaiser Family Foundation. About 50% of the firms with up to 9 workers offered coverage, as compared to 78% of firms with 10-24 workers and 90% of firms with 25-49 workers, the study concluded.

This is the direct fallout of the fact that health care premiums for small businesses are an average of 18% higher than those of large businesses, according to the National Federation of Independent Business.

“Plenty of companies simply can’t afford it, and plenty of small businesses simply don’t,” Thomas said. He recently talked to an owner of a company that laid off 47 people, and is now struggling to provide health care benefits to the rest of the 16 employees.

The shortfall in numbers is also forcing significant changes in many small businesses in and around the Lowcountry, including changing carriers, increasing deductibles, dropping group policies, etc.

The Kaiser Family Foundation study found out that several companies are already looking to transfer more costs to employees. Even among the companies that offer benefits, 40% favor increase in the employee contribution towards premiums, and 41% favor increase of deductible.

McFaddin, working with companies to find health insurance policies, has witnessed first hand a recent shift in employer and employee attitudes towards health insurance due to the shaky economy.

“The need to save money has compelled the companies to have a re-look at their options and strategies,” said McFaddin.

“Companies need to save money, and now they’re willing to listen to different strategies,” McFaddin said. A recent trend is for companies to switch to high-deductible plans, she said.

For instance, a deductible increase between $1,000-$5,000 will keep premiums down for the employer and employees. This will compel the employees to set up health savings accounts or health reimbursement accounts, which are gaining popularity, according to McFaddin.

With HSAs, the employees can easily put up to the deductible amount into the savings account. The unused money is carried forward until the age of 65. This also attracts tax benefits, as the deduction is above-the-line, thus, reducing the employee’s taxable income.

“Things were different 3-4 years ago, when people used to flaunt their high-deductible plan,” McFaddin informs. “Today, if we do that for a client, it’s viewed as an expression of thanks to keep the premiums lower.”

Family Services, a nonprofit organization in Charleston involved in offering programs and counseling to families and individuals, offers a traditional and a high-deductible health savings account option for its employees.

It has witnessed tremendous growth in its high-deductible HSA plan over the last few years. Although the costs of providing the plans tend to differ each year, it generally costs less if you opt for a high deductible one. Stephanie Masula, human resources spokeswoman for Family Services, informs, “This year, the cost of traditional plan increased by $70 and $28 for the high-deductible plan.”

Induced savings means there is a high demand for high-deductible plans throughout the country and small businesses top the list. According to the Kaiser Foundation study, during the past two years, there has been an increase from 16% to 35% in the number of workers in small firms with a high-deductible plan.

The study further claimed that around 21% of the companies not yet offering it will be making the shift and offer a high-deductible plan during the next year.

However, switching to a high-deductible plan is not the Hobson’s Choice at this stage.

McFaddin chips in, “Clients need to show some flexibility while buying and some of the changes to consider include agent, carrier or plan.”

Masula, who recommends receiving 3 bids each year from different agents, provides another point worth exploring. As an example, Masula cited Family Services that saved $30,000 when it changed its carriers.