As health insurance rises, fewer firms pay

The cost of health insurance is on the rise again. Premium increases are jumping back into the double digits, and Jeff Morton has only one thing to say about it: "Ouch!"

As the chief financial officer of a small graphic-arts company in Portland, Maine, he's expecting its health insurance premium to go up in "excess of 25 percent" next year. That's on top of a 20 percent hike this year.

"There's actually a two-step process we go through," he says. "First, we see what's in the envelope ... then after that, we sit down and determine if we can stomach the rate increase. If not, we go out to bid."

Other businesses around the country are finding themselves in the same boat, just when the economy is sputtering and they're facing shrinking profits. A survey released yesterday by the Kaiser Family Foundation found that health-insurance premiums jumped 11 percent this year, the biggest hike since 1992. Experts are predicting that next year, premiums will go up even more, an average of 13 percent. And for small businesses, the news is worse. Their premiums could go as high as 40 to 50 percent.

As a result, the number of companies offering health insurance has remained flat over the past two years. In the near future, many workers may find themselves paying more for insurance, through either higher deductibles or bigger co-payments.

"If the trend continues, you're definitely going to see more employers saying to their employees, 'You pay more,' " says Robert Blendon of the Harvard School of Public Health in Boston. "That's because there's nothing on the horizon to figure out how to slow these costs."

Three main factors have led to the spike in healthcare spending: the cost of prescription drugs, increasing fees charged by doctors and hospitals, and the consumer backlash to the restrictions imposed by managed-care systems over the past 10 years.

"You've got pressure from all fronts, but a lot of it is reacting to the squeeze-down that resulted from implementation of managed care," says Diane Rowland of the Kaiser Family Foundation in Menlo Park, California. "Now we're going through a readjustment back to more historical patterns in terms of rising healthcare costs."

When insurance companies switched to the managed-care model, they tried to save money by putting restrictions on when people could go to the doctor and which doctor they could see.

That didn't sit well with many consumers, who complained to Congress. It, in turn, forbade some of the more Draconian restrictions, such as requiring permission before going to an emergency room. Lawmakers also banned the so-called "drive-by deliveries," in which women gave birth and were sent home the same day to save money.

"What we learned in the managed-care debate is that the public's tolerance for limiting their access to medical care is not great. People want healthcare services," says Ms. Rowland.

Yet rolling back such restrictions has carried a price. Managed-care companies and health-maintenance organizations aren't saving as much as they believed they could, and they're passing the extra costs on in the form of higher premiums.

Hospitals and doctors are also adding fuel to the soaring costs. Throughout the 1990s, as managed-care organizations and HMOs took control of a larger share of the insurance market place, they forced healthcare providers to accept lower rates of reimbursement for their services. As a result, many hospitals shut down or consolidated.

That's given the remaining hospitals more bargaining power. And doctors, who felt misused by the health insurance companies, began to organize. With their new clout, the two groups are now successfully demanding higher rates of pay.

But many experts contend that prescription-drug spending is the biggest current culprit in the push for higher insurance premiums. Americans are not only using more prescription drugs, but they're also using new, more expensive ones. The result: Prescription drug costs are increasing at three times the rate of other healthcare costs.

"In many markets, drugs will soon surpass doctors as the second biggest component on health-insurance premiums. We're not doing anything effective yet to take on the drug companies, and we really need to," says Alan Sager of the Boston University School of Public Health.

But right now, Jeff Morton doesn't have time to waste. He's holding his breath, waiting for the next bill from the insurance company.

So far, Northeastern Graphic Supply, which is a 61-year-old, family-owned company, has managed to pay 100 percent of the cost of its employees' insurance, even though its competitors don't. That puts Northeastern at a bit of an economic disadvantage.

"But we don't have a lot of turnover either, so there are benefits to having a strong healthcare plan," says Morton. If the premiums keep going up, however, the company may have to ask their employees to help defray some of the cost.

"It came up about two years ago, but we tabled it," he says. "We tabled it again last year, and I'm sure if we see a sizable increase, it will come up as an issue again."