Healthcare costs: big woe for small firms

Health-insurance premiums are up by double digits for the fourth straight year. And Chuck Mott, like millions of other small-business owners around the country, is wondering just how he'll pay them this time around.

He doesn't have many options left. "Depending on how high the increase is, we may have to ask our employees to pay even more of the premium," he says. "But if it keeps going up, I'm not sure how much longer we can continue to do that either."

Health-insurance costs have jumped an astounding 59 percent since 2001 - five times the rate of inflation and five times the growth in wages. Economists blame those spiraling costs for dragging down the economic recovery and putting a damper on hiring in firms of all sizes.

But it's the small businesses - those with 200 employees or fewer - that are getting hit the hardest. On average they pay the highest premiums and get smacked with the largest annual increases. That's because the smaller the number of employees, the higher risks for insurance companies. The end result: Health-insurance costs have become a "critical problem" for two-thirds of small businesses in America, according to a survey by the National Federation of Independent Businesses (NFIB). That's an 18 percent hike since 2001, when 47 percent called healthcare costs a crucial concern.

"Clearly, they've reached a point where they realize that they don't have the tools to deal with this issue over the long term," says Henry Simmons, president of the National Coalition on Health Care. "They realize that all they're doing is putting a tiny Band-Aid on for maybe a year. Then the problem's not only back, but it's back worse than it was."

Because small businesses are forced to deal more directly with the actual cost of healthcare than larger firms that can spread those costs over thousands of employees, think of the small companies as the canaries in the healthcare-system coal mines. And things with them are not well.

Nearly 25 million small-business owners, employees, and families are without health insurance, according to NFIB. That's almost 60 percent of the nation's more than 45 million uninsured.

The numbers are steadily growing. In 2003, 53 percent of all workers in small firms were covered by company health insurance. This year, that figure dropped by three percentage points, according to an annual survey of businesses done by the Kaiser Family Foundation and the Health Research and Educational Trust.

While both large and small employers are substantially increasing the percentage of the premium and other out-of-pocket expenses that employees pay, 99 percent of large firms continue to offer insurance, a number that's held steady over the past four years. But the number of small businesses offering insurance has dropped from 68 percent in 2001 to 63 percent today.

"There's a strong suggestion in some of the data ... that many small employers have done just about all the cost-shifting that they can do," says Drew Altman, president and CEO of the Kaiser Family Foundation. "In the real world, given the wages their workforces make, given the nature of their companies, they face even tougher choices than they have in recent years."

In Seattle, Mr. Mott, who owns the commercial-cleaning business Innovac, knows of some companies that have stopped offering insurance altogether. They just couldn't afford it anymore. But Mott, like most small-business owners surveyed, would like to keep offering some kind of coverage. It helps him attract and retain good workers, but more than that, there's the humanitarian reason. Many of Innovac's workers have been there 10 or 15 years. "They've made a commitment to you, and you feel that you want to make commitments to them, but it's a struggle," he says. "I'm going to have to make choices to maintain the viability of this enterprise. We can't continue to offer all of these things and continue to be viable."

Like most small-business owners, Mott is hoping that Congress will pass a bill that would allow small businesses to band together into large buying cooperatives called Association Health Plans (AHPs). That would allow them to spread the risk among larger groups of people, the same way that large firms do. Healthcare experts agree that will help bring the costs of premiums down in the short run, but many warn it will not deal with the underlying problem, which is the spiraling cost. Indeed, Dr. Simmons points out that large companies like General Motors have also been hit with skyrocketing premiums in recent years, and its managers are no less concerned.

There also appear to be very few viable solutions on the political front. President Bush is proposing expanding health savings accounts to help workers pay for increased costs, while challenger John Kerry wants to expand programs like the State Children's Health Insurance Program so government picks up some of the costs. But neither is proposing the kind of overall change that many experts believe is necessary. That's because none of the solutions is particularly palatable to the people.

"There's a feeling on both sides politically that this issue isn't good for politicians' health," says Robert Blendon of the Harvard School of Public Health in Boston. "The Republicans used to be in love with managed care [in the 1990s], and they ended up with a backlash in their own party. And the Democrats used to be for government limits on hospital spending, and that didn't politically work either."