Health Insurance for Your Small Business

By Stacey L. Bradford Published: September 21, 2005



MAKE A LIST OF the biggest headaches facing small-business owners and finding affordable health insurance for employees ranks right near the top.

Thanks to soaring insurance premiums, many small-business owners say health insurance is a luxury they simply can't afford. According to a recent survey by the Kaiser Family Foundation, a nonprofit organization based in Menlo Park, Calif., small firms (defined as those with three to 199 employees) experienced a 9.8% increase in health-insurance premiums in 2005. The average small company now pays $4,032 a year for individual coverage and $10,584 for a family. While the increase is less than what insurers demanded last year — rates increased a staggering 11.2% in 2004 — it comes on the heels of three years of double-digit price hikes. That's forced some small employers to drop coverage altogether.



Indeed, while 98% of large firms (defined as 200 employees or more) provide health insurance for their workers, only 59% of small firms do. Back in 2000, the figure was much higher with 68% of small businesses offering their employees health benefits. As you might expect, the smallest firms (those with just three to nine employees) struggle the most with affordability and only 47% of them provide any type of coverage.



Of course, dropping health coverage may hurt your business more than you think. You could risk losing your top employees and it may keep you from attracting top talent, warns Todd McCracken, president of the National Small Business Association. So small-business owners may be better off finding ways to reduce their health-care costs without discontinuing coverage altogether.



The key to affordability is to shop around from carrier to carrier and to consider sharing some of the costs with your employees, he says. In many cases, small-business owners can lower the premiums by increasing deductible levels or raising the co-payment for certain services, such as office visits and medications. While you might not be able to provide your workers with the Cadillac of PPOs, they'll be grateful to have some coverage rather than nothing.



Here's are some ways for small-business owners to reduce their costs and still offer comprehensive health benefits.



Share the Pain

Just because your insurer is raising rates by a painful 10% doesn't mean that you have to shoulder the entire increase. Consider passing it along or splitting the rate hike with your employees, suggests Gene Fairbrother, the lead small-business consultant for the National Association of the Self-Employed.



Even if you aren't struggling with a price hike you can save money by increasing the percent of the premium employees pay out of their own pockets. A common arrangement for employers is to ask their workers to cover 30% of their own premiums and 100% of the family's premium, says Madelyn Flannagan, vice president of education and research for the Independent Insurance Agents and Brokers of America. In many states there are no restrictions on how much an employer must contribute. Even in states like California, which have regulations that dictate minimum contribution levels, the minimum amount an employer must cover is only 50%.



Shave Benefits

Small-business owners should be able to keep the premium at the same price as last year if they shave some of the benefits in the plan, says John Nelson, Jr. co-CEO of Warner Pacific, an insurance brokerage based in Westlake Village, Calif. One way to do this is to raise the co-payment for office visits. By increasing the co-payment on a Blue Cross of California PPO from $30 to $40, a small company of five employees can decrease its monthly premium by $232 or 13%, says Nelson. Cut out drug coverage for branded medications and the premium will shrink $532 or 28%, he says.

High Deductible Plans

By far, the biggest savings are found on high deductible plans. Across the country, premiums decrease by 10% to 30% when the deductible jumps from $500 to $2,000, says Emily Fox, a spokeswoman for eHealthinsurance.com.



The savings can be even more significant in certain parts of the country. In California, for example, a small employer with five employees could save $750 a month or 40% by switching from a Blue Cross of California plan with a $500 deductible (with a $30 co-payment for office visits) to a $2,400 deductible (with a $35 co-payment), says Warner Pacific's Nelson.



Since a high deductible plan can be a bit difficult for many employees to stomach, you can soften the blow by offering to contribute part of the money you are saving on premiums into a Health Savings Account (HSA) for each worker. The IRS allows both employers and individuals to set aside pretax dollars into an HSAs to help pay for out-of-pocket medical expenses, including those steep deductibles. Any money that isn't used in a given year can be rolled over into the next for future medical expenses. Click here for more on HSAs.



Medical Reimbursement Plans

Health insurance still too expensive? Here's your chance to spend whatever amount you can afford. Under Section 105 of the tax code, the IRS allows small businesses to reimburse their employees for medical expenses. The business owner sets the amount of money he is willing to lay out every year and the employee then goes out and purchases health insurance on the individual market. Payments from Medical Reimbursement Plans are tax-free for the employees and tax deductible for business owners. One of the nicest features of these plans is that it allows employers to offer some type of medical benefit without the headaches of worrying about rising premiums, says National Association for the Self-Employed's Fairbrother.