Small employers seek relief from rising health-care costs

Some foresee eliminating benefits if trend continues
Back-to-back years of double-digit health-coverage cost increases have small businesses reeling. And while a few small business owners say discontinuation of health coverage is an option should the trend continue, most are looking to alternative health-care delivery systems and other measures to control costs.
Health insurance costs have increased in fits and starts for the last 20 years, according to data collected by the U.S. Bureau of Labor Statistics.
From 1980 to 1983, health insurance costs as measured as part of the Employment Cost Index accelerated steadily, reaching an annual increase of 23.5% in the 12 months ending March 1983. From that point, the rate of increase declined steadily, to 3.5% in the 12 months ending June 1986. Costs then went up 14.7% in the year ending December 1988, but leveled off to 0.3% in the year ending March of 1996.
In recent years, small businesses have been hit particularly hard as a combination of increasing health-care costs and government mandates for coverage have jacked up premiums. The U.S. Chamber of Commerce says that small business has absorbed average premium increases of 18% to 19% in the last two years, compared with an average increase for all businesses of 7% to 10%.
Rhetoric surrounding the issue has contained threats that, if the trend continues, employers would be forced to drop health-care coverage as an employee benefit. SBT spoke with business leaders about how they planned to deal with rampant increases. While dropping coverage was offered as an extreme possibility, most saw other measures that could be taken to stave off that eventuality.
Bill would increase cost
One state bill that concerns small business advocates is Senate Bill 157 (SB157), currently in committee.
According to the Legislative Reference Bureau, the bill would expand the requirements of current law which mandate that group health insurance policies cover inpatient hospital services for the treatment of nervous and mental disorders, and alcoholism and other drug abuse problems.
The bill would remove requirements for the minimum amount of coverage, but would retain the requirements with respect to providing the coverage. Except for group plans offered by limited-service health organizations, the bill would cover all types of group health benefit plans, including managed-care plans, insurance plans offered by the state, and self-insured health plans of the state and municipalities.
The bill would impose a new requirement that coverage of nervous and mental disorders and alcoholism and other drug abuse problems must be the same as the coverage for the treatment of physical conditions. That means deductibles, co-payments, annual and lifetime limits and medical necessity definitions would have to be the same for nervous and mental disorders as for physical ailments.
According to the Wisconsin chapter of the National Federation of Independent Businesses (NFIB), the mandate would add $27 million to $54 million per year to group health insurance premium costs.
Small businesses would bear most of those costs, according to Bill Smith, state director of the National Federation of Independent Businesses.
“The problem is that self-insured plans regulated under ERISA are exempted,” Smith said. “Only about a third of the state’s insured population would be covered. If you are a big business and self-insured, you are exempt. Any mandate is a hit on small business health-care costs. This one is particularly onerous, as this would increase health insurance costs.”
Smith said that NFIB has seen some members’ rates triple this year.
“The increases are expected to continue in 2002, according to the experts,” Smith said. “With that, and an uncertain economic future, this is the worst time for the legislature to impose any new mandates.”
PEHCPA defeat a blow
According to board members and staff of the Independent Business Association of Wisconsin (IBAW), Gov. Scott McCallum’s veto of the Private Employer Health Care Purchasing Alliance (PEHCPA) was a setback for small business in terms of controlling health coverage costs.
The measure, which would have allowed small businesses to participate in a risk-sharing pool and which would have imposed rate-band restrictions on the health insurance market as a whole, was vetoed by Gov. Scott McCallum.
“We have taken a position in favor of it,” IBAW executive director Steve Sobiek said. “NFIB has taken a position in favor of it. There are three small business associations in the state, and all three have come out in favor of PEHCPA.”
McCallum’s nixing of PEHCPA was characterized as a partial veto — but that’s not the way it looked to observers.
“I would dispute that,” Smith said of the term partial veto. “He couldn’t veto the entire program. But by deleting the funding, he has, in effect, stopped the program dead in its tracks. I can only conclude that is his intention. We have a very serious crisis in the state, and this program is definitely needed.”
PEHCPA originated as part the state’s previous biennial budget bill but was hobbled due to technical problems – problems that were resolved in the version delivered to McCallum as part of the most recent budget proposal.
While PEHCPA would be a self-funded private-industry initiative, the biennial budget proposal included an $850,000 loan from the state life insurance fund. McCallum characterized that funding source as unconstitutional, while PEHCPA sponsors pointed out that it was suggested to them by Senate Majority Leader Scott Jensen.
“There was tremendous expectation on the part of the small business community that this would provide them with some choices,” Smith said. “There is tremendous disappointment and frustration in the small business community.”
Smith said he was particularly mystified by a lack of communication regarding McCallum’s position on PEHCPA prior to the veto announcement.
“We have worked very closely with McCallum when he was lieutenant governor, Smith said. “He has organized and provided the leadership for several governor’s conferences on small business. He has taken the small business agenda to Gov. Thompson. We have been grateful for that support in the past. But I have not received a call from anyone in his office to explain this veto.”
McCallum said several organizations that represent small businesses came out against PEHCPA, including the Metropolitan Milwaukee Association of Commerce, Fox Cities Chamber of Commerce, the Green Bay Area Chamber of Commerce and Wisconsin Manufacturers and Commerce.
“You look at those groups and they do represent larger businesses,” Sobiek said. “There are a lot of health insurance carriers that are members, and they obviously exerted influence.”
Particularly mystifying to Sobiek was the sudden endorsement of Wisconsin Manufacturers and Commerce (WMC) of the veto.
“WMC told me a week or two before the veto that they were not taking a position on this — and then they did,” Sobiek said.
Pool and rate band separate?
“We have never opposed the purchasing plan,” WMC health-care lobbyist Eric Borgerding said. “But the purchasing plan should not be confused with rate bands. We are opposed to them because, from what we have seen, they will raise premiums for the majority of ratepayers.”
Borgerding said his organization was “neutral on this. We even were neutral, if not leaning toward PEHCA, regardless of the $850,000 loan on state life insurance fund.”
“The governor’s small business task force on health insurance opted not to endorse rate bands, which we took as a signal,” Borgerding said. “And the office of the commissioner of insurance has said rate regulation of this sort would lead to higher premiums for other groups. We have seen similar if not identical proposals in other states that have resulted in rates going up, and this has resulted in repeals. We also looked at data from the HMOs and the industry here in Wisconsin. Some people like to believe they are just lying — but we think these people know what they are talking about and we should listen to them. From what we have seen, rate bands do nothing to control costs. They simply shift those costs from one group to other groups.”
Borgerding added that rate band provisions were not part of the original PEHCPA provision in the previous biennial budget. But according to the staff of Rep. Lorraine Seratti, the Florence County Republican who helped move PEHCPA through the Conference Committee, the rate band is critical to preventing adverse selection — a situation where the pool would contain only sicker, older groups.
Seratti’s research assistant, Tim Fiocchi, stressed that changes to an original proposal, introduced by Democrat Rodney Moen, Whitehall, were designed to skirt even more restrictive legislation.
“What came out of conference was that the rates would be limited to plus or minus 10% based on health status and occupation,” Fiocchi said. “To some extent it would eliminate some of the redlining practices we have seen in the past.”
Fiocchi said rate bands would limit — but not eliminate — the use of health status in setting rates. This measure could be defined as less onerous than outright community rating — under which every demographically similar group would receive an identical rate.
“The function of the rate band is to limit the variation based on someone’s health concerns so we don’t have a situation where only the healthy can be insured,” Fiocchi said. “In order for the pool to compete in the open market with the other policies out there, restricting rates allows the pool to compete in the open market without doing the underwriting. No one could compete if they didn’t do some health underwriting. The way the pool saves a great deal of market is that you don’t spend all the money necessarily to do health underwriting. Without them (rate bands) there is no way the pool could compete for any people who are relatively healthy.
Fiocchi implied the system would fail without rate bands.
“Without rate bands, the pool would likely immediately have an adverse selection problem and go into a death spiral,” Fiocchi said. “How tight the rate band has to be is debatable. In California, they started off at 25% and went to 10% after a number of years.”
Smith echoed Fiocchi’s sentiments on the importance of rate bands, stressing that their inclusion in the proposed legislation was actually more restrictive than what was proposed by Blue Cross-Blue Shield.
“This is a modified community-rating approach for the purchasing pool and the rest of the small business community in the two- to 50-employee range,” Smith said. “Blue Cross/Blue Shield made eliminating health status their part of their recommendations. Rep. Seratti suggested the 10% rate band. Gender and age and family size and plan design — all those things they use to rate small groups are unrestricted. Any actuary will tell you age and gender drive most of the rating decisions.”
Smith was cynical about the OCI’s position against rate bands — and suspected Humana had a role.
“Humana is one of the major insurers of small business in the state,” Smith said. “They have operated in other states with more restrictive rating factors. There are about a dozen states that have eliminated health status entirely. These same insurance companies are operating in those states.”
OCI assistant deputy commissioner Eileen Mallow said the office had heard from Humana — and Humana had told the state office that it would pull out of the market if rate bands as included in the PEHCPA proposal were implemented. She said she was not aware of any other state insurance providers expressing such a concern. She took issue with statements implying that the OCI was opposed to rate bands.
“Rate bands are in place right now,” Mallow said, referring to the 30% plus-or-minus restriction that covers the market as a whole. “We recommended that they not be changed.”
Mallow also said OCI was concerned that the Wisconsin pool would not be large enough to spread the risk of large claims around — and that even with rate bands it would fall victim to adverse selection.
Janes: Rate bands add consistency
IBAW board member Jim Janes, president of Oshkosh Marine Supply, has an inside track on understanding the impact that PEHCPA would have on small businesses in the state.
Janes was appointed by Gov. Tommy Thompson to the Private Employer Health Care Coverage Board, which was created in 1999.
“We have been meeting for the past year looking for ways to get a more year-to-year consistency for small business,” Janes said. Janes’ 40-person contract manufacturing house, founded in 1921, has since diversified to serve many non-marine related interests, including automotive and health-care clients. “I think the misconception is that we are trying to lower small business’ cost. Small business is not looking for a reduction in our cost. What we are looking for is fairness, equity and consistency. Small business is seeing more substantial increases than larger institutions. The issue is not price — although we would all like to bring our expenses down. We can all budget for a 6%,10% or even 12% percent increase. But increases on the order of 20% — you just can’t plan for that.
“The rate band became an issue in the current budget. Currently, there is a rate band of 30% for small business based on health status. The budget would have reduced that to 10%. Age would still be a factor, marital status would still be a factor, sex would still be a factor, community status would still be a factor. The reasoning there is that any one of us small business people are only one illness from being top-rated. As a large pool, we would have the same probability as any municipality, government agency or large business. If we can get even 15,000 employees into the pool, then we are equivalent to any one of the large corporations.”
Like Smith, Janes was critical of Humana’s efforts to quash PEHCPA.
“They are a very large underwriter in small business insurance,” Janes said. “They did not join the California group, while Blue Cross/Blue Shield did. They (Humana) are afraid of adverse selection.”
While Janes said he can comprehend Humana’s opposition to a measure that would impose additional government restrictions on its industry, he was, like Sobiek, mystified by WMC’s sudden decision to urge a veto.
“I was really disappointed with WMC,” Janes said. “They sat on the sidelines for three years — and then they asked McCallum to veto it. When all of a sudden one of their large contributors — Humana — comes up against it, they start shouting ‘this is no good for business.'”
Janes said that absent an override of McCallum’s veto or other measures to stabilize costs, some small employers may opt to eliminate health coverage as a benefit.
“I think if we continue to see the 25% to 40% increases, that will happen,” Janes said. “There are formulas as to how many employees lose health insurance for every percentage in cost increase.”
Mallow was adamant that rate bands as proposed in the vetoed PEHCPA legislation would not moderate increases faced by small businesses.
“Rate bands would control the amount above or below a mid-range that rates could be set,” Mallow said. “They would not limit the amount of the mid-range. And they don’t deal with the root of the problem — that health-care costs are going up.”
Treick: Fundamental change needed
Ed Treick, president of the drug screening company S-F Analytical Laboratories in West Allis, shares Janes’ concern given the current trend.
“The problem is that companies cannot afford the high cost of health care,” Treick said. “My agent was in the other day and said the average increase he is seeing is 23%. And that’s on top of 20% last year and 17% the year before that.”
Treick said he was not convinced that government programs of any type could affect the situation, and that structural changes in the delivery of health-care services were necessary.
“The consumer is not involved in the transaction,” Treick said. “We need a way to get those people covered by insurance to find the best deal in health care. There are very dramatic differences in cost for things such as live birth with no complications, from one hospital to the next. Same thing with knee transplants and everything else.”
Treick said employers may drop health coverage if, under new regulation, they can be sued for decisions the plan administrators make.
“I think you will see a lot of employers giving up offering health care if there is any chance employers can get sued through this Patient’s Bill of Rights,” Treick said. “If I chose XYZ health plan and, as a result, my employee was denied care and died, I could be sued.”
Several Patients’ Bill of Rights proposals in the federal legislative process offer employers varying degrees of protection from legal action.
“I think what is going to happen in many cases is employers are going to find different types of plans that may involve the consumer more, be that an MSA which may be the best option or something else,” Treick said.
Treick was particularly interested in a Medical Expense Reimbursement Plan (MERP), a high-deductible plan where the employer takes the risk of paying a certain amount of the deductible.
Whereas most health insurance premiums are more expensive for older workers, MERPs allow employers to contribute the same amount for each employee, ensuring fairness and capping costs.
Treick said MERPs may be more successful than MSAs for a number of reasons.
“MSAs are a hard sell because there are some people don’t want to take that risk,” Treick said. “And there are some people who are on such stringent drug programs that they know their deductible would be used up every year.”
Deabler says focus on cause
Ron Deabler is president of two employment agencies, and feels that skyrocketing health-care costs are of primary concern to small businesspeople.
Deabler’s companies include American Technical Services, with offices in Brookfield and West Allis , and US Techforce, with offices in Appleton and Fond du Lac. American Technical Services employs 12 full-time persons and works with 150 contract employees. US Techforce has eight permanent staff members and 150-200 contract employees in the field.
“It is a serious issue,” Deabler said. ” With the way health costs are going in this country, I don’t see companies continuing to provide medical coverage at the level they are now. I think we are already seeing the coverages being altered — deductibles and co-insurance are going up.”
Rather than discontinuing coverage, Deabler also believes alternative delivery systems will be the norm.
“I am a firm believer in MSAs (Medical Savings Accounts),” Deabler said. “Systems like that are going to lead to a wiser consumer of health care. You are going to ask more questions about the cost of a procedure — maybe shop around a little bit.”
Deabler said it was uncertain whether access to MSAs would be expanded, allowing more businesses to participate.
“It is tough to say — I think they have to be expanded in order for medical coverage to be viable,” Deabler said. “But the politics behind the MSAs are a difficult thing for Washington to juggle. The insurance companies on the one hand like them and on the other hand they don’t. Doctors and large health-care institutions are dead set against them because it will hold their feet to the fire.”
Deabler also has some definite opinions on why small businesses are being hit by these escalating costs.
“It is not a problem necessarily related to insurance companies,” Deabler said. “If you look at large insurance companies — the Humanas of the world — these companies aren’t making any money. They are a pass-through from doctors and hospitals to consumers.
“The real problem with health-care costs is the uncontrolled spending of the large hospital groups today. For example, in southeastern Wisconsin alone, the capital expenditure dollars by the five largest medical groups in this area this year are more than three quarters of a billion dollars. There is no watchdog or control over what they spend. There is no discussion of how many MRI units we need in an area. Years ago there was a federal law that required every state to have an evaluation arm in the legislature — this evaluation arm served to approve all of these types of projects. So if Aurora wanted to do a $300 million expansion, they would have filled out the proposal form and submitted it to the state. The state then has the right to say yay or nay. This law sunsetted 10 to 15 years ago. We are seeing capital expenses at an all-time high, and doctors’ pay at an all-time high.”
Borgerdling says there might be something to Deabler’s arguments.
“What he is talking about is the Capital Expenditure Review process,” Borgerding said. “I was starting to do this type of work when that law was repealed. You can certainly make the case that a lot of the building and expansion that is going on is driving cost through increased utilization or higher charges to pay for that expansion.”
Borgerding added that even when the measure was in effect, very few applications for a certificate of need were denied.
Barring a change in the cost trend, Deabler is afraid some employers will have to do away with health insurance as an employee benefit.
“I think it is coming down the road where employers will eliminate it,” Deabler said. “I had a talk with one of my partners the other day. He asked at what point we eliminate health coverage, give these people an extra $4,000 and tell them to do what they want. This will happen if MSAs are not expanded. As tough as it may seem, when you get these 20% to 30% increases, that’s what we are coming to.”
Oct. 12, 2001 Small Business Times, Milwaukee