SICKENING COSTS Small businesses have no easy solution to rising health care fees

Fifteen years ago, Stanley Hiken could afford to offer Blue Cross coverage to his employees for free. But by 1988, the owner of Hiken Formal Wear Inc. was paying $90,000 a year to cover his 35 or so employees, including his own family.

When the Blue Cross rates shot up to $120,000 for the next year, despite the fact that Hiken Formal Wear hasn't filed a large claim in 15 years, Mr. Hiken had no choice but to dress down his company's generous health coverage: He switched to the PHN health maintenance organization and saw his annual health bill drop to $62,000, with his employees contributing $36 a month.


This year, however, the bill rose to $72,000, and the employees' contribution increased to $54 a month. "We're entering into Blue Cross and Blue Shield's realm," Mr. Hiken lamented, "but God knows what they're charging now.

"It's making it so that we can't survive," he said. "It's actually putting us on the ropes."


Mr. Hiken's only consolation may be that he's not alone. The issue of health care has been rising on the national agenda lately, but not as fast as the cost of health care. The money spent on employer-sponsored health plans has increased by 15 percent a year, or roughly three times the general consumer price index for the last four years, according to The Wyatt Co., a Washington-based benefits consulting group.

Last year, Americans spent $666.2 billion on health care, a 10.5 percent increase from 1989, according to Wyatt. That money represented 12.2 percent of the gross national product, up from 11.6 percent in 1989.

"It gets to be ridiculous," said Ronald A. Bialzak, owner of A. F. Bialzak & Sons Inc., a Highlandtown florist. His company switched from Blue Cross to the CareFirst HMO two years ago. "You can only charge so much for your products" to cover fixed costs such as health care, Mr. Bialzak said.

With costs generally on the rise, it stands to reason that a company that wants to stop spending more on health care must cut back on the level of benefits. That's because about the only option that saves money but still preserves the most benefits -- setting up a self-insurance fund -- makes economic sense only for companies that can spread the risk among a large pool of employees, at least 250, according to health insurance consultants.

The easiest way for small companies to lower their health care costs is to ask employees to use their spouses' health insurance when possible. Courts have ruled that an employer may require workers who earn less than their spouses to file claims under the spouse's health plan, but enforcing such a policy can be next to impossible.

The next step any company should take, most consultants urge, is to offer employees the option of paying for their coverage with pretax dollars. Depending on an employee's tax bracket, the savings could reach 30 percent. Companies save money by reducing their overall wage base, and therefore their employment taxes.

But only 38 percent of small to midsized companies currently allow their employees to pay with pretax contributions, according to Andrew E. Zuckerman, the Grant Thornton accounting firm 's national coordinator of employee benefits specialists.

"This is a concept that all employers should be considering," Mr. Zuckerman said, "and they're not."


Small companies that must take the next step, raising employees' costs or lowering benefits, will find there are a variety of ways to do it, some less painful than others.

Employers who encourage workers to pay a share of the health vTC costs through pretax contributions may find it easier to ask employees to pay more, as Hiken Formal Wear did. The third painful step is to change the levels of co-payments and deductibles.

Mark C. Medairy Jr., a partner with Towson-based benefits consultants Duke & Medairy, said that raising a deductible from $250 to $500 can lower premiums by 7 percent to 10 percent. Another rise to a $1,000 deductible means another 7 percent reduction in premiums, Mr. Medairy said.

And while the standard co-payment for an employee used to be 20 percent of the first $2,500 in medical bills, or $500, many companies are raising that ceiling to $5,000 and beyond, for a $1,000 co-payment. Some are raising the percentage of co-payment to 30 percent or 40 percent, Mr. Medairy said, and some companies are doing both.

Another option may sound like a bit of a gamble, but it could save a lot of money. The "split-funded plan" allows an employer to pay a discounted rate, with the threat of a surcharge if claims run higher than expected. Under this plan a 25-employee company that ordinarily would pay $8,000 a month for insurance could pay as little as $5,000 a month. But if claims rise above a pre-determined level, the charge could rise to $8,500 or $9,000 a month before the contract year is over.

The employer is "rolling the dice a bit," Mr. Medairy explained. "He's hoping his employees are healthy and they won't utilize the plan that much."


All of these tactics assume a company has an insurance plan to fiddle around with, or doesn't want to make a wholesale change. For those without any health plan, the state legislature adopted a new option during the last session.

Called the "limited benefits plan," the option is a low-frills, and therefore less costly, insurance plan for companies with 25 or fewer employees that have had no insurance for at least two years. Blue Cross and Blue Shield of Maryland Inc. is now selling such a policy to individuals for an average of $89 a month.

Employers willing to switch to a health maintenance organization likely will see cost savings, but the workers must be willing to submit to the stricter use policies that managed health care requires. And some indemnity insurers will raise a company's rates if a certain percentage of the employees sign up with an HMO.

That's because the insurer will assume only the oldest and sickest employees remained with the indemnity carrier, according to John Kosciusko, a consultant with The Wyatt Co. in Washington.

He noted that some small companies that are having trouble finding a friendly insurer may have luck joining a trade group or association that offers a group health plan.

But unless the association has strict ground rules that limit the movement of healthy companies out of the plan, among other things, the companies that remain may wake up two or three years later to find shocking rate increases.


Employers are "kind of between a rock and hard place" with health insurance, he said, and so, by extension, are benefits consultants. "A lot of people are asking us for win-win situations, and they're just not out there."