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Rising benefit costs hurt small businesses' financial health
By Jim Hopkins, USA TODAY
Sam Manolakas just got clobbered by another double-digit price increase for employee health benefits at his four Brookfields restaurants.
This year's jump: 20%. Last year: 17%. In 2002: 15%. The $60,000 Manolakas now shells out for benefits each year eats up a growing chunk of his Sacramento-area chain's $500,000 in annual profit.
But the worst is yet to come, Manolakas says. A new California law requiring beefed-up health benefits could push his annual health costs to as much as $1.3 million, he says. That would force him to sell one or more of his eateries.
"It would be the end of our four restaurants," Manolakas says.
Small employers, whacked by soaring health costs, are fighting back as rising premiums threaten entrepreneurship. In November, California voters will be asked to repeal the new California law through a referendum forced on the ballot by small-business and other trade groups.
From California to Washington, D.C., this is a bumper year for political fights over small-business health costs, the top issue for the USA's 5.8 million small employers. They employ about half of the nation's 115 million private-sector workers.
The battles in statehouses and Congress cut both ways. The California law's opponents say it will burden businesses with even higher health costs just as the state's wobbly economy needs them to grow. Supporters say it will boost the number of Californians with health benefits by more than 1 million.
Elsewhere, lawmakers in nine states have sought to let small firms offer employees coverage free of costly state-mandated benefits such as fertility treatments. They say that will benefit business and consumers by lowering costs.
Opponents, including Gail Shearer, director of health policy analysis at Consumers Union, disagree. Shearer says stripped-down coverage only creates more insured people with less-adequate benefits.
Then there is restaurateur Manolakas' biggest gripe. None of the politics in California and elsewhere solve the underlying problem: rampant health cost increases.
Those costs are a problem for all companies. They're a bigger problem for small firms, because their costs are rising more. Last year, premiums jumped 15.5% for firms with three to 199 workers vs. 13.2% for those with 200 or more, says the Kaiser Family Foundation. Last year was the fourth-consecutive year of double-digit increases.
Many small businesses are responding by dropping coverage, adding to the increasing number of uninsured Americans. About 65% of small firms offered benefits last year, down from 68% in 2001, Kaiser says.
DHS Products in Ventura, Calif., doesn't offer benefits to its 58 workers making fingernail files and other nail care accessories. Founder Dallas Stephens says he would like to offer health coverage, but the $300,000 annual cost is prohibitive. DHS can't raise prices to cover the cost because it already faces competitors in China with cheaper labor.
Stephens says doing without benefits is a matter of survival: "Anything I can do and still stay in business."
The California law passed last year, known as SB2, would force DHS to add benefits. That's why Stephens frets about the outcome of November's vote. If SB2 survives, DHS would likely flee California - possibly to another country.
"I'm out of here," Stephens warns.
Survey says: Critical problem
Health costs are the No. 1 problem for small businesses, the National Federation of Independent Business (NFIB) trade group said in a survey out last week. It said 65% of 4,603 members surveyed said health costs are a "critical" problem, up from 47% in 2000.
Though political fights over small business health care are waged nationwide, the SB2 battle is getting extra attention because California often spawns trends that spread nationwide. California has more employers than any other state: 668,000, about one of every eight in the USA.
In California, 65% of those responding to the non-partisan Field Poll in January supported SB2. Field has not polled on the November referendum, however.
Washington state lawmakers have taken notice of SB2. They considered a bill this year that would have forced employers with 100 or more workers to offer benefits or pay a fee to the state. The bill died.
Beyond such "pay-or-play" legislation, lawmakers this year focused on small-employer relief on:
•State mandates. Bills were introduced in nine states, from Washington to Maryland, to let insurers sell health plans free of state-required benefits such as chiropractic care. Advocates say that would lower plan costs, enticing more small firms to sign up.
Washington Gov. Gary Locke, a Democrat, signed a bill giving small firms access to plans that don't include 12 of 39 required benefits, such as chiropractic and eye care.
In Indiana, similar legislation for employers with 50 or fewer workers never made it out of a Senate committee.
State Sen. Becky Skillman pushed the bill because mandated benefits keep costs high, forcing small employers to skip coverage. "For many Hoosiers, it was no coverage at all," she says.
Bare-bones plans could cut small-employer benefits costs as much as 20%, Skillman says.
Skillman, a Republican, is running for lieutenant governor in November. If she wins, she'll press the issue again when the Legislature meets next year.
•Subsidies. Starting next month in Idaho, needy workers at companies with 50 or fewer workers can tap a state fund for up to $300 a month to pay for their children's health insurance.
Initially, the plan is expected to help about 5,600 kids, says Ross Mason of the state Department of Health and Welfare. Idaho hopes to extend the program in 2006 to needy workers themselves at small firms.
Overall, 18.4% of Idaho's workers lack health benefits, giving it the 12th-highest proportion of uninsured adult workers among all states, says a recent study by the Robert Wood Johnson Foundation. Texas, at 26.9%, is No. 1.
•Buying pools. In Congress, the House last month passed legislation allowing creation of so-called association health plans.
AHPs let companies band together across state lines to form big groups with buying power to negotiate lower rates. Groups would be exempt from state-mandated health benefits.
AHP legislation has passed the House several times since 1996. It's never made it through the Senate, partly because of opposition from big insurers and state regulators who don't want to see state-mandated benefits circumvented.
The NFIB, with 600,000 members, is a prime sponsor of AHPs. At best, the bill has a "50-50 chance" in the Senate this year, says NFIB lobbyist Jessie Howe Brairton.
Caught in the middle
Underscoring the volatility of health care legislation is the fact that a rival trade group - the National Small Business Association - opposes AHPs. It has 150,000 members.
It fears small companies with mostly healthy workers will join together to get the cheapest deals. That would leave behind small employers with less healthy workers, driving their health costs even higher - as much as 23%, says association spokesman Jeremy Claeys.
Caught in the middle of this fight are companies such as Design Concepts in Madison, Wis. The firm's 45 workers design medical and consumer products.
Design Concepts tried to link with other professional service companies such as law firms to get better rates through an association plan. But insurers said that wasn't allowed.
"I feel as though we have absolutely no leverage at all," says Dave Franchino, managing director.
In the meantime, his company's health costs spiral higher. This year, for the first time, Design Concepts' annual employee health costs exceeded the cost of rent.
Meanwhile, competitors are moving work to countries where labor is cheaper and health benefits are scarce.
All this leaves Franchino frustrated. "Where is it going to end?" he asks. "It just seems unsustainable for us as a small business."
