Wall Street Journal examines the effect of steep health insurance premium increases on Small Business
17 11 08 - 12:11
Small Firms Shiver as Health Premiums Rise
By VANESSA FUHRMANS
Already struggling in a tough economy, many small employers are about to face another big hit: markedly higher increases in health-insurance premiums as they head into 2009.
For many of these companies, the steeper increases couldn't come at a worse time, when the economy is weakening and credit is harder to come by.
"We can't pass these costs on to our customers; the market just won't bear it," said Daniel Lance, who owns E.CAB, a St. Petersburg, Fla., firm that produces finishes and fixtures for elevator-cab interiors.
After no increase last year, E.CAB's premiums jumped 75% to about $6,800 a month when its annual Blue Cross Blue Shield of Florida policy came up for renewal this month. Much of the jump was triggered by the hiring of a few older workers by the 25-employee firm, pushing it into a higher-cost actuarial bracket. E.CAB couldn't get a better price from rival insurers.
Rather than pass the cost on to his employees, who aren't required to contribute premiums for themselves though they do for family members, Mr. Lance said he's forgoing new wood-cutting equipment he had planned to purchase. "I just felt it was a bad time [to pass on costs]," he said. "The employees are having a tough enough time, too."
As hard as it has been for businesses to absorb ever-higher health-care costs each year, the collective premiums they paid had actually climbed at a slower rate in recent years. But as small businesses begin to receive their annual renewal notices, employers and health-insurance brokers in the South, Midwest and California report noticeably steeper rises. Some premium increases being quoted to employers are double those quoted just a few months ago.
In a nationwide survey of 30 insurance brokers released by Citigroup last week, more said insurers were raising premiums at a faster rate than those who reported slowing increases.
The clearest evidence of acceleration comes directly from insurers themselves. As they released third-quarter earnings in recent weeks, WellPoint Inc., UnitedHealth Inc. and Humana Inc. all reported less aggressive pricing by competitors in a number of markets, making it easier to charge premiums that would assure a solid profit.
"Generally speaking, we've been increasing our pricing over the last several months and last several quarters with the thought in mind that it's going to be a lot more conservative in terms of the pricing environment and we're beginning to see that," said James Murray, Humana's chief operating officer, in its earnings conference call with analysts late last month.
For-profit health insurers have seen profit margins shrink this year in the face of higher-than-expected medical costs and pricing missteps, not to mention membership declines as more businesses drop or cut back coverage. While companies with 500 or more employees might have leverage to negotiate, health insurers are "being much more rigid" with smaller firms, said Edward Kaplan, national practice leader at Segal Co., an employee benefits consultancy.
Adding to upward pressure on prices could be dozens of not-for-profit Blue Cross and Blue Shield plans, whose investment portfolios have taken a beating in the recent market turmoil. In recent years, the not-for-profits have been under political pressure in their states to reduce their big surpluses from flush years by providing price breaks to customers. Analysts say they now may have more cause not to.
"Now that investment income is significantly less, we could see less concern about an embarrassment of riches and more about battening down the hatches," said Matthew Borsch, a Goldman Sachs analyst.
C. Steven Tucker, a health insurance broker for small businesses in Illinois, said his clients have been getting increases ranging between 28% and 31% this month, compared to typical increases of 18% to 20%. In Florida, brokers say many plans hit with high increases are high-deductible plans eligible to be used with a health savings account.
A few years ago, health insurers tried to win business with the new health savings accounts by charging low premiums, but since the most popular ones pay 100% of costs after a $1,500 to $3,000 deductible, their costs have been higher than anticipated. "Now the insurers are catching up," said John Sinibaldi, an employee-benefits consultant in Seminole, Fla.
Dottie Jessup, who owns bicycle shops in Clearwater and Palm Harbor, Fla., with her husband, Tom, said they and their 25 employees, who share premium costs 50-50, couldn't handle a 12.5% increase set to go into effect next month. "We don't know what kind of year we're going into," she said.
Instead, they went with their only other option: to raise one plan's deductible to $2,500 from $2,000 and the other to $3,500 from $2,850, in exchange for just a slight premium increase.
"Our concern is that we're getting to the point where we're wondering where this is all heading, because you can only reduce benefits and contain costs so much," she said. "What's our ability to provide benefits to our staff going to look like in the future?"
G. Leo DuMouchel, an Atlanta-area employee-benefits consultant, said that after years of negotiating smaller increases by raising deductibles and paring benefits, many of his small-business customers have run out of that option.
"They've pushed [cost-sharing] to the limit," said Mr. DuMouchel, who added he hasn't seen a premium increase for his clients below 17% since October, compared to 6% to 8% increases last summer. "They know employees can't handle any more."
Write to Vanessa Fuhrmans at vanessa.fuhrmans@wsj.com