Small firms change tactics to cope with rising costs

As the price of health care continues its inevitable rise each year, small businesses are trying to grapple with the rising costs – and some even are looking to opt out completely.

According to the Small Business Basic Medical Coverage Survey conducted by Needham, Mass.-based, nearly 90 percent of small businesses are paying more to provide basic medical insurance to their employees in 2005 than in 2004, and about two-thirds of them are trying one or more strategies to contain basic health-care costs. According to the survey, the increases are having a significant impact on employee compensation, forcing small businesses to adopt measures that, in many instances, have a direct effect on employee take-home pay.

The survey found that 64 percent of the 304 small businesses surveyed are trying one or more strategies to contain basic health-care costs.

The most common cost-containment strategy is to increase the size of co-payments employees must pay when using medical treatment and services.

Another significant percentage of employers have chosen to contain costs by increasing employees’ share of monthly coverage premiums — a tactic that has a direct impact on employee take-home pay. An even larger percentage of employers report that they intend to adopt the tactic in the near future, making it the fastest-growing trend in medical cost-containment among small businesses today, said

Other cost-reduction strategies used by small businesses include switching plans, reducing extent of coverage, fine-tuning eligibility standards and eliminating coverage altogether.

The survey found that 14 percent of small businesses offer employees significant incentives not to participate in company medical plans, or actively encourage employees to enroll in a spouse’s medical plan. Incentives typically offered include lump-sum salary increases, cash rebates and contributions to other employee benefit accounts.

These companies believe that the potential health-care cost savings will more than cover the cost of non-participation incentives, said Richard Cellini, head of research at

“ estimates that many companies could offer employees a 10 percent salary increase (in lieu of plan participation), and still lower total payroll expenses in a given year,” said Cellini.

Other results include:

• Only 1.7 percent of participating companies reported joining forces with other companies through a buyer’s cooperative to purchase basic medical insurance.

• Despite the variety of medical plans available, three plan formats are the favorites among small businesses: Preferred Provider Organizations; Health Maintenance Organizations; and Point of Service providers. Less than 10 percent of small businesses surveyed offer any other format.

• Micro-employers (those with one to 20 employees) lead all small businesses when it comes to picking up the full cost of medical coverage. Thirty-two percent of micro-employers offer fully-funded medical coverage (requiring employees to pay nothing toward the cost of medical care premiums). As companies grow in size, fully-funded medical coverage becomes increasingly rare. Less than 3 percent of the largest small companies (more than 200 employees) offer fully-funded medical plans.

• Another 31.7 percent of micro-employers offer completely unfunded medical coverage (requiring employees to pay 100 percent of all premiums due).

• “Straddle” companies (those with 100 to 150 employees) report the highest per-employee health-care costs — 17.7 percent of gross annual payroll, vs. an average 14.6 percent for all small businesses.

The full survey results are available at

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