How small companies can lower their health-care costs.
The rising cost of health care is hurting small companies everywhere. While there are no grand solutions, there are steps you can take to keep your costs down
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It hasn't come to this. But with the general inflation in health-care costs, who could blame a company owner for fantasizing about placing such an ad? After all, annual premium increases of 20% to 40% have been routine in recent years. And many experts expect rates to rise an average of 15% a year over the next five years, which means that employer costs could double between now and the mid-1990s.
None of this comes as a surprise to Jim MacDougald. When he renewed his company's medical plan last year, the insurance company had raised the premium 70%. That was tough to take for a business with 25 employees and $4 million in sales. It was especially tough for MacDougald, chief executive of Applied Benefits Research Inc., because his Clearwater, Fla., consulting firm assists other companies with their benefit plans.
The reason for the hike: an employee's dependent was confined to a hospital with a long illness. Since no other insurer would touch MacDougald's company, "we got stuck," he says, "with paying any blackmail price they wanted to charge."
Being at the mercy of an insurer is fairly common for small companies these days. But MacDougald knew better than to let himself be whipsawed again. He's making changes in his medical plan, including various cost-containment programs and cost sharing with employees.
Unfortunately, though, not all cost-containment strategies are available to all companies. One variable is location; generally, businesses in densely populated states have the most choice. Another is size. Insurers offer companies with more than 100 employees a broader selection of medical plans than they do smaller companies.
Still, most CEOs owners can follow Jim MacDougald's lead and take steps to reduce their premiums, or at least limit the rate of increase. And they can do it without gutting their plans or compromising the care their employees receive.
While the steady increase in health-care costs is a tide that no single company can turn back, there are strategies to help you manage these costs more effectively. Yet the most successful CEOs go beyond what's written in an insurance contract. They give employees an incentive to be involved in the company's health. Whether it be because of profit sharing, information sharing, equity participation -- or all three -- these employees are cost conscious not only about health care but about every phase of the business. Holding down costs is to their advantage as well as the company's.
WHEN YOUR COMPANY'S TOO SMALL TO GET DISCOUNTS: HEALTH-CARE COALITIONS
What group of 125,000 people has received increases of only 21% in their health-insurance premiums since 1984? A big company with the muscle of, say, Mobil Corp. or Procter & Gamble Co.? Wrong. It's a coalition of 6,400 small companies in the Cleveland area whose $105 million in annual premiums speaks the language that insurers can understand: size and power.
Companies with fewer than 100 employees get little attention in the insurance marketplace; they are the small fish that everyone throws back. Their choices are limited and they pay more for everything they do get. That's why, in 1974, the Council of Smaller Enterprises (COSE) in Cleveland, part of the Greater Cleveland Growth Association, bargained with Blue Cross/Blue Shield of Ohio for a 10% discount on the cost of group health-care benefits for its member companies.
The plan was not very successful; between 1978 and 1982, premiums soared by 130%. So COSE tried a different tack. Instead of acting simply as a conduit through which its members bought insurance, COSE itself became the customer, looking to all the world like a Fortune 500 company. Premiums dropped 15% in 1985, the first full year under the new plan, and in the next four years rose by an average of less than 9% annually -- at a time when increases nationwide were running 20% to 40%.
COSE's performance reflects the realities of an insurance marketplace in which size and power are next to godliness. It negotiated a variety of sophisticated plans with various cost-control features and took over administration of the plans, including centralized enrollment, billing, and reimbursement. Insurers charge between 5% and 15% of the premium for administration costs; COSE charged less than 1%.
"For many small companies, the only hope they have to bring costs under control lies with the formation of purchasing groups," says John Polk, executive director of COSE. But coalitions need not be as big as COSE to be effective. A handful of other purchasing groups flourishes around the country, usually organized by local chambers of commerce. In terms of bargaining clout, a chamber is often more effective than an industry trade association because of its ability to concentrate its power on local providers.
Apart from the advantages conferred by size, a coalition is most effective if it does three things:
* Negotiates the plans as if the coalition itself were the customer.
* Administers the plans itself or uses a low-cost third-party administrator.
* Manages the claims information, which will enable it to identify ways to further cut costs.
How Did You Choose Your Agent?
Chances are good that you went with the insurance agent who sent you a pitch letter and a proposal. And you'll probably dump that person when another agent arrives with yet another promise to lower the cost. But there is a better way: consult with local companies of about your size. Have they used their agent for at least three years? Has their agent been aggressive in incorporating cost-saving mechanisms? Then, of course, interview the agent. Consider your decision as carefully as if you were hiring a key person for your company -- because you are.
