Tough Medicine

Health-care costs up? Share the pain

For the past three years, corporate travel agent Anne Schimmel has had a simple strategy for coping with soaring health-care costs. When costs went up, the president of Travel Connections Inc. in Denver jumped to a cheaper plan. It was a nuisance, but in a tight labor market, Schimmel was afraid to pass the bill on to her 40 employees.

This year, Schimmel overcame her fear. When her health-care costs leaped 16% in June, she raised employee deductibles from $0 to $250 for individuals and $500 for families. She didn't lose a single worker in the process. "To keep a quality plan," she says, "we have to pass on some costs to employees."

When the economy was booming and un-employment was at a near-record low, business owners struggling to hold on to employees had little choice but to absorb steep hikes in health-care costs. Not so in today's looser labor market. "Employers are in the driver's seat," says Tom Swift, a senior vice-president with Marsh Advantage America, a benefits-consulting firm in Des Moines. For the most part, that means raising employee deductibles and co-payments. According to William M. Mercer Inc., 16% of small companies increased such costs in 2000, compared with 8% in 1999. Experts project a threefold-to-fourfold increase this year.

Consider Dean Smith, CEO of Specialty Heat Treating Inc., a Grand Rapids (Mich.) manufacturer with 90 employees. Last year, when health-care costs jumped 28%, Smith raised co-payments from zero to 10% and slapped a $100 deductible on his self-insured plan. This year, with costs expected to soar 46%, Smith plans to start deducting about $15 a week from his employees' paychecks. How can he get away with it? Sales are down 5.5%, he says, and employees understand that the move is a reflection of tough times. "A top-notch health plan used to be mandatory," he says. "Now it's negotiable." It's the same story at Schimmel's Travel Connections, where revenues are down 16% this year. "I'm angry that rates keep going up," says travel agent Donna Marshall, a single mother of two who says her health-care costs will rise 30% this year. "But the company is doing what it can."

CUTS IN COVERAGE. Some entrepreneurs are taking even more drastic measures. Several small-business purchasing alliances-- such as the 140,000-member PacAdvantage in California--have added plans with deductibles as high as $3,000, which cost employers half as much as standard coverage. "If the labor market stays where it is, small companies may be able to remain competitive" without offering standard managed-care coverage with relatively low deductibles, says Jamie Amaral, a health-care analyst at the National Federation of Independent Business. With no long-term solutions on the horizon, there may be no choice but to keep passing the buck.

By Joshua Kendall

    Before it's here, it's on the Bloomberg Terminal.