McKinsey & Co. created a firestorm early this summer when it announced that its “Benefits Package Decision Makers Study” indicated that 30 percent of employers are likely to stop offering medical benefits once most of health care reform takes effect in 2014.
The resulting political posturing overshadowed the message that the business community was sending through the survey: It is a burden to provide health care coverage to employees. Escalating costs are the primary reason, causing major headaches for small- and mid-sized businesses and their employees.
I’ve lived through the frustration and desperation of how to cope with the exploding costs of health care. This situation has caused our management team much soul-searching and many restless nights as we grappled with whether we could even afford to provide these benefits.
Traditionally, our company (a mid-sized business) paid the entire health care premium for all employees, with our staff members paying a percentage of the premium to cover their families. That practice died three years ago when our insurance provider raised the premium by close to 50 percent. At that point, we had no choice but to pass along some of the premium cost to our employees.
In October 2007, the company paid the monthly premium for all employees opting for the basic plan and paid a sizeable portion of the family plan. Just one year later, the basic plan monthly premium rose 48 percent for a single employee and jumped 43 percent for family coverage. That monumental price hike brought no new services, only the same plan as the year before. (The accompanying graph tells the story of the family coverage plan rate hikes.)
In October 2009 we were forced to change insurance carriers when our provider announced a 55 percent hike in the premium, during a year in which the overall inflation rate was -0.4. The only viable alternative was to join a larger risk pool through a professional employer organization (PEO). This brought new challenges, as we began paying for services that we didn’t need, such as payroll administration. While the switch did result in lower premiums, the fix was only temporary as that provider announced a 25 premium increase the next year. So, once again we were forced to begin a health care quest, searching for an adequate plan at a non-exorbitant price. Despite three years of analysis and worry, we hadn’t fixed the problem; we had just put a patch on it until the next open enrollment season.
As of August, we are part of a new PEO with the basic health care plan costing $322 a month for a single employee, with the company contributing $235 of that and the employee contributing $87. For family coverage, the basic plan premium is $940 and the company’s share also at $235 and the employee paying $705. How does this plan rate nationally? Actually, it compares favorably. America’s Health Insurance Plans (AHIA) survey of small businesses (50 and fewer employees) found that the average monthly premium for a single employee was $426, with a family paying $1,117.
The Kaiser/HRET Survey of Employer-Sponsored Health Benefits states that workers paid 47 percent more in 2010 than in 2005 for family health care coverage, while wages increased 18 percent. Employers, in contrast, pay 20 percent more than they did in 2005. However, a company’s match on premiums is only part of the cost. Add in staff time to research and negotiate the best plan and then administer it, and you better realize the hardships businesses have keeping pace with exploding health care costs.
But what if employers had not increased the employee participation in premium payments? The answer is simple – their costs would have increased, forcing cuts elsewhere, such as pay raises or entire salaries. A likely outcome would be more Americans without jobs. The cost of health care is just too high for employers to cover the entire cost for their workers and still be able to stay in business.
While it is an investment in the health of employees, the cost of benefits is a major expense that isn’t being used for innovation, expansion or capital improvements, all of which drive economic growth. And importantly, it’s money that isn’t being used to create jobs. Think of how many salaries could be covered by the money that small businesses spend on health care benefits. Sometimes I wonder if the politicians in Washington understand that the mandates they put into law are hindering the very job creation they seek.
Recent court decisions make it likely that the Supreme Court will ultimately decide on the constitutionality of aspects of health care reform, such as the mandate that all citizens carry health insurance. If that mandate goes into effect in 2014, businesses with 50 or more employees will face a fine of $2,000 per employee for not offering health care coverage. This undoubtedly will have consequences for businesses and employees. Do the math and you quickly discover that it will be cheaper to pay the fine – perhaps viewing it as another form of taxation – than offer a medical plan.
It begs the question, why would any smart businessperson continue to offer medical benefits? An examination of the finances involved elicits one answer – to drop the coverage. However, when considering the impact on our employees, that’s not the right thing to do. And it makes clear that doing the right thing often comes at a high price.