Small Firms Face Spiking Health Care Premiums

The recent political firestorm in California, where individuals are seeing increases on health insurance premiums of 39 percent, has galvanized renewed momentum for federal health reform. Yet individuals are not the only ones facing major rate hikes.

Small businesses are staring at premium increases as high as 50 percent with little relief in sight, say employers, brokers and insurance experts.

Health care costs on the whole have moderated in recent years, but that has not given small employers much relief. The federal Centers for Medicare and Medicaid Services reported last month that health care spending rose 4.4 percent in 2008, the smallest increase in nearly 50 years.

In a fall 2009 survey by consulting company Mercer, small companies employing 10 to 499 people expected to see an average health care cost increase of 9.5 percent based on their projections. Actual increases have been more than that, observers say, though no comprehensive surveys exist yet on this year’s renewal rates.

Among the reasons cited for the rate increases are concerns that health care reform would lower profits, a shrinking market that leaves insurers with the sickest members, and increased use of medical services as members lose their jobs and employer-provided health insurance.

“I think anecdotally we are hearing consistently higher increases from our members,” says Amanda Austin, director of federal public policy at the National Federation of Independent Business. “It is possible they are experiencing some frontloading in anticipation of new reforms that may eventually cap these types of increases.”

Gary Klaxton, a vice president at the Kaiser Family Foundation, says health care reform is just an excuse.

“They are charging more money because they want to charge more money and they want to blame someone else,” he says.

Ben Geyerhahn, New York project director for Small Business Majority, a group supporting health care reform, says his company’s policy to cover five people will cost 20 to 30 percent more this year. He says that in New York, small businesses with fewer than 100 employees on average spend about 18 percent of their payroll on health insurance.

According to statistics from the New York Department of Insurance, small businesses faced rate increases as high as 58.67 percent at Group Health Inc. A spokeswoman for the company says that rate increase was an aberration due more to the fact that the product, an HMO, had few members, most of whom had high medical costs.

The high rate increase is emblematic of the small group market as a whole, where those who remain are the sickest individuals and the most in need of insurance. They are also the most expensive to cover.

Lisa Horowitz, a broker in New York City with 22 years of experience, says the last year has been particularly hard for small employers in New York state, where rate increases are based on an insurer’s book of business for a geographic area.

“What I have seen this last renewal cycle starting this time last year until now has been astronomical,” Horowitz says. She has seen routine rate increases around 20 percent.

New York state insurance regulators don’t have the power to approve rate increases before they are issued, though legislation has been introduced to give them so-called prior approval of insurance rates.

Instead, the department investigates whether a rate increase was justified at the end of the year. Often it is not, says John Powell, assistant deputy superintendent for health at the New York Insurance Department.

From 2000 to 2008, the state’s insurance regulator ordered insurers to return $48 million to plan members.

Powell says such refunds are not given to small businesses whose rate increases forced them to drop coverage.

—Jeremy Smerd

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