An unhealthy situation

Insurance can be costly for entrepreneurs

By Judy Artunian
Special to the Chicago Tribune
April 23, 2002

Health insurance premiums are on the rise, especially for sole proprietors and business owners with just a few employees. Does that mean it's time to sacrifice quality coverage for lower costs?

"A lot of people are willing to give away good benefits and go to a substandard health plan when their prices go up," said Mark Gurda, president of healthinsure.com and Castle Group Health, both based in Northbrook.

"The biggest mistake that people make is not understanding that we're having a health-care crisis. Prices for individual health plans are rising 20 percent on average. This is about the third year of 20 percent increases. Small groups of five or fewer people are hit even harder."

Among the factors that are contributing to higher insurance costs are greater health plan utilization, burgeoning prescription drug prices and previously underpriced plans that are now aggressively raising their rates.

Small businesses can control their health insurance expenses by keeping tabs on what insurance carriers are offering.

An insurance broker who specializes in working with small businesses is in the best position to help you compare the benefits provided by the different health plans.

You can also do your own research by logging onto Web sites such as www.healthinsure.com and www.ehealthinsurance.com.

Group insurance is available to companies with as few as two employees. As an employer, you may split the group premium costs with your employees however you wish. According to Gary Lauer, CEO of ehealthinsurance.com in Sunnyvale, Calif., "As a general rule, we see employers paying between 75 percent and 80 percent of the total premium and the employee contributes the remainder."

A sole proprietor can take out an individual policy. Both sole proprietors and small employee groups may also be able to join a group plan offered by professional organizations and civic groups. Be aware, however, that organizations that bring small businesses together to form a purchasing pool often wind up passing extremely high premiums on to their members after a few years.

According to Kim Clarke Maisch, the Illinois state director of the National Federation of Independent Business: "Historically, purchasing pools haven't done well in Illinois. Part of the problem is that as costs go up, the purchasing pool finds that all the healthy employer groups leave because they can find better rates somewhere else. That leaves the pool with a very sick group." And, as a result, costly premiums.

Legislation has been introduced into the Illinois General Assembly that may allow the state to establish a purchasing pool for small businesses.

In addition, Clarke Maisch said that Congress could eventually pass legislation to allow national organizations, such as the U.S. Chamber of Commerce, to join forces and form a purchasing pool that would be large enough to offer affordable health plans.

For now, most small employers are left to fend for themselves. Refugio Alfaro, owner of Blackbird Fly, a graphic design firm in Chicago, recently reaped the benefits of shopping around. Alfaro's wife, Roxann, is his only employee.

For four years the two had been covered by a health plan purchased through the National Association for the Self Employed (NASE). Alfaro was already looking for a new plan when he heard that his premiums would jump from $590 per month to $607 beginning in April.

"They'd already increased it about three times in the last two years," said Alfaro. "I was paying all this money for something I never use. Then again, you can't do without health insurance because you never know."

He eventually found a Unicare plan that decreased his monthly premium to $312, nearly half of what he had been paying.

"The coverage is actually a little better than what we had through NASE. Our old plan didn't cover doctor visits until we met the deductible, which was $2,500. With Unicare I get three doctor visits per year at $30 a piece," said Alfaro.

Like most other self-employed professionals, Alfaro can deduct 70 percent of his health insurance premiums as a business expense in 2002. In 2003 businesses will be allowed to deduct 100 percent of their premium costs.

In addition, the self-employed can deduct the expenses for which their health plan doesn't reimburse them if those unreimbursed expenses total more than 7.5 percent of their adjusted gross income.

Medical savings accounts

The best health-insurance tax break for some business owners may be an Archer medical savings account (MSA). An MSA is a tax-exempt account like an individual retirement account, but the MSA funds are used to pay for medical expenses.

"MSAs are the big secret that most insurance agents don't know a whole lot about because it's not traditional insurance. You get a tax break on top of lower premiums," said Gurda.

You're eligible for an MSA if you or your spouse are self-employed and have a high deductible health plan that meets certain criteria. As with some IRAs, your MSA contribution is tax-deductible. MSAs are offered by some insurance companies, banks and other organizations approved by the IRS.

The MSA program was established by the federal government as a pilot project in 1996 and is up for renewal at the end of this year. "I'm sure they'll extend it," said Gurda.

Even if you go with an MSA, you'll still need to choose a health plan. Preferred provider organizations offer more flexibility in choosing physicians and hospitals than do health maintenance organizations, but PPOs are usually more costly.

Many carriers allow small businesses to offer more than one type of plan so that employees can choose from an HMO or a PPO. Some carriers are also beginning to offer point-of-service plans, which feature a combination of the HMO and PPO services.

For the ultimate in freedom to choose your physician, there is the most costly option: the traditional indemnity plan.

When comparing the health plans from the various carriers, consider not just the premium price, but also which health costs are paid by the health plan after you've met the deductible and whether there is a co-pay (the amount you pay for visits to the physician). If you or others in your group want to see physicians who aren't in the plan's network, how much more it will cost you to do that?

Take into account the plan's services, such as whether prescription medications are covered. And finally, look into the carrier's reputation. Ask your self-employed friends how they like their own health plan. Also talk to your doctor and his office staff about their experiences with the carriers you're considering.

Getting an accurate quote

To get an accurate premium quote, you'll need to tell the carrier about any pre-existing medical conditions among your employees. Serious medical conditions could lead to higher premiums, but by law individuals on a group plan can't be denied coverage due to their medical history. (That's not the case for individual health plans, however.) Also, Illinois' Small Employer Health Insurance Rating Act restricts the range of rates that a carrier can charge groups that have similar characteristics, such as policy coverage and demographics.

There are no fire sales when it comes to health insurance. "Most people don't realize that health-plan prices are fixed," said Lauer of ehealthinsurance.com. "The price you pay for a health insurance product from us versus the carrier direct, an agent or a broker is the same. You can't negotiate."

In fact, drastically reduced rates are a red flag that you may be dealing with a disreputable company. If you have doubts about the legitimacy of an insurance carrier, you can find out if the company is licensed by the Illinois Department of Insurance by calling the department toll-free at 866-445-5364.