HEALTH INSURANCE: SMALL BIZ IS IN A BIND.

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Author: Weber, JosephSymonds, William C.Lee, LouiseForest, Stephanie Anderson

WORKPLACE

For Jane V. Thomas, the raging national debate over the cost of health care hits close to home. As the insurance bill for her Laramie (Wyo.) company, Wyoming Analytical Laboratories Inc., climbed 10% this year, to more than $5,000 a month -- the latest in a series of double-digit hikes -- she decided to stop offering coverage to her 15 eligible employees. Now the 64-year-old chemist, whose family was once hit with catastrophic illness, is haunted by the choice. "When I hire somebody, I know I have their future in my hands," says Thomas. "It bothers me a lot."

Even as President George W. Bush and Senator John F. Kerry ratchet up the rhetoric over how best to fix health care, plenty of small-business owners are voting with their feet. While big and small companies alike are struggling with soaring health-care costs, the combination of a patchy economic recovery and ever-higher premiums are falling hard on companies too tiny to have clout with insurers. "It's a particular problem for small businesses," says Karen Davis, president of the Commonwealth Fund, a private foundation that tries to broaden health-care coverage. "Premiums are going up faster for them, but they get less for the premium dollar than big firms."

As a result, hundreds of thousands of small companies are scaling back the coverage they offer to employees, boosting co-pays, or pulling the plug on insurance altogether. And even when they continue to offer coverage, many employees are canceling policies because they can no longer afford their share of sharply higher premiums. According to a Sept. 9 report by the Henry J. Kaiser Family Foundation and the Health Research & Educational Trust, 63% of businesses with fewer than 200 employees now offer health benefits, down from 68% in 2001. Worse, just 50% of employees at small companies have coverage at work, vs. 57% three years ago.

The worrisome trend is stoking a decade-long debate: Should the federal government step in to help ease the burden on small businesses and their workers, an option favored by the Kerry camp? Or should small-business owners be allowed to pool their resources to buy coverage on the open market, the route preferred by many Republicans and small-business trade groups?

Rising health-care costs are squeezing just about everyone. For the fourth year in a row, health-insurance premiums in all employer plans climbed at a double-digit rate -- 11.2% on average this year, according to the Kaiser study. Driven by hikes in medical costs and a cyclical downturn among insurers, family coverage at work now averages $9,950 a year, while coverage for singles has hit $3,695. Many small firms have suffered even higher premium hikes because they can't self-insure as big outfits can, have little bargaining power with insurers, and employ fewer people over whom they can spread risk, says the Commonwealth Fund.

Health-care experts are especially troubled by the slide in coverage at small companies because a disproportionate number of Americans work for them. Nearly three-fourths of America's 45 million uninsured work at companies with fewer than 500 employees or are dependents of such workers, says the advocacy group Alliance for Health Reform.

For Bush and the National Federation of Business, the answer seems simple: Let small businesses band together in national groups to pool their risks and buy coverage, much as big companies do. Such association health plans (AHPS) appeal to many small-business owners because they rely on market forces and seem to level the playing field between small firms and insurers. "That could help us lower our prices," says Steve L. Steinheimer, president of software consultant SSG Ltd. in Richardson, Tex., which expects its health-care costs to rise 27% next year.

But for many experts, AHPs offer false hope. They fear such plans would try to keep costs low by weeding out companies with more ill workers than average. Once free of such commonly state-mandated benefits as mental-health coverage, they say, insurers will offer fewer benefits. Critics also warn that many plans, in a bid to attract members, may not charge enough to cover costs and could eventually go broke. That's what happened in Kansas in the 1980s when AHP-like plans were permitted there. And some fear poor regulatory oversight since states would have no power over national AHPs. "If people see this as a silver bullet, they'll be sorely disappointed," says Michael Miller, director for health issues at Community Catalyst, a health-care policy group in Boston.

AHP opponents look to a plan that already serves 9 million federal employees and their dependents. The Federal Employees Health Benefits Program offers choices among some 200 private health plans across the country, is carefully monitored, and is financially secure. One idea, favored by Kerry, would open it to small and large businesses and individuals, effectively allowing them to benefit from the buying clout that a huge member base brings. To woo small business, Kerry would stabilize the rates with government subsidies, keeping them low even for outfits with high claims by chipping in government dollars. He would also offer a tax credit for small businesses to cover up to half the cost.

It wouldn't be cheap. Davis figures the Kerry reforms would cost some $323 billion over 10 years. AHP advocates argue that they'd be better able to fashion plans with lower premiums once freed of government mandates. The federal plan "is too expensive for most employers," says Jamie Amaral, the NFIB's national director for health research and development.

Is there a solution to this mess? Given the rancorous tone in Washington these days, it may not come soon. With small businesses unable to agree on the best fix, the reality is that more and more will be forced to trim coverage. Gary Siegel, who runs San Francisco Auto Repair Center, has hiked co-pays for the past three years. He is "reconciled to the fact that the costs are just going to keep going up." That means more pain for everyone.

The McGraw-Hill Companies, Copyright 2004

GRAPH: SIZE MATTERS: SMALL BUSINESSES OFFERING HEALTH INSURANCE/WORKERS COVERED BY SMALL BUSINESSES

PHOTO (COLOR): THOMAS "When I hire someone, I know I have their future in my hands"

PHOTO (COLOR): SAN FRANCISCO Siegel has had to raise co-pays for three years running

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By Joseph Weber, in Chicago

With William C. Symonds, in Boston; Louise Lee, in San Mateo, Calif. and Stephanie Anderson Forest, in Dallas