Small companies ask, 'How about a raise instead of a medical plan?'

Ethan Hartsell is facing some tough decisions before the end of the year. Healthcare costs are soaring, and as comptroller of A&D Precision in Fremont, Calif., he may have to raise the co- payments his 31 employees shell out for the company plan.

But even that may not be enough. Back in 1998, the cost of health benefits equaled 1.1 percent of A&D's sales. Today, it's 2.3 percent. In the "low margin" semiconductor business that A&D is in, Mr. Hartsell says, that's almost more than the company can bear.

So A&D is considering another option: Letting employees take cash or other incentives instead of signing up for the company's medical plan at all. "We're considering it," Hartsell says, even though he's not yet sure just how to how to go about it or what the incentives would be.

Encouraging employees not to participate in the company's healthcare plan may be a growing trend among small businesses, says Richard J. Cellini, the head of research at Inc. in Needham, Mass., which helps companies manage employee expenditures. In a survey it released last week, found that 14 percent of businesses with 200 or fewer employees were enticing employees to not sign up for the company medical plan in order to save the company money. As inducements, they might be offered funds for their retirement plan, for a private Health Savings Account - or just plain cash.

Owners could offer a 10 percent raise to an employee to opt out of the healthcare plan and still come out ahead, Mr. Cellini calculates. That's because his survey indicates that the cost of providing healthcare to an employee averages 14.6 percent more on top of the employee's salary.

Young healthy employees might be tempted to take the cash and do without health insurance - or find they can buy it more cheaply elsewhere and pocket the difference.

But that's not a good strategy for many, says Kathleen Stoll, director of health policy at Families USA, a nonprofit healthcare advocacy group. "For sicker or older people, that leaves you in the individual [health insurance] market," she says. Getting insured can be expensive and "really, really tough, if you can get coverage at all."

Cellini says most people who opt out know they can get health coverage another way, through a spouse's company, parents (if they're still a minor), or perhaps through a college or university if they're a part-time student.

"It doesn't benefit anybody for an employee to be covered twice and pay premiums twice, because when you break your arm you only get one check" from just one insurer, he says. "A certain amount of this [opting out] is healthy and efficient."

What it does show, he says, is how hard small companies are looking to cut healthcare costs. "Just as healthcare costs are ratcheting up, [small businesses] are ratcheting up their efforts to contain those costs."

"I think we're seeing a sea change," says Jamie Amaral, director of health research at the National Federation of Independent Business (NFIB), the nation's largest small-business advocacy group. "Small employers are beginning to say, 'I want my employees to pick the [health] plan they want and take the risk they want.' "

More and more NFIB members would like to see an "uncoupling of the employer-employee relationship as far as health insurance is concerned," Ms. Amaral says. "They're seeing it as more of an individual responsibility." Some set aside money to contribute toward employees' healthcare, then bring in an insurance agent to talk directly to each employee about what plan to choose.

Healthcare has been the No. 1 issue for NFIB members since 1986. Last year, 65 percent of NFIB members listed it as primary, "the highest it's ever been," she says.

The 600,000 members of NFIB, which average just six employees each, have seen double-digit increases in their healthcare costs in recent years, resulting in a tripling of costs over the past six years.

Mom-and-pop shops often operate on a slim margin, says Ms. Stoll of Families USA. They want to do the right thing for their employees and often have a close personal relationship with their workers. "They're saying, 'I need help so I don't leave these people uninsured and unable to go to the doctor,' " she says.

Being uninsured is a major financial gamble for families. The average medical spending for a typical family of four rose to $12,214 in 2005, according to Milliman Inc., a global consulting and actuarial firm based in Seattle.

Cellini and Amaral both say that small businesses might try joining together to create larger pools of employees in order to negotiate lower premiums. Only 1.7 percent of small businesses surveyed by do this now. Legislation passed in July by the US House would allow businesses to join together across state lines to form cooperatives to buy health insurance.

The bill is controversial because health insurance is little regulated at the federal level and regulations can vary greatly from state to state. Stoll and others worry that buying groups would flock to states with weak insurance safeguards that offer inadequate plans.

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