Five strategies for cutting small business health insurance costs

The recession is officially over but it doesn't feel that way when planning your small business cash flow. You are not alone. Many, perhaps most, small business owners are finding that the lagging indicators of the recession pack the most punch in terms of squeeze on cash flow. Yet employee health costs continue to increase faster than any other overhead cost. The traditional approach of going from one insurer to the next to request a more competitive rate quote is no longer effective and rarely results in a smart cost-saving decision. Meanwhile, we are still years and many political battles away from implementation of the significant health insurance reforms that might help with the problem. So what options are available now? This article highlights a few of the most common and most effective strategies.

1. Stop writing blank checks

Traditional indemnity health insurance policies used in most older small business health plans is sometimes referred to as "blank check coverage" because there are significant maximum benefit amounts and therefore little incentive for a person under medical treatment to attempt to control costs. Major medical insurance policies provide coverage broadly defined as "ordinary and necessary medical care" without specific reference to the cost of the treatment.

A simple cost-saving solution is to adapt insurance that includes meaningful coverage limitations. Policies that cap total coverage at $100,000, $250,000 or $1 million are more affordable. Provisions that limit the number of covered doctor visits or place a maximum benefit for each day in a hospital also significantly cut the insurance cost. These policies may substitute stronger benefits for routine and commonly used types of medical care in order to improve popularity. Cost-conscious employers of all sizes have replaced their major medical 'blank check' insurance with policies that define the specific amount of coverage available. This type of insurance is referred to as "scheduled benefit insurance" in recognition of its contrasts to major medical insurance.

For example, the monthly rate for Core Health Insurance Plus (Gold level) with a $1 million limit and a maximum coverage of $1000 per day for hospital charges would be $578 for a 4 person family of an employee aged 45 in Columbus Ohio vs. more than $1,000 for the most popular major medical insurance policy in that area. This insurance is available to all employees regardless of health status but has a waiting period for pre-existing medical conditions that may not be appropriate for some employees.

Some lawmakers as well as the medical practitioner organizations oppose the use of limited benefit insurance. They want that unlimited maximum revenue stream to continue. Yet employers will inevitably be forced to make the tough decision on the maximum amount of coverage they can afford to provide. We strongly believe that an insurance that you can comfortably afford and that gets you into a treatment facility with a payment of the bulk of the initial fees is far better than not being able to afford insurance at all. We think that soon all public and commercial health insurance plans will be forced include some type of maximum benefit provision even though it will remain a controversial issue.

2. Trade off rising costs for employee choice

Adopt a Health Reimbursement Arrangement (HRA) to allow the employer to define the business contribution at a pre-determined level that does not change over time due to increasing insurance costs. Essentially this amounts to cost-shifting of future premium increases to the employees or pushes employees to consider more cost-effective options. The financial impact on employees can be minimized by allowing the employees more choice in health plan choices. When employees have more cost-saving choices and access to personal help to understand and evaluate the choices, the actual result is an increase in perceived value of the employer health benefits even when the employer's actual cash price is lower.

Most of the nation's large employers have already adapted some type of HRA design but small businesses have yet to recognize the potential savings available through this tool.

3. Avoid the 'lowest common denominator' approach

Small business health insurance is typically selected based on the coverage that the least healthy member requires and is available to all employees. That means that the healthy employees do not save money and are not rewarded for good behaviors that lead to lower health insurance costs. If your group is composed of mostly healthy members then consider taking the opposite approach and allowing healthy employees to select a preferred risk plan first at the lowest available rates. The savings can be enough to afford a separate high risk insurance plan for the less healthy employees.

While the health insurance law has rules to prevent employers from "dumping" unhealthy workers onto the government-subsidized pre-existing condition insurance plans, this option should be considered when a firm finds it otherwise difficult to afford coverage due to a few unhealthy members.

4. Tap available tax savings

Even after implementation of the restrictions imposed by the new federal health reform law, you are allowed to set aside up to $2,500 of earnings each year for each employee into a tax-free Flexible Spending Account (FSA), also known as a Medical Expense Reimbursement Account. This plan produces in a wage tax savings of $180-250 for the employer (depending on state and local wage tax rules) and an additional $600 or more of tax savings for each employee who utilizes the $2,500 deferral.

While this savings doesn't directly lower health insurance costs, the extra cash savings works out just as well. Now with this money set aside for out-of-pocket medical costs employees are less apprehensive about selecting a lower-priced insurance option that might have a higher deductible or uncovered costs.

Health Savings Accounts are also available in addition to the FSA for those who may wish to set aside even larger amounts. HSAs are most popular among business owners for themselves and less popular for employees. We like to remind our clients that Individual Retirement Accounts (IRA) - whether paid by the employer or the employee - are excellent tools to provide a tax-advantaged financial reserve for out-of-pocket medical costs. Both HSAs and IRAs allow penalty-free withdrawals to cover out-of-pocket medical expenses.

5. Consider the medical home

Health insurance costs are directly controlled by local medical costs and state insurance laws. Small changes in distance can mean large change in health insurance costs. Small businesses have learned to think outside the box and might have also noticed that medical cost friendliness roughly correlates with overall business friendliness. In other words, the states that are considered the most business-friendly tend to have the lowest health insurance rates. Conversely, those states where business climate and regulation are considered unfavorable also tend to have higher medical insurance rates.

One small delivery service owner found that he could save thousands of dollars simply by changing his official business address from this home address to the warehouse "across the river" where he kept his vans. Changing address also resulted in lower local taxes as well.

The growth of medical tourism has raised public awareness that cost of medical care can vary dramatically and we are also now becoming aware that choice of business location dramatically impacts health insurance rates.

Freedom Benefits recognizes that small business owners don't have the time to become experts on the constantly changing health insurance field. That's why we offer a free exploratory interview. An experienced professional small business adviser can analyze the possibilities and present the details of one or more of these cost-saving options for consideration.

To schedule an interview to explore cost saving options, please send a request by email to Tony Novak at tnovak@freedombenefits.net.

About the author-

This Web page and related content is written and periodically updated by consumer finance writer Tony Novak. Comments, questions, feedback and corrections are welcome to help keep content relevant and up-to-date. Contact the author directly by e-mail, on Twitter or through his Web site. Article reprint rights as well as specifically customized content may be available on request. Reprint is not permitted without written consent.