Smallest businesses, self-employed find workarounds to avoid pain of health insurance costs

By Samantha Stainburn April 05, 2010

The smallest businesses have always been the least likely to pay for employee health insurance, and ever-increasing premium rates and the recession are prompting even more of them to drop out of the system.

In 2001, 58% of firms with three to nine employees provided health coverage, according to the Menlo Park, Calif.-based Kaiser Family Foundation; in 2009, only 46% of the smallest firms did, compared with 72% of companies with 10 to 24 workers, 87% of companies with 25 to 49 workers and more than 95% of firms with 50 or more workers.

Kerry Finnegan, a senior partner at consulting firm Mercer LLC in Chicago, estimates that between 5% and 10% of Mercer clients with fewer than 50 employees dropped coverage in the past year.

For many, costs have become unsustainable. Health premiums have risen almost five times as much as the overall rate of inflation for small employers since 2000, the Washington, D.C.-based Employee Benefit Research Institute reports. The cost for a small business to cover a family now averages $13,700 a year.

So what's a micro-business owner to do?

"I get acupuncture, and I take vitamins," says Julie Northcutt, CEO of Caregiverlist Inc., a three-year-old Web site that helps families and senior care agencies find home-based aides. "The Pacific College of Oriental Medicine is three blocks from my house, and I try to go once a month, which costs $35." Ms. Northcutt has tried to avoid paying for benefits at her Chicago-based startup by hiring mostly part-time, independent contractors and encouraging full-time employees to jump on their spouse's health plans if they can.

The few remaining full-timers, including her, have individual plans, and the company reimburses their premium costs. Ms. Northcutt shells out $350 a month for her plan, which pays for 100% of her health care once she's hit $5,000 a year in medical expenses. "When you know you're paying out of pocket, you try to stay healthy," she says.

While entrepreneurs may find better deals with individual plans, particularly if they elect not to take benefits like maternity care that they must pay for in a group plan, brokers say the catch is that you don't have to have a chronic condition to be turned down.

"The underwriting for individual health insurance is overzealous," says Shelley Schiff, a Northbrook-based independent insurance broker. "If you've got a pre-existing condition, you will either be accepted with exclusion riders or declined." Ms. Schiff has seen entrepreneurs denied coverage because they are overweight or had mental health services excluded because they were in marriage counseling.

According to health care research group the Commonwealth Fund in New York, nearly three-quarters of people who tried to buy coverage in the individual market over the past three years never bought a plan, either because they couldn't find one that fit their needs or that they could afford, or because they were turned down due to a pre-existing condition. Thirty-six percent were turned down, charged a higher price or excluded because of a pre-existing condition.

Last year, James Gustin, 45, CEO of Fig Media Inc., a Chicago company that provides DJs, produces videos and shoots photos at events, stopped offering health insurance to his staffers. It cost Fig about $36,000 a year to cover 12 people. "When 2009 started, our business fell, and that was the first thing we had to cut," he says. "It was a really neat perk, and it does attract better people, but it's not a standard in the industry."

Mr. Gustin, who's a Type 1 diabetic, held onto the Blue Cross & Blue Shield plan for himself and the company president, but in February, underwriters determined that the annual bill for covering just two employees would be about $14,400, in large part because of Mr. Gustin's diabetes. He contemplated ditching insurance altogether but decided to hang on. "It was just too risky not to have anything," he says. He's using it as little as possible, however.

"If anything happened to me now, I'm flying to Mexico. It's cheaper for me to go to a doctor in Cancun," he says. Mr. Gustin already buys his diabetic supplies abroad. "You can buy a 100-milliliter bottle of insulin over the counter in Canada for $30, whereas if I go to Walgreens, it's $90," he notes. "Going to a doctor helps me learn how to manage my diabetes, but it's at a high cost," he says. "I'm doing my own research and caring for myself a lot more. I'm not some weirdo, but there are alternatives."

"If you're in a position of not being able to afford insurance, it's pull-out-the-stops time," says Oak Forest insurance broker Michele Thornton. "Whether it's two employees or 50 employees, there are always things you can do," she says, including programs like health savings accounts that lower taxes for firms and employees, or shopping around for a better deal.

Mr. Gustin says that the time it takes to find and maintain a decent group health plan is something else that the smallest-business owners can't afford. "I could probably do OK if I spent hours on it or had a person dedicated to monitoring health insurance. But it's another full-time job."

See the article on the Crain's Chicago Business website here.