Small Payroll, but Big Woes on Insurance

February 2, 2009

BELLAIRE, Tex. — When the bottom fell out of the automotive market last year, Amberly Allen’s fast-growing direct-mail firm hit a wall in a hurry.

As orders from car dealerships fell by half, Ms. Allen deferred plans to hire more sales representatives. She put off buying the building she now leases in this Houston suburb. And in November, both she and her husband, one of her four employees, stopped drawing salaries.

Still that may not be enough to keep the four-year-old company afloat. Determined not to lay off any of her tight-knit band of workers, Ms. Allen is now agonizing over an equally unappealing option: whether to terminate the health benefits she provides for her employees and herself.

Even before the recession, owners of the smallest businesses had struggled to absorb the inexorable annual rise in health premiums. The share of firms with fewer than 10 workers that offer health benefits has declined by 16 percent since 2001, to 49 percent, according to an annual survey by the Kaiser Family Foundation and the Health Research and Educational Trust, while the rate in larger firms essentially stayed flat.

The economic downturn has only accelerated the pressure on small-business owners to pinch every penny, and many feel they have few options but to go after employee health coverage.

Surveys suggest that rising premiums have prompted more than half of small businesses to reduce benefits, raise deductibles or require workers to shoulder a larger share of an ever more expensive pie.

Workers in firms with fewer than 25 workers are now twice as likely to be uninsured as those in larger firms, according to the Employee Benefits Research Institute. For those small-business employees who do have insurance, the share with high deductibles has more than doubled in the last two years.

Yet for many small-business owners, it can be excruciating to reduce or eliminate benefits for employees who have long been treated as family and who continue to work at their sides, every day.

“When it’s a small business, it’s personal, and the impact is more emotional,” Ms. Allen said. “It’s not just about dollars and cents. These are actual people, and they’re very important to me. And I care about them.”

With the help of her insurance broker, Ms. Allen is exploring whether her employees could afford individual health policies if she provided them with stipends equal to about half of what she now pays for their health care. She is also researching whether it may make sense to shift her workers to a personnel leasing firm with more affordable group coverage, and then rent them back.

With her current insurance policy up for renewal on April 1, the clock is ticking.

“Either way, I’m going to make sure they have coverage,” said Ms. Allen, whose sales were stagnant in 2008 after two years of exponential growth. “That’s very important — to make sure they don’t feel I’m just cutting expenses and pulling the rug out from under them.

“I have a good team in place and they take care of me. They’re loyal, they work very hard, they’re honest, and with the extra effort they put in, I want them to know it will be reciprocated, that I will take care of them.”

Ms. Allen’s current small-group policy with UnitedHealthcare costs the company $19,575 a year, equal to 17 percent of her payroll expenses. Although her workers have filed few reimbursement claims, premiums were set to rise 16 percent this year, said Carolyn L. Goodwin, her broker in Dallas.

“You can’t cut your rent unless you move, you can’t cut your Internet, you can’t cut your phone — so where do you cut?” Ms. Allen, 28, said. “When you’re not taking a dime out of the company, at some point you have to question whether you’re just working to pay everyone else’s bills.”

Many small-business owners, like Monty J. Friebel, who co-owns a wood fabricating shop in Shelby, Ohio, have significantly increased the share of premiums that employees must pay, in his case to 46 percent from 15 percent a decade ago. Others, like Thomas L. Fritts, proprietor of T. L. Fritts Sporting Goods in Winnetka, Ill., have ended coverage for the children and spouses of employees and moved to plans with high deductibles.

Lenin A. Paredes, owner of a title insurance company in Elizabeth, N.J., recently raised his employees’ contributions and added a $1,000 deductible to their plan. Will L. Neilson, owner of a bistro in Bath, Me., said he had been reduced to manipulating the schedules of part-time workers so that they fell below his 30-hour-a-week threshold for benefits. Mark H. Jacobs, a partner in a family-owned sawmill in McMinnville, Tenn., finds himself considering replacing older, more experienced workers who leave with younger ones who would be cheaper to insure.

Ms. Allen’s employees at Direct Innovations — the bulk of its business deals with automotive direct mail — said in interviews that they understood the need to cut expenses. Each expressed confidence that she would find a way to protect their health coverage.

“If I was just a number, Employee No. 384, it might make me nervous, but with Amberly, I’m not worried at all,” said Melissa G. Ornelas, 51, who signed on as vice president for business development at least partly because Ms. Allen had agreed to pay 95 percent of her health premiums. “If it took her last penny, she would take care of me.”

Mark D. Jones, 26, a production assistant who had been uninsured before Ms. Allen hired him, splits the cost of his coverage with the company. “I can’t foresee her saying, ‘Sorry, I can’t give you health insurance; hope you don’t get sick,’ ” Mr. Jones said.

None of the employees suffer from a chronic condition, although two are smokers, and none said that losing coverage alone would prompt them to leave the company. “I’m just happy to have a job,” Mr. Jones said. “The thought of finding another one makes me cringe, because times are tough.”

But it was also clear in interviews that the employees, and perhaps Ms. Allen herself, have not fully considered the potential consequences of ending employer-sponsored insurance — even if a stipend replaces it.

A few weeks ago, Ms. Allen’s broker provided her with quotes for individual policies from Aetna that would ostensibly save $6,235 a year in premiums for three of her workers. The premiums for each would be cut nearly in half. (With individual and small-group coverage, unlike large-group policies, customers can be charged varying rates based on their age, health status and claims experience.)

But the prices do not tell the whole story. Aetna cannot guarantee it will cover the three workers until it reviews detailed medical histories. Then the insurer could rule out coverage for certain conditions, or charge more to include them. The quoted rates, Ms. Goodwin explained, could rise by as much as 50 percent.

There would also be tax implications. When employers pay for a worker’s health insurance, that portion of compensation is not taxed as income. That would not be the case if Ms. Allen instead paid her workers a stipend for insurance.

In addition, Ms. Allen might not be able to fatten her workers’ stipends enough to offset future increases in premiums. The deductibles and annual out-of-pocket maximums for the individual policies would be less generous. And mental health treatment and maternity care would not be covered.

That poses a particular problem for Ms. Allen and her husband, Brian Dubiski, 40, who said they hoped to start a family soon. They said they might be forced to seek full coverage through another small business that Mr. Dubiski operates.

A number of states have started programs to lighten the health care burden on small businesses through tax credits, pooling mechanisms and insurance regulation. President Obama, in his campaign, called for federal tax credits to encourage small businesses to provide coverage but also threatened to tax “all but the smallest businesses” if they did not contribute to their employees’ health care. Mr. Obama has not yet formally proposed a health plan.

The aid cannot come fast enough for businessmen like Mr. Fritts, of the Illinois sporting goods business. He saw his company’s health costs rise 30 percent last year even as its sales plummeted by nearly 60 percent. He said it had been devastating last month to tell workers who had been with him for 15 years that they would have to start paying half of their premiums and that he could no longer insure their spouses and children.

“It was absolutely the toughest thing I’ve had to do as a business owner,” Mr. Fritts said. “It was heart-wrenching for my employees, very emotional. You feel like you’re failing them. But it was either this or don’t stay in business.”