Health Care and Insurance and Small Business

Workers can help lower health costs:

July 31, 2006

Health care costs keep small-business owners up at night. According to Forbes magazine, the cost of health care is rising at three times the rate of inflation. Because demand for medical treatment will continue to grow as Americans age, insurance premiums will continue to increase.

Some small-business owners' first reaction is to shift rising costs to employees. Others simply eliminate health insurance benefits altogether. While this reduces expenses and raises profit in the short term, it ruins a company's ability to keep valuable employees.

In the long run, a sub-par work force leads to sub-par performance. For longterm success, a small business must position itself as an "employer of choice" in the local labor market. This is not possible without attractive health care benefits.

Rising health care costs require smallbusiness owners to think smartly about the design of insurance packages and their investment in employees.

Healthier employees mean lower insurance premiums. A company that documents falling costs to the insurer over time can bargain for lower premiums in a competitive insurance market. Costs fall when employees take advantage of preventive care, correctly manage their diseases and choose healthier lifestyles.

Intervention and incentives can generate positive changes in employee behavior. Entrepreneurial employers reward employees who quit smoking, lose weight or undertake regular physical activity.

Small businesses can hire firms that specialize in surveying the health of employees and coaching them through medical treatment. Haelan, an Indianapolis company that offers this type of service, has documented a 28-percent reduction in Workers' Compensation medical costs when this type of strategy is employed.

Motivating employees to manage stress better also has a high economic payoff. The American Institute of Stress estimates that up to 90 percent

of doctor visits

have their root in

stress-related problems. Small-business

owners who limit workplace stress in smart ways

can lower health care

expenses and increase productivity.

High deductibles are another way to preserve some coverage, since they make insurance more affordable. A small-business owner can purchase a catastrophic policy for employees and pay them a bonus that equals the high deductible (usually $1,000 or $2,000). Out-of-pocket employee expenses are kept low, and the possibility of keeping unused money motivates employees to be better medical consumers. According to the Cato Institute, this type of insurance strategy could reduce national health care costs by up to $300 billion.

Insurance premiums are also lower when the number of insured employees is larger. Small businesses often pool employees under one contract with an insurer. The Indianapolis Chamber of Commerce, for example, offers this option for its smallbusiness members. A firm with 50 insured individuals, for example, can save $14,250 when it co-insures with other small companies that belong to the Chamber.

Small businesses in Indianapolis must learn to live with exploding medical costs. The winning strategy is not to shift more of the financial burden on employees, but rather to rethink how employees are engaged.

A company's health insurance scheme is not just an issue of expense, but also one of worker productivity, employee retention and organizational stability. Small businesses can leverage incentives for healthy employee behavior and innovations in insurance plan design to better weather the storm of health care inflation.



Powell is an associate clinical professor of business economics and faculty chairman of the evening MBA program at Indiana University's Kelley School of Business Indianapolis.
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