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The Defining Moment

General Business News

June 2003

The Defining Moment

There are defining moments in all lives. From the first time you say "no" to your mother and find out that word is only valid when she tells you "No" to the day you die, there will be a series of events that shape the thoughts you think and the things you do. For a business, "life" is no different. From concept to opening day to the day you retire from your business, the character and reputation of that business will be defined by what you do at critical moments in the business’ life.

If you accept this theory, then we are going to suggest to you that as a small business owner you are at a defining moment in both your own life and that of your business. Healthcare costs are skyrocketing and they are putting a squeeze on your time, your profits, your health, your company’s health and the health of your employees.

What you do now will define who you are and what your business is for a long time to come. But what do you do? You just met with your insurance agent who told you the rates for next year would increase 20%. "Hey," he says, "Don’t feel too bad. I have one group whose rates increased 50%."

You would laugh at such an incredible increase, except you have friends whose health insurance rates really are increasing that much. Surely, there must be something you can do and firing your agent isn’t an option. After all, this is the third set of quotes he’s gotten for you and your current company’s proposal beat all the new quotes. How did you ever get into this mess?

There are a number of reasons we could site to tell you why we are where we are, but that wouldn’t help your bottom line. The simple fact is you have a good group of employees and they need healthcare coverage. So, here are your choices:

  • Stay where you are and suck up the increase. Tell your employees that you are sorry, but this is the best you can do. Those who are committed to the company will grumble but stay, unless they can’t afford the new rates and have to have insurance. Those whose only investment in the company is a paycheck may realize the grass really isn’t greener on the other side, so they might as well stay. The real mercenaries in the bunch may jump ship, but that may be the best thing for you.

  • You can change the deductibles and copays under the present plan or make the employees pay a higher percentage of the premium and save a few premium bucks. This may be preferable if you have a relatively healthy group that doesn’t visit the doctor much. The grumbling will be there, but good education can solve most of the problem.

  • You may be able to move to a different plan, but make sure you can tell your employees their choices will be limited under the HMO or PPO you are going with.

  • You can take the drastic step of moving to a high-deductible plan that will qualify your employees to set up their own Medical Savings Accounts (see our February 2001 article). Again, MSAs are great if you have a healthy group with few employees that have young children. Since these type plan designs require the employee to pay every dollar up to the deductible amount, less healthy employees and those whose children wind up at the doctor every week, will probably balk at a high-deductible plan.

  • You could go with what is generally called "consumer driven" healthcare. This, in essence, is another way of going with a high deductible plan and contributing a set amount to a healthcare reimbursement account on behalf of the employee. The employee can then use the Health Reimbursement Arrangement to cover costs up to the deductible.

  • You can go with real "consumer driven" healthcare where you contribute to the HRA and let your employees decide how to spend it, including whether they purchase insurance at all. In essence, this is the healthcare area’s version of the "defined contribution" plan that we have become accustomed to in the pension arena.

  • You could combine a number of these options to see if you can limit your costs or, you could forget about it and stop offering any kind of plan. Talk about grumbling then.

Ok, let’s go with the premise that you really don’t want to leave your employees insurance naked, what options should you choose. That’s hard to tell in a generalized article, but we will try.

MSAs and HRA type plans are gaining popularity because the cost of higher deductible insurance can be a lot less than the lower deductible plans, but the same thing that makes these plans attractive to the employer may kill them in the eyes of the employees. This is where education will come in. Remember we said there were a number of reasons for the healthcare cost explosion? Well, one of them really is consumer driven, in the wrong way.

Many years ago, things such as prescription cards and physician copays didn’t exist. We all basically had to meet our deductible before we received any benefits. Then, even that benefit was limited by the co-insurance clause in the insurance contract. A typical example would be you first had to meet a $500 deductible, then you paid 20% of eligible charges until your total out of pocket was say $2,000. Do the math and you will see that the total charges covered on which you had some payment liability would have been $8,000. After that, the insurance company picked up the full tab.

That all changed when copays and drug cards became popular. Let’s assume your doctor charged $125 each time you came for an office visit. That meant that you could only see the doctor four times before you spent $500. With a $20 copay, you can now see the doctor 25 times for the same $500. Guess who picks up the $2,625 difference. This is just one small example of how the system has gone awry and moving back toward a system that puts responsibility on the consumer will help reduce the over-utilization of medical resources, but that doesn’t solve your problem of selling the plan to your employees.

About all you can do is point out the benefits of moving to the new plan. Many times, the employee will experience a premium decrease. If they choose the MSA option, they can take the savings and put it into an Archer MSA that will be free from income tax. If they have low bills, they will have money left in the account at the end of the year. If they stay healthy, over a period of time, the savings can add up and in the best case they can use the account as a supplemental retirement account.

Even if they do have a catastrophic illness, the law fixes their maximum out-of-pocket costs in any given year. How important can this be? Let’s look at an example.

A company was looking at changing companies. Forgetting deductibles and looking only at the maximum out-of-pocket costs, the benefits were something like this for a family of 5:

In-network annual maximum out-of-pocket costs were $3,000 per family member up to $9,000, but that didn’t include copays. Hence, the maximum out-of-pocket could be much more, but that normally is not the case.

Out-of-network annual maximum out-of-pocket costs for reasonable and customary charges were $9,000 per family member up to $27,000 plus copays.

The problem here is those words "reasonable and customary." Say your child had a rare disease and needed a heart transplant. Say further there was a hospital and doctor in-network that could perform the procedure, but you are in New York and that doctor is in California. The strain on your family during the separation would probably pull the family apart. It happens time and again.

Worse yet, the providers are across the street from you, but they have never serve a patient like your child and there are many complications because of the child’s disease. You have done your homework and found out that there is a program in a neighboring state that works with children like yours with a 70% survival rate. In network, your child has a 40% chance of surviving and out-of-network, your child has a 70% chance.

Which provider would you choose? It doesn’t really matter because the decision is up to your insurer. If you go against their wishes, the benefits will be greatly reduced. Let’s say in this case the out-of-network benefits are 50% of the reasonable and customary charges for the transplant. Great, you have some savings that will cover the $9,000 max for your child, and then the insurance will kick in. You have it made.

Dream on. Life isn’t that simple because every insurance company has a different definition of reasonable and customary and it’s nowhere near what the provider charges. In some instances, it’s not unreasonable for the insurance company’s definition of reasonable and customary to be less than the Medicaid or Medicare rates. Guess who picks up the tab? It’s not the insurance company.

Suddenly, this policy doesn’t look good in a worst-case scenario and that’s what insurance is really for – catastrophes. Explain this to your employees and tell them these kind of worst-case scenarios happen all the time to real people. This may help you sell the higher deductible policy that, for 2003, limits the family’s liability to $5,050 for the year and that’s basically an absolute limit.

Health reimbursement arrangements work in the same way MSAs work, but the employee cannot make contributions to the plan. In addition to using HRA dollars to pay for other qualified expenses, insurance premiums can be paid out of the account also. Balances left at the end of the year can be carried over to subsequent years and when an employee retires or leaves the company reimbursements are still available up to the balance in the account. The maximum that can be added to the account is $3,000 in any year to qualify as a tax-free benefit.

Unlike computers, the cost of healthcare is expected to increase in the 15% to 20% range for the next few years. Like computers, though, your employees expect you to provide health benefits. Sometimes that is absolutely impossible, but other times there may be a way for you to provide a benefit to help yourself, your employees and your business. If you’re about to give up on the prospect or are casting about trying to at least minimize your costs, give us a call. We may be able to help you find a solution that for you, your business and your employees will define your company as one of the best in the country, at least to your employees.

Please remember our troops are still in harm’s way and need your prayers. Have a great June.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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