Health insurance rate hikes hitting California small businesses could hurt state’s economic recovery
Small businesses in California are being hit this year with double-digit hikes in health insurance costs that could hurt the state’s economic recovery as companies curtail plans for hiring and expansion to pay their insurance bills.
Five major insurers in California’s small-business market are raising rates 12% to 23% for firms with fewer than 50 employees, according to a survey by The Times.
Similar increases are being felt by many small businesses across the nation, including those in Texas, Ohio and Florida — mainly the result of escalating costs for medical care and pharmaceuticals, insurers say.
In California, some small businesses say they are stunned by their latest insurance bills. Longtime customers of Blue Shield of California, for instance, are facing rate hikes as high as 76% after the insurer lost money on a handful of plans.
“We don’t have that money,” said Ann Terranova, a San Francisco financial planner who is dropping Blue Shield for herself and two employees after learning that their annual premium would jump to more than $19,000 a year from $11,000.
Financial pressures are also squeezing Tessier Cabinet Co., a 59-year-old family business in Montclair. Its president is reluctant to hire because of weak demand for his goods amid a 14% rate hike from Kaiser Permanente. “I’m ready to hang it up,” Dan Tessier said.
Economists and small-business advocates worry that insurance costs — on top of taxes and rising wages —- will hamper the ability of small firms to expand and scare away new small companies. Analysts point out that small businesses are responsible for creating most new jobs in California and are key to its economic recovery.
“If healthcare costs and other costs go up, it’s going to make it more difficult for small businesses to hire, and that lack of employment growth is going to be a drag on the economy,” said Dennis Tootelian, director of the Center for Small Business at Cal State Sacramento. “Hiring is one of the most critical factors for getting the economy back on track.”
Other experts believe higher costs could trigger an exodus of small firms.
“If they have the option, they will probably think of doing business somewhere else,” said Esmael Adibi, an economist at Chapman University in Orange.
Small firms nationwide are struggling with the problem as they worry about what the effect of the new national healthcare law. It will impose billions of dollars in taxes on insurance companies and require mid-sized firms to provide insurance for workers or pay fines.
“They are very concerned that their costs aren’t going to go down. They’re just going to go up,” said Stephanie Cathcart, a spokeswoman for the National Federation of Independent Business in Washington. “They’re going to be paying new taxes, new fees. It’s kind of a double whammy on them.”
California insurers defend their rate hikes as sound and fair, saying they struggle to balance affordable rates with the need to remain competitive and turn a modest profit.
Blue Shield, for example, said hospital charges rose nearly 20% last year, while physician costs and pharmaceutical fees increased almost as much. Anthem Blue Cross also cited the cost of medical care in explaining its average rate hikes of 13% this year.
“We understand that one group that has been most hard hit by the economic downturn of the past few years is the state’s more than 3 million small businesses, who we all rely on to be major contributors to our local economy,” Anthem spokeswoman Peggy Hinz said.
“We want to be competitive in the marketplace, but we also want to take care of our members,” Hinz added. “We work each day to do both.”
The high cost of insurance has become an urgent concern nationwide as businesses and individual policyholders struggle with fast-rising rates. After a public uproar earlier this year, Anthem, California’s largest for-profit insurer, canceled increases of as much as 39% on individual policies.
As in the individual insurance market, small businesses have little leverage to negotiate for lower rates or more comprehensive benefits, often electing skimpier coverage to counter rising costs.
Overall premiums for small firms in California rose 180% cumulatively over the last decade, according to the California Employer Health Benefits Survey. Larger firms’ rates increased 146%.
Small businesses say 2010 is shaping up to be their most expensive year yet, leaving them with few good choices. They say they can pass charges along to employees, reduce benefits, cancel insurance programs or raise the price of goods — an option few are willing to entertain because of competitive pressures.
“They just don’t have the profit margins to pay this cost,” said insurance broker Scott Hauge, who heads Small Business California, an advocacy group. “It goes right to their bottom line. It’s a killer.”
About half of the estimated 6 million Californians working in small businesses get insurance through their jobs.
Among the major insurers who serve the small-group market, Aetna and Blue Shield are each increasing premiums 18% on average this year, although some Aetna customers who renew policies this summer will see increases of as much as 23%, the company said.
Kaiser, the state’s largest HMO, is raising rates 12% on average. Health Net Inc. said its customers would see “low double-digit rate increases.” UnitedHealthcare declined to release its rates.
Not all the rising costs are related to inflation. In some cases, insurers lost money because they priced plans too low and, as a result, are now introducing higher rates.
Blue Shield, for example, miscalculated the cost for three plans that pay all medical expenses once customers meet thresholds for out-of-pocket expenses. The San Francisco insurer is now raising premiums as much as 76% for some small businesses.
“It turns out that people used a lot more medical care than we had anticipated,” said Tom Epstein, Blue Shield’s vice president of public affairs. “We need to increase the rates to cover the medical costs. We can’t lose money on these products.”
Many small firms say they feel a duty to provide health insurance, or see it as a necessary cost to attract qualified job candidates. Either way, they predict that a continued rise in their healthcare bills will dampen their prospects for recovery.
“Our margins will dwindle to nothing,” said Bill Thomas, chief executive of U.S. Technical, an engineering firm in Fullerton. “It’s the beginning of the end.”