Rising health-care costs are pushing entrepreneurs to the limit. Some are changing coverage. Some are eliminating coverage. And some are deciding not to go into business at all.
By SIMONA COVEL
For entrepreneurs trying to start or run a business, the obstacles are huge. But few loom as large as one: health care.
For years, small businesses have griped about the burden of rising health-care costs and warned that the situation was near a crisis point. Well, it’s fair to say that the crisis point is here.
At some businesses, in fact, health care is the highest expense after salaries—with devastating consequences. Owners must skimp on vital investments like youtube services from themarketingheaven.com
and market research. Some can’t hire the people they want because top candidates demand premium coverage. Or they end up understaffed because of the high cost of insurance—and lose potential clients as a result.
At the same time, to keep costs in check, countless companies are slashing coverage or dropping it entirely. Some are turning to freelancers or offshore workers instead of hiring full-timers and locals. And some would-be entrepreneurs find insurance so onerous that they’re not even starting a business in the first place.
What’s more, it isn’t just individual companies at risk. It’s the entire economy. Historically, small businesses have boosted recoveries significantly. Since they can’t simply make mass layoffs and hunker down, as so many big companies do, they must take risks to survive—like investing in innovative ideas and hiring more workers to implement them. But stratospheric health-care costs threaten to damp that enthusiasm and choke off investment.
“We have got to figure out how to get an affordable [insurance] package to people who would be entrepreneurs,” says Carl Schramm, president and chief executive of the Ewing Marion Kauffman Foundation, a pro-entrepreneurship organization in Kansas City, Mo. If such a package existed, he adds, “the chances of a more robust recovery at the hands of entrepreneurs would decidedly be higher.”
Mr. Schramm believes that Washington has had few constructive ideas so far, as most of the focus and the funds have been directed to big business, particularly the bailouts of banks and auto makers.
“You don’t have a general chatter right now on the importance of entrepreneurs in government circles,” he says. “There’s a decided emphasis on protecting the framework of big business,” even though small companies historically create the most U.S. jobs.
What Will Congress Do?
It’s not clear what the looming health-care fight in Washington holds for small companies. President Obama has implied that any kind of employer mandate to pay for coverage would exclude small businesses. That’s a relief to many owners—but it still leaves enormous numbers of people without coverage. A recent study from the National Federation of Independent Business, a Washington, D.C., trade group, found that 26 million of the nearly 46 million uninsured Americans are small-business owners, employees or their dependents.
Some members of Congress, mindful that small businesses employ the majority of Americans and lots of their constituents, are pushing for programs that will let small businesses join cooperatives that could use their size to spread risk and negotiate costs down, like bigger businesses. A House-sponsored bill would offer a tax credit to business that join the cooperatives. A similar plan from the Senate also allows companies to band together to spread risk and offers tax credits to help small businesses pay.
Several small-business lobbies support the plans. Though the proposed bills don’t address the biggest problem in the health-care system, the dramatically rising cost of care, the general consensus among a wide swath of lobbying groups and small-business organizations is that they offer a starting point to level the playing field.
No Local Hires
Still, the proposals are just one element in the larger debate about health-care coverage and could morph as lawmakers draw battle lines over contentious issues like a public health-insurance system.
But, for some small businesses, help can’t come soon enough. Consider Nimbus Software of Atlanta. After being battered by the recession, business at the marketing-software company is finally looking up. Nimbus has a six-week backlog of work—too much for the four full-time employees to handle.
But rather than hire more full-time staff, chief executive and co-founder Jason Brewster plans to use developers in the Eastern European nation of Belarus, and maybe additional contractors in the U.S. “If health care wasn’t a line item we needed to worry about, I would probably hire directly,” he says. “I’d have better control” over the staff and their work. But with the company paying about $1,000 per month for the average family plan for each employee, the cost adds up to virtually an extra minimum-wage worker for each full-time staff member.
Mr. Brewster knows how important health insurance is—he has four young children, including one with autism. When the company was founded in 2000, coverage cost about 70% less, he says, and employee co-pays were lower. But now, he says, Nimbus can’t afford to pay for new employees’ health-care coverage—even though the staff is mostly young and fit. On the most recent annual report on his employees’ usage, Mr. Brewster says, not a single one met the deductible.
The problem, he says, is size. Big companies have enough employees to self-insure—their employees are pooled together for purposes of determining risk, and rates in large part are based on workers’ actual health-care use. But Nimbus is too small for that type of plan, so employees’ good health has no impact on rates. Instead, small businesses like Nimbus have little bargaining power and are at the mercy of their insurance company, which assumes the risk. And in recent years, insurers have raised small business rates furiously. Employers have increasingly passed some of those costs on to their staffs.
So, for now, more full-time staff is out of the question—and potential local workers are losing out on jobs. Using offshore workers can be risky, Mr. Brewster acknowledges. Monitoring their work is more difficult, for instance. But the risks are far outweighed by the cost savings, he says.
Across the country in Oregon, business owner Paul Ward has discovered the many compromises it takes to set up health coverage for a small business. The founder of Web- and multimedia-design company Media Mechanic LLC, based in Tualatin, Ore., outside Portland, is in the process of trying to replace contract workers with three new full-time staffers. He wants local employees who know the market and can help establish the young business. But competition for high-tech workers is fierce, and the best workers demand benefits, Mr. Ward says.
The cheapest plan he found will cost about $400 per employee in premiums, assuming the employees are young and healthy. Covering employees’ spouses and children would run as much as $800 per employee per month—if the company covers 100% of employee premiums and 50% of the spouses’ premiums. That’s simply too much to handle, Mr. Ward says, so he plans not to offer family coverage, and he’ll likely cover only half or two-thirds of his employees’ premiums. That’s a tough pill for Mr. Ward to swallow; in Michigan, where he grew up, workers’ rights reigned supreme, and he believes employers should offer the fullest possible coverage for their staffs.
Even with those concessions, health insurance is likely to come in as the company’s No. 2 expense—second only to wages, and edging out rent and utilities. “It’s less money I can spend on marketing, and less money I can spend on investment in the company,” Mr. Ward says.
M2 Health Care Consulting hasn’t been able to find an affordable plan—and that’s having serious consequences for the health-policy consulting firm. Since the business was created in 2005, its president, Brenda Gleason, has relied on local contract workers—currently, five of them. But her accountant has advised her that it’s time to make those staff members full-time employees, partially for the tax benefits. Ms. Gleason would also prefer the dedication of full-time workers.
The problem? The Washington, D.C., company just can’t afford to cover employees—despite a growth spurt that has left it desperate for additional staff. Only health savings accounts with catastrophic coverage seemed affordable, but they didn’t provide enough coverage to make Ms. Gleason comfortable. Traditional plans with more-comprehensive coverage and lower deductibles came in between $750 and $950 per month per employee, and that’s just not affordable, Ms. Gleason says. (For her part, Ms. Gleason is currently covered by the domestic-policy plan that her partner’s employer offers.)
Since prospective employees increasingly expect coverage, M2 is at a disadvantage. When Ms. Gleason recently offered spots to two candidates, both turned her down, citing at least in part the lack of coverage. It’s a particular problem now, she says, because she’s looking for workers with three to five years of professional experience; often, they’re too old to be on their parents’ plans but too young to have a spouse or partner with coverage.
Meanwhile, the delays in hiring caused M2 to lose business recently. A big potential client took its business elsewhere because M2 didn’t have enough staff to handle the project. “If I can’t hire more people, I can never win that contract,” Ms. Gleason says. “I don’t want to think I’m putting the brakes on the business.”
In some cases, when a young small business tries to buy insurance, the expenses are enough to stifle it before it gets off the ground. That was the case for Louise Hardaway, who decided to start her own business when her employer, a home-care company focused on bleeding disorders like hemophilia, closed in the spring of last year. She and a former co-worker had a list of clients near their home town of Nashville, Tenn., and thought they’d be able to build a small but stable enterprise. “I really had always wanted to start my own company,” Ms. Hardaway says.
Both Ms. Hardaway and her partner were married to spouses who are self-employed, so they needed to find coverage. Their families had been covered by their previous employer. Ms. Hardaway called an insurance broker. She knew that as a small start-up, her company, Factor 4 Life, would be at a disadvantage, and she expected to pay a couple of thousand dollars a month. After a few days, the broker called with a quote: $12,800 per month to cover five people—Ms. Hardaway and her husband, her business partner, and her partner’s spouse and child. She knew being over 50 might be a liability, and her husband had a bout with kidney stones that may have affected the quote. Nevertheless, they’re in “relatively good health,” she says, with no chronic diseases. The insurer would say only that the quote was based on information Ms. Hardaway provided.
Determined to find coverage, Ms. Hardaway decided to check with several other insurance companies. But because the first company deemed the group to be “max rated”—falling into a high-risk category—the quest was essentially doomed. Insurers share the information, her broker told her, and all of the other quotes would be similar. “You have to cover a lot of healthy lives to make [insurance] profitable,” Ms. Hardaway says. And that’s “an inherent problem” for small businesses.
Ms. Hardaway’s broker suggested health savings accounts, which may offer lower premiums but generally come with a high deductible. But she balked when she saw the fine print: Pre-existing conditions would be covered only for a certain period. She was worried in particular about some polyps that had shown up on a past colonoscopy. If she developed cancer in the future, she was afraid the company could say it was a pre-existing condition.
Factor 4 Life lasted about six months. Last fall—one month before their coverage from their existing employer was set to expire—Ms. Hardaway and her business partner shuttered their nascent business and started working for another company.
The two partners lost thousands of dollars in attorneys’ fees and business filing fees to set up the now-defunct company—not to mention all the time involved. But now they have employer-sponsored health insurance; Ms. Hardaway is paying about $1,000 per month in premiums for herself and her husband. Her new employer “is letting us be self-directed, they know we have a history of success.”
“But it’s not the same” as the dream of being on her own, she says.