by Cynthia Harrington

Rates for health insurance premiums skyrocketed this year.

From a low of a half-percent increase in 1996, employers got annual renewal increases on the average of 30 percent. For financial services companies experiencing declining revenues, the hit to the bottom line is particularly ill timed. But few could afford to do nothing.

Timothy W. Chase, CPA, PFS, CLU covers six employees in his Towson, Md.-based Wealth Management Services. Chase reported premium increases of over 40 percent for 2002. "We ended up switching plans," he said. "We feel it’s critical to offer coverage to our employees, but we had to do something."

Deena B. Katz, CFP, principal of Evensky, Brown & Katz, in Coral Gables, Fla., provides single coverage for 15 employees. The employee pays out of pocket for family coverage and a $20 co-pay. Katz reported that the firm’s premiums jumped by 35 percent. "We feel that providing for our employees’ good health is the best money we can spend," said Katz. "But there’s only so much money in the overall benefit package and money for the higher premiums has to come from somewhere."

Lynn Edwards, CPA, is the benefits partner for KraftCPAs, in Nashville, Tenn. She has come to dread the end of the year when the new insurance premiums arrive. This year, rates were going to jump by 37 percent for the 100 employees who are covered on the plan. "We pay 60 percent and the employee pays 40 percent of the premiums, so we were both hit very significantly with the increase," she said.

This jump is the most significant for more than a decade. In the 1970s and 1980s, increases of 20 percent and higher were commonplace. The move to managed care and generally declining rates of inflation drove increases down steadily throughout the 1990s.

According to the Health Insurance Association of America, the reasons are easy to identify. Technological advances offer better medical care with a high price tag, prescription drug prices are up, as is usage, and the workforce is getting older. And none of these causes is going to diminish in the foreseeable future.

But updating the firm’s health insurance is a time-consuming process. Someone has to dedicate the time to cut costs. And there are just three ways to do that. Firms can increase the amount that an employee pays out of pocket, cut services or change carriers.

Because the purpose of the insurance is to benefit employees, their input in the decision is often solicited. "We present all the options to our staff," said Katz. "Health insurance premiums are part of the overall benefits package. They chose to spend more on the insurance rather than a bigger salary increase or increased 401(k) contributions."

Evensky, Brown also moved to a new carrier. Katz and the firm’s controller reviewed dozens of options and rigorously matched the list of what employees had to have with what was offered. They were able to increase benefits with the new carrier and stay within their budget. "We changed from an HMO to a more flexible plan," said Katz. "We also beefed up coverage for mental health and wellness care. We wanted employees to not be discouraged from going to the doctor for just a checkup."

KraftCPAs had incentives to stay with their current carrier. They didn’t want to interrupt employees’ doctor relationships that were started just three years before when they switched to the current PPO. And they were very pleased with the service that they were getting. So they scoured their other options. They raised the co-pay on non-generic prescription drugs from $15 to $35. They doubled the deductible. "With that, we reduced our increase to 12 percent," said Edwards.

Chase kept coverage with their current vendor but switched to a different set of options. The coverage was very similar but the new plan has a more restrictive list of doctors. The savings were significant. Premiums increased by only 20 percent. "The move wasn’t hard. We checked everybody’s list of doctors and all were still offered with the new plan," said Chase.

Not all firms are feeling the pinch, however. Employers that established plans with greater employee participation weren’t presented with big increases this year. Sidney Blum, CPA, PFS, ChFC, of Successful Financial Solutions, in Northbrook Ill., is one of those. He established a two-part plan for the firm’s 11 employees.

People who were not covered by a spouse’s plan could set aside a portion of their salary pre-tax to pay for individually written policies. All employees could participate in the medical reimbursement half of the plan, in which employees submitted claims for medical expenses that could also be paid for with pre-tax savings dollars. He sees no trend to either higher claims or savings to pay for the individual policies.

Blum’s greatest concern is that employees plan for too many or too few expenses. The amount that they put away must be established at the beginning of each year and cannot be changed. If the employee spends more than they saved, they pay for it with after-tax dollars. Blum worries about the reverse, as well. He points to certain prescription drugs that, in the future, will no longer remain prescription and, as a result, will no longer qualify as a medical expense to be reimbursed. The employee who planned savings to pay for the higher cost of a prescription drug would have money left at the end of the year. "That’s the risk for the employee," said Blum. "Anything left at the end of the year reverts to the employer."

What will happen for most firms if next year’s increases match this year’s?

"If rates go up by that much again, it will be a tough decision," said Edwards. "I would hate to have to try to think about changing carriers. But we can’t continue to increase the deductible and drug card provisions that much more."

Katz would rely on their employees for guidance. "We want healthy people on staff and we don’t want them stressed about paying for medical care," she says. "We’d go to them and ask what they want to do here."

Many feel they’re just running out of options to avoid the higher premiums. "But what are we going to do?" asked Chase. "We’re really stuck between a rock and a hard place."

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