Small Businesses Can Benefit From Understanding Healthcare Trends
David A. Proctor, CLU, ChFC
The difference between small businesses and large
corporations when it comes to healthcare programs and costs is often
like night and day.
Major corporations can take a longer view when it comes to healthcare
issues and costs. They have the ability to marshal and leverage their
not inconsiderable resources to design advantageous programs and mitigate
At the same time, many smaller and even some mid-size companies focus
more on the short-term business issues, including healthcare. It’s
common for small businesses (20 to 200 employees) to designate one
person, perhaps the owner or someone wearing a dozen hats, to “take
care of benefits.” There’s never enough time to spend
on “the little finger on the left hand.”
Finally, the healthcare renewal date looms up on the calendar and
someone is forced to ask, “What do the numbers for the coming
year look like?”
For small businesses, healthcare is one of the top company costs,
yet there is rarely enough time, knowledge or energy to perform adequate
due diligence. In many cases, it is viewed as a bother.
Under such circumstances, it isn’t surprising for small businesses
to base healthcare buying decisions on inadequate or skewed information,
opinion and even on one or two individuals’ personal preferences.
Even worse, there is often reluctance to make a change. “We’ll
just stick with what we have now. We don’t want any problems.”
This is anything but a pleasant picture, particularly with healthcare
costs continuing to escalate and the number of variations and options
in plans increasing all the time.
To gain a longer view on healthcare, it may be helpful to look at
the trends in healthcare as a way to develop a better understanding
of what’s coming in the years ahead. Here are several indications:
1. Cost increase. Healthcare costs amounted to
$1.9 trillion in 2004, about 2.5 times what they were in 1990. That
figure amounts to 16.9% of the Gross National Product.
While these are only a few of the overall trends in healthcare, it
seems that they paint a rather clear picture of increasing total costs,
particularly as the 79 million Boomers reach the age when the utilization
of healthcare resources raises.
2. Per capita costs. In 2004, the per capita cost
was $6,280, up from $2,881 in 1990, or an average national annual
increase of 5.9%.
3. Spending cycle, 1960 to 2004. Public and private
attempts to curtail accelerating costs through wage and price controls,
voluntary hospital cost containment and most recently managed care
and the threat of health care reform have triggered sharp declines
in private group spending. Yet, these declines have always been
temporary and have been followed by rapid growth in costs. The average
annual growth in private per capita health spending was 3.7% from
1960 to 2004.
4. Hospital care and prescription expenditures, 1994-2004.
While the proportion of national healthcare expenditures for hospital
care declined from 34.1% during this period to 30.4%, the share
spent on prescription drugs almost doubled from 5.6% to 10% of health
5. Public vs. private spending. The percentages
were virtually unchanged from 1994 to 2004: Public, 44.3% vs. Private
55.7% in 1994 and in 2004, 44.4%, Private and 55.6% Public.
6. Promotional spending for prescription drugs, 1996 to
2004: Grew from $9.2 billion in 1996 to $27.7 billion in
2004, with direct-to-consumer advertising having the highest average
annual increase of 22%.
It is also worth noting that attempts to control healthcare costs
thus far have been only temporary and have rather quickly set off
fairly dramatic cost increases. Whether that will continue is an open
question; however, it is prudent to assume they will continue to rise,
driven particularly by medical technology.
The impact of these trends are easily seen in employers’ efforts
to take steps to cap employee health care spending:
• Higher co-pays: How far can this go? Will a point be reached
when employees stop using medical facilities? If that happens, what
are the long-term implications?
Fortunately, there are a few helpful steps small businesses can take
to improve their healthcare offerings and control costs:
• Higher deductibles: Again, these reduce
employer costs, just as do higher co-pays. But what are the limits?
And what comes next?
Both higher co-pays and deductibles are beneficial in relieving “pressure,”
namely, in controlling employer costs and unnecessary or opportunistic
utilization of medical services. There is an important question inherent
in these two issues: How long can employers expect to rely on them
as healthcare costs continue to rise? Is there a point when employees
• Avoid making last minute decisions regarding healthcare
plans. It’s natural to put off what we don’t like
to deal with. Time runs out and someone says, “Let’s
just stick with what we have.” This is almost always costly
in terms of cost and quality of a plan. While it will take additional
time, begin investigating possibilities at least six months before
renewal time. By planning ahead, a business can avoid surprises
and unexpected cost increases.
It seems clear that healthcare costs will probably continue to rise,
some years more than others. Nevertheless, the direction is upward.
Small businesses are best served by taking the right steps to make
sure that their healthcare dollars are spent wisely.
• By being open to new healthcare plan strategies.
While most of us have a greater comfort level with what we know,
closing our eyes to other approaches only isolates us from helpful
possibilities that may better meet budget requirements and employee
• Work with brokers experienced in the small business
healthcare market. Even though there is a multitude of small
businesses, many healthcare brokers would rather spend their time
with larger companies with more employees and larger premiums. All
of which translate into more lucrative commissions. Small businesses
are often the “training ground” for new or inexperienced
brokers, the place where they can “learn the ropes”
before moving to larger accounts. However, there are boutique benefits
agencies that specialize in serving small businesses, with highly
experienced personnel who can be particularly valuable. They are
more educators than salespeople. They serve as the “point
person” for their customers, answering questions, obtaining
information and resolving issues with insurance companies. If you
were to ask these brokers, they would tell you that they act as
a mini-HR department for their clients. There is no extra cost for
these value-enhancing services. A broker is paid a commission by
the insurance company when enrolling a client.