How many dreams fall prey to health care costs?

  • Article by: ERIC WIEFFERING , Star Tribune
  • Updated: November 2, 2011 - 7:43 AM

Alex Danovitch's business has nine employees, Andy Johnson's has 90. One firm is four years old, the other 11. One is in south Minneapolis, the other in St. Cloud.

Different industries, different stages of growth and different daily challenges, save one: paying for their employees' health insurance.

"It is an astronomical cost for a start-up," said Danovitch, co-founder of the Minneapolis company ReGo Electric Conversions, which converts hybrid cars to plug-in hybrids.

"We want people to focus on their jobs and not worry about the what-ifs of life," said Johnson, CEO of W3i, a fast-growing technology firm. "But the reality is we don't have the buying clout of large companies."

That health care costs are high and getting higher is an old story. It's usually told through the lens of the aggrieved employee being asked to pay a higher share of the premium, or from the perspective of giant companies grappling with annual health costs that run in the hundreds of millions or even billions of dollars.

But soaring health care costs also serve as a drag on start-ups and fast-growing young companies. In addition to the usual risks of bootstrapping the next ReGo or W3i, would-be entrepreneurs often face a difficult decision to give up the company health plan and pay between $800 and $1,000 a month to insure their families.

From the perspective of a start-up company, it can mean going slow on new hires because the cost will go well beyond starting salary. The average annual premium for family coverage has doubled in the past decade and now tops $15,000, with more than $10,000 coming out of the employer's pocket, according to an annual survey by the Kaiser Family Foundation and the Health Research and Education Trust.

Or, let's look at it from the perspective of a potential recruit. At firms with fewer than 200 employees, annual deductibles for a single person are double those paid by workers at larger firms. Last year, half of all small firms required employees to incur out-of-pocket costs of at least $1,000 before insurance kicked in. In 2006, only 16 percent did. How much do those higher costs hurt young companies' ability to recruit new workers?

Health care reform -- assuming the Affordable Care Act is not overturned by the courts or Congress before the major provisions go into effect in 2014 -- may ease the financial burden for some small companies. The small-business exchanges permitted by the legislation, for example, provide emerging firms with a potential opportunity to pool their buying power when shopping for insurance.

But it remains to be seen whether health care reform will slow health care inflation, the force behind those escalating premiums. No other country spends as much as the United States on health care, $2 trillion annually, yet we are one of only three industrialized countries without universal coverage.

Instead of a nanny state approach to health care, we've opted for a company-town model that has 58 percent of all workers in the U.S. covered by health plans offered by their employer.

But with health care costs rising faster here than elsewhere in the world, that expectation is proving increasingly burdensome for American businesses to meet. Wal-Mart, the nation's largest private employer, announced earlier this month that it would not offer health benefits to new part-time employees, and that it was sharply raising premiums for its full-time workers.

Most companies don't drop coverage. They turn whatever knobs and pull whatever levers they can to better manage the increases. It could mean asking workers to pay a higher share of their monthly premiums, currently an average of 28 percent for family coverage, or to accept higher deductibles and co-insurance levels.

But if Wal-Mart is struggling to cope with higher health care costs, it's not hard to imagine the challenge facing small and emerging companies.

Health insurance represents about 10 percent of total labor costs at ReGo, which has four full-time and nine part-time workers. Only full-time workers are eligible for the plan, which does not cover spouses or dependents and features a deductible that's higher than Danovitch would like.

Still, given the trajectory of health care costs, he's worried about being able to retain the plan.

"The last time we put this contract out to bid we got a lot of 'nos,'" Danovitch said. "We don't feel comfortable with the way things are going."

W3i is well past the start-up stage. Revenue has grown at an annual rate of 50 percent each of the past few years, Johnson said, and the company has added 25 employees this year alone.

That growth has allowed Johnson to steadily increase W3i's share of employees' monthly premiums to 75 percent. But Johnson's health care bill, like every other company's, is rising rapidly. As a result, W3i can't yet afford to pay a similar share of the monthly premium for spouses and dependants.

"Clearly, there are structural problems in our health care system," Johnson said.

Unless radical change comes to the U.S. health care system, three things seem assured:

Companies, old and young alike, will continue to shift a greater share of the costs to their workers.

Newer companies will have a hard time offering the kind of benefits employees have traditionally enjoyed -- at any price.

And, as a result, some entrepreneurial visions will never advance beyond what-if.

ericw@startribune.com • 612-673-1736

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