Salary.com: Small Businesses Change Pay Practices to Meet Healthcare Costs

August 23, 2005

New results released this week by Salary.com in its Small Business Basic Medical Coverage Survey show that nearly 90 percent of small businesses are paying more to provide basic medical insurance to their employees in 2005 than in 2004.

Half of the 304 surveyed companies reported year-over-year increases of 10-20 percent, while almost one tenth of small businesses surveyed reported increases of 30 percent or more. These cost increases are reportedly having a significant impact on employee compensation, forcing small businesses to adopt measures that, in many instances, have a direct effect on employee take-home pay.

Sixty-four percent of small businesses report trying one or more strategies to contain basic healthcare costs. The survey found that the most common cost-containment strategy in use today is to increase the user fees (typically called “co-payments”) employees must pay when actually consuming medical treatment and services.

However, a significant percentage of employers have chosen to contain overall medical costs by increasing the employee share of monthly coverage premiums – a tactic that has a direct impact on employee take-home pay. An even larger percentage of employers report that they intend to adopt this tactic in the near future, making it the fastest-growing trend in medical cost-containment among small businesses today. Other cost-reduction strategies currently used by small businesses include: switching plans, reducing extent of coverage, fine-tuning eligibility standards, and eliminating coverage altogether.

In one surprising finding, 14 percent of small businesses offer employees significant incentives not to participate in company medical plans, or actively encourage employees to enroll in a spouse’s medical plan. Incentives typically offered include: lump-sum salary increases, cash rebates, and contributions to other employee benefit accounts. These companies reportedly believe that the potential healthcare cost savings will more than cover the cost of non-participation incentives. “Salary.com estimates that many companies could offer employees a 10 percent salary increase (in lieu of plan participation), and still lower total payroll expenses in a given year,” according to Richard Cellini, head of Research at Salary.com.

Salary.com’s Small Business Basic Medical Coverage Survey was conducted in July 2005. Approximately 300 small businesses (each employing 1-200 individuals in the United States) completed the survey. The full survey results are available at http://research.salary.com.

“Salary.com’s Basic Medical Coverage Survey provides a look at what a cross-section of small businesses are doing to control medical coverage costs in the U.S.,” said Kevin Cuddeback, director of Salary.com’s Small Business unit. “Healthcare costs continue to grow for the majority of small businesses, but many companies have found ways to at least slow the rate of increase. Often, they are using tactics that directly impact their compensation practices.”

Other interesting survey results:

* Few Companies Band Together to Purchase Group Insurance: Only 1.7 percent of participating companies report joining forces with other companies through a buyer’s cooperative to purchase basic medical insurance. Still, survey results show a substantial uptick in the number of small businesses willing to seriously consider this strategy in the future – making group healthcare purchases a new trend-in-the-making.

* Three Clear Winners Have Emerged: Despite the variety of medical plans available today, three plan formats have emerged as favorites among small businesses: Preferred Provider Organizations; Health Maintenance Organizations; and Point of Service providers. Less than 10 percent of small businesses responding offer any other format.

* Micro-Employers Offer the Most Generous Plans: “Micro-employers” (1-20 employees) lead all small businesses when it comes to picking up the full cost of medical coverage. 32.2 percent of Micro-Employers offer fully-funded medical coverage (requiring employees to pay nothing toward the cost of medical care premiums). As companies grow in size, fully-funded medical coverage becomes increasingly rare. Less than 3 percent of the largest small companies (200+ employees) offer fully-funded medical plans.

* Micro-Employers Also Offer the Least Generous Plans: Micro-Employers are also most likely to disappear altogether when it’s time to settle the tab for basic medical coverage. 31.7 percent of Micro-Employers (more than any other small business segment) offer completely unfunded medical coverage (requiring employees to pay 100 percent of all premiums due).

* Straddle Companies Experience the Worst of Several Worlds: “Straddle” companies (100-150 employees) occupy the awkward mid-range of the small business category: too large to be lean, yet too small to enjoy economies of scale. Straddle companies report the highest per-employee healthcare costs (17.7 percent of gross annual payroll, versus an average 14.6 percent for all small businesses). Additionally, Straddlers report a higher rate of increase in the cost of medical coverage (11.4 percent for 2004/2005) than almost any other group of small businesses. Perhaps as a result, Straddlers offer employees the smallest contribution toward the cost of medical coverage (45.2 percent on average). Straddlers are also more likely than any other small business segment (except Micro-Employers) to offer employees completely unfunded plans (with 28 percent of all Straddlers offering such plans).

* Giant Midgets Stand Tall: The largest small companies (200+ employees) are able to leverage their relative size for the benefit of employees. On average, these so-called “Giant Midgets” pick up 62.5 percent of the cost of medial premiums – one of the very best deals offered in the small business category.

Was this article valuable?

Here are more articles you may enjoy.