Businesses Question Insurance Tax Credits Some Fear Premium Hikes Will Cut Gains

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California small-business owners expected to be early beneficiaries of health reform, with billions of dollars in federal tax relief flowing this month to help them purchase medical coverage for their employees.

But many said the 35 percent credits granted under the hard-fought legislation have run into a new hurdle: a buzz saw of rate increases by insurance companies, including 58 percent to 75 percent hikes levied recently by Blue Shield of California.

Sue Haubert, the owner of Beanscene Espresso in Oak Park, called her 58.6 percent Blue Shield hike an "insane premium increase."

"I bought the business less than a year ago," she said of the company that employs three people who are subject to the new rate. "As you can only imagine, this type of increase has affected my bottom line."

Small businesses are the backbone of the state economy, accounting for 98 percent of all California workplaces and providing more than half of the state’s jobs, according to the U.S. Small Business Administration.

Yet annual rate increases, which outpaced inflation even before Blue Shield’s dramatic hikes, have forced many employers to stop offering coverage and caused employees who can’t afford it to drop out.

Companies with fewer than 50 employees account for 44 percent of the state’s total uninsured working population, according to a study released in March by the UC Berkeley Center for Labor Research and Education.

The Obama administration released guidelines on May 17 offering small businesses tax credits against their premium costs. The credits are one of a handful of immediate federal health reform measures, with others slated for 2014.

Qualifying firms must have the equivalent of 25 full-time workers, pay average salaries below $50,000, and pay at least 50 percent of the health plan costs themselves.

The credit is worth up to 35 percent of a small business’ remaining premium costs and by 2014 the savings increase to 50 percent, according to the federal guidelines. The UC Berkeley study estimated the tax breaks are worth $4.4 billion in California alone.

Optimism to cynicism

Still, from Haubert’s coffee shop in Ventura County to a small advertising operation in the Bay Area, optimism generated by the credits has been replaced with cynicism.

"That money is going right back to the insurance companies," said Brad Wing, co-owner of the San Francisco Advertiser, who received his 58.3 percent increase notice in April.

Tom Epstein, vice president of public affairs for Blue Shield of California, said competitive business practices prevented him from disclosing the exact number of customers absorbing the hikes.

He said the company had about 500,000 enrollees in its small-business products. He said only customers in three plans without a copay will see the large rate increases.

Epstein said his company had no choice but to raise rates after it failed to accurately predict how the recession would force healthy workers to drop their coverage to save money, while those with health issues retained theirs out of necessity. Too many patients met the high out-of-pocket deductibles offered by the plans, and benefitted from their lack of a copay, Epstein said.

As unfortunate as these rate increases are, they are what’s needed so we can make enough income to pay our bills and make the investments we need to improve service and provide better care for our members," Epstein said.

An examination of Blue Shield’s base prices showed the 58 percent increases were not the highest in the three affected plans – Blue Shield Savings 1800/3600, Savings 3000/6000 and Savings 4800. Rate information from an industry database showed a 75 percent increase for the lowest deductible, Savings 1800/3000.

The company offered other products without the high rate increase, but included similar deductibles and added copays of around 20 percent. The Blue Shield hikes are in line with increases from all major insurers on small-business health savings plans, Epstein said.

"Anthem Blue Cross offered this first," he said. "Health Net followed us. Aetna and United offered products like this. Every one of these insurers had very substantial rate increases."

Aetna spokeswoman Anjie Coplin said her company has instituted a 25 percent increase for small-business HSA plans this year, affecting 11,000 customers in California.

Anthem Blue Cross, which has Blue Shield operations nationally but is independent of it in California, said their rate increases for small-business plans will be in the 13 percent range this year. They did not provide figures specific to HSAs, which would likely be higher.

"We understand that one group that has been most hard hit by the economic downturn of the past few years is the state’s more than 3 million small businesses," Anthem spokeswoman Peggy Hinz said.

Heath Net and UnitedHealthCare did not provide figures.

A corporate windfall?

Advocates with Consumer Watchdog, a Santa Monica group that sued Anthem Blue Cross over its rate hikes in the individual market, said the increases for small-business plans may turn the tax credits into a corporate windfall.

"The insurance companies are crying crocodile tears," said Jerry Flanagan, Consumer Watchdog’s lead advocate on healthcare reform. "Tax subsidies that small businesses are receiving will probably be used to fuel insurance company profits."

High-deductible health savings account compatible plans, popularly known as HSAs, began appearing after 2003, when the federal government introduced the tax-free shelters they are designed to work with.

The number of people in the plans has grown rapidly – 25 percent last year alone, according to a report released this month by America’s Health Insurance Plans, an industry group. California leads the nation in HSA customers, with just over 1 million enrollees statewide, the report found.

But many customers considered them an imperfect option. They encourage a customer to put money in the federal tax-free health savings accounts, but that money must be drawn on to meet deductibles that are typically higher than a traditional plan. The premiums were initially less than non-HSAs with the same benefits, but have become a financial strain after steady increases.

State’s authority limited

Kathy Derington, 62, who sold her coffee shop to Haubert but retained the plan, said her May 2008 premium of $771 has been raised to $1,808, a 134.5 percent increase in two years.

"It’s obscene," said Derington, who had been trying to get state regulators to look into the hikes for weeks but found them slow to respond. "The insurance companies suck you into this product, and then they raise the rates."

Part of the reason Derington saw no traction with regulators is because their authority is very limited in California. There is no state regulatory body assigned to keep track of proposed rate increases to health plans, let alone prevent them.

Anthem withdrew its now-infamous 39 percent increases to individual market plans amid public outcry that led to a special audit by the California Department of Insurance.

That scenario is less likely with the Blue Shield increases in the small-business market.

"Absent action by the Legislature, state law does not give the Department of Insurance oversight on small group health insurance rates," said insurance department spokesman Darrel Ng.

Flanagan said if the state wants stronger health insurance regulation, it should use an apparatus that has been in place for more than two decades.

Consumer Watchdog founder Harvey Rosenfield wrote and lobbied for Proposition 103 in 1988. With its passage, the state regulated auto and homeowners’ insurance and challenged rate hikes, he said.

"In California, five companies control 96 percent of the health insurance market. It’s almost a cartel," he said. "After a decade’s worth of double-digit increases, and you get them again in a recession, there’s just no more money to pay the price."

Consumer Watchdog
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