5 Ways to Reduce Small Business Health Insurance Costs

Business health insurance is a major cost of doing business, especially for small companies and mom-and-pop firms. With premiums soaring, many small business owners are asking their employees to shoulder more of the financial burden or cutting benefits entirely.

The New York-based Commonwealth Fund, an advocacy group for health care reform, says small business health insurance costs average 18 percent more than those of larger businesses.

In California, health insurance costs increased 10 percent in 2006 alone, according to the California Employer Health Benefits Survey.

Those costs have proven too high for many small businesses. According to the U.S. Chamber of Commerce, more than 45 million Americans are uninsured, and approximately 60 percent of the uninsured are employed by small businesses.

In 2006, the average monthly cost for health insurance for small group plans, which are largely used by small businesses, was $311 per month, according to a survey by America's Health Insurance Plans, a trade group representing health insurance companies. The average premium for a family of four was $814 per month, the association reported.

Small business health insurance may take a huge chunk out of your revenue, but benefits often attract better employees and help retain existing workers. Satisfied, healthy employees are more likely to help your business grow.

If you're struggling to provide health insurance, here are some tips that could reduce your small business health insurance costs.

1. Keep employees healthy. Motorola Inc., for example, has instituted a comprehensive wellness program that includes disease management for afflictions such as asthma and diabetes, as well as offering flu shots, cancer screenings, smoking-cessation sessions and a round-the-clock phone line staffed by nurses.

The company found that for every dollar it invested, it saved $3.93, according to a 2003 report by the U.S. Department of Health and Human Services report, “Prevention Makes Common Cents.” Likewise, heavy machinery manufacturer Caterpillar estimates that its wellness program will save the company $700 million by 2015.

Such wellness programs don’t just keep company accountants happy. They’re also popular with workers. Pharmaceutical giant Pfizer Inc. found that 85 percent of its employees in its New York offices participated in at least one wellness program, and that 80 percent used on-site facilities such as fitness centers or physical therapy, according to the HHS report.

2. Reduce coverage. Cutting coverage or asking your employees to contribute more to the plan is a logical step to reducing small business health insurance costs. The downside of this strategy is that it will likely prove unpopular with workers.

It's fairly common for businesses to exclude dental and vision insurance, but talk to your employees to see what they want covered.

They might opt for having dental and vision insurance and a health savings account, for example.

3. Consider health savings accounts. Health savings accounts are an increasingly popular option for owners of small businesses. These tax-exempt accounts, which are used to pay for certain medical expenses, could reduce your small business health insurance costs while giving your employees tax breaks.

You must have a high-deductible health insurance plan to establish a health savings account. For example, in 2007 the minimum deduction for individuals is $1,100; for families, it is $2,200.

That means that you or your employees would have to pay $1,100 out of your own pockets for health care expenses such as doctors' visits or prescriptions before you are reimbursed by the insurance company.

But there are benefits: In 2007, employers, workers, and their families can contribute tax-free up to $2,850 for individual health savings accounts or $5,650 for family accounts. These funds can only be used to cover health care costs, and employees can take their accounts with them if they leave. The funds generally do not expire.

Contributions and withdrawals are both tax-free, and individuals can claim tax deductions on their 1040 forms – meaning employees don't need to itemize to get the tax break. Employer contributions are also tax-deductible for business owners but are not required. Individuals can also set up health savings accounts.

To establish or participate in a health savings account, your only comprehensive health insurance can be the high-deductible health insurance plan and they must be offered to all employees.

Health savings accounts benefit healthy employees who do not regularly see doctors. You or your employees can, however, have health insurance that specifically covers ailments, including certain diseases or illnesses, accidents, dental and vision care.

4. Join a group. Small group health insurance plans cover between two and 50 employees, although there are "group of one" insurance plans for the self-employed that offer similar benefits.

The larger your group, the lower your premiums will be. According to the America's Health Insurance Plans 2006 survey, 80 percent of small groups polled had 10 or fewer employees in their health insurance plans, and the average monthly premiums for individuals was $330. Firms with between 26 and 50 employees paid $287 a month for single premiums.

If your business has fewer than 10 employees, you can still partner with other businesses or individuals and expand your group plan. Note that health care laws are governed by the states, so you'll want to partner with people in your state.

5. Shop around. Health insurance is a huge business, so shopping around for different providers could reduce your small business health insurance costs. Start by searching the Internet and also ask other owners of small businesses what they pay for health insurance. Insurance agents will charge fees, but you'll save time and they can investigate health insurance plans for you. The National Federation of Independent Businesses partnered with eHealthInsurance, a national health insurance agency that gives you several quotes online.

Tiare Rath is a freelance journalist and a former personal finance columnist for MarketWatch.com

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