Staying Alive: How Did You Get So Lucky With Renewal Rates?

Staying Alive

The struggles of a business trying to survive.

Thanks to everyone who commented on my last post about the most recent decline in my health insurance rates. As always, you raised a number of interesting questions. Here are a few I think warrant further explanation:

…it sounds like the monthly insurance prices show what coverage under your company plan costs you as an individual — or is that what your COMPANY pays per month to the insurance company per employee?

I am an employee of the S corporation that I own, which means that the costs that I listed are the same for me and my employees. But in case I didn’t make it clear, the numbers in the chart were the prices of insurance for each employee or family. In 2012, our bill from Keystone HMO was $7,595.35 per month. Of that, $1,066.50 is for me and my own family. That leaves $6,528.85 for employees who are buying coverage. They pay a third of that ($2,154.52) as a deduction from their wages. The company contribution to employee health insurance is $4,374.33 per month, or $52,491.96 per year. This money, if not spent on health insurance, could be used for any number of things. I could put it in my own pocket. Or I could pay down debt. Or I could invest in new machines, or more advertising. Or I could pay it to my employees as additional wages.

Are you saying that if you didn’t purchase the insurance yourself, you wouldn’t add to their salaries in order to purchase their own insurance? My understanding is that most economists believe that the costs of employer provided health care are actually borne by the employees, but your comment suggests that is not the case.

Economists believe all kinds of things that are contrary to how the real world works. This is one of them. If I understand this idea correctly, the economists are saying that the wages that employees can expect is somehow fixed, and that a portion of it is diverted, presumably by mutual agreement, from cash wages to health benefits. This is contrary to my experience.

Costs at most small companies are really borne by either the customers, whose purchases should cover all activities, or by the owners, who might have to reach into their own pockets to cover shortfalls. Once money enters the company, it is up to the boss to allocate where it goes. And wages are also decided by negotiation between the boss and the employee. I have hired more than 100 people and have never had one ask me how much the health coverage cost me. As far as I could tell, they were just happy that we offered coverage.

I see health insurance as an additional expense that is required to attract and keep good employees. Just like heating the shop, and providing good tools for them to use. If I skimp on any of these, it will have a negative effect. How much I choose to devote to any aspect of worker welfare is my choice. The money devoted to health insurance is not theirs by right.

If I decided to stop providing health insurance — and didn’t drop prices to my customers proportionally — I would PREFER to use the extra money to pay down company debt. However, I might need to pass some or all of it through to my people in order to retain them. How much would be determined by whether we were making a profit (in which case the extra money isn’t critical to surviving) and what my competitors were doing. Here’s some game theory to run past those economists: If every employer were to drop health insurance at the same time, none of them would need to increase wages to compensate, because the employees would have no reason to change jobs for a better deal. There would be no better deal.

Obviously, even though all employers would be better off if they did this, it won’t happen. But some number will be tempted to do so. I know I would, and here’s why: It would eliminate a bureaucratic headache and also eliminate the uncertainty of rapidly changing costs. It would be one less thing for me to think about. I could concentrate on my business instead. If I decide to keep offering it, it will be because of the drastic cost difference between individuals buying for themselves and the rates offered to employers. This is how the health insurance market operates now. Exchanges are supposed to fix that. But we’ll see how they play out.

From 2005 to 2013 a 50% increase amounts to an average annual rate of increase of about 5.5%. Is that out of line with other business expenses over the same period?

Take the $606.01 I was paying per month for family coverage in 2005. Using data from this calculator, the cost today, if it had risen at the overall rate of inflation, would be $717.77. This is actually a much larger increase than many of my expenses over that period. For instance, a sheet of cherry plywood that cost me $99.91 in 2007 cost me $71.25 last week. This kind of price drop holds for many of the materials I buy, in part because demand has never recovered from the 2008 meltdown. My rent has gone down by 20 percent. My labor bill has gone up, but that’s because I hired a bunch of people, not because of wage inflation. Business insurance costs have been steady. So, no, my business costs have not risen at the same rate as my medical costs.

Wow. How’d you get so lucky that your insurance rates dropped?

That’s a good question, so I asked our benefits administrators whether costs had gone down for just my company or in general. Here’s the answer I got:

Dear Mr. Downs,

It was about your group in particular (not the AIA as a whole) and that overall for the last 12 months your group ran well.

What that means is that what the carrier paid out on behalf of your group in medical/rx claims did not exceed the amount they charged you in premium.

If this is true, it’s pretty scary. This is confirmation that demographics of the people I hire directly drive my health costs. The system is incentivizing the hiring of younger, healthier workers (I have written about this previously), and giving me a perfectly rational reason to turn down older, potentially sicker applicants. That should be fixed.

I don’t know what Obamacare is going to bring, but I really doubt it is going to reduce health care costs {or} health insurance costs.

I sort of agree. The only thing that will bring costs down is a broad consensus by the voters that the system has to change. Politicians won’t lead the way on this. They get too much money from the various interest groups that benefit from the current system. If employers take advantage of the Affordable Care Act to get out of the health insurance game, a much larger number of people will be forced to confront the entrenched special interests (by which I mean insurers, doctors, and hospitals — I believe they are all in cahoots on this).

Then we might get change we can believe in. But I doubt this will happen. I suspect that most employers will be unwilling to confront their employees with such a drastic change. It’s really, really hard to look your people in the eye and tell them that you are taking away an important benefit. In the past, I have provided insurance to my people because I believe that everyone needs it, and our system put that responsibility on me. The new law provides an alternative path for people to buy their own policy, allegedly at reasonable rates. If that turns out to be true, I might pull the trigger.

Bosses: what would it take for you to do this?

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2012/11/27/how-did-you-get-so-lucky-with-renewal-rates/?partner=rss&emc=rss