Business Costs.

Expenses for everything from health care to overtime are expected to rise, putting a damper on next year's profits

THE local economy may keep chugging along, but the cost of doing business in Los Angeles is about to go up.

From increased health care costs to a hike in workers' comp premiums to higher overtime expenses, business owners will feel the pinch soon after the new year dawns. What's not clear is whether they will be able to pass these higher costs along to customers or be stuck with them.

"So many new costs will hit us on Jan. 1, our members aren't exactly sure what to expect," said Betty Jo Toccoli, president of the California Small Business Association.

Topping the list will be higher health-insurance premiums. After four years of essentially flat costs, premiums in Los Angeles went up by an average of 8.4 percent in 1999, and are expected to increase by another 8 percent to 10 percent next year, according to management consulting firm Hewitt Associates.

In fact, double-digit increases are expected to be the norm for the next several years, thanks to higher drug costs, more-expensive treatments and the expectation that legislators in Washington and Sacramento will pass new regulations on managed-care companies.

What's more, due to the tight labor market, a lot of employers will probably eat much of those rate hikes.

"It's tough for small businesses to ask their employees to pay higher premiums," says Scott Hauge, president of CAL Insurance and Associates in San Francisco and the CSBA's issues chairman. "A lot of our members pay the entire (premium) cost now, and they say the administrative costs of implementing a plan where employees pay part of their premiums would be too high."

Small businesses are not the only ones feeling the pinch.

Xerox Corp. announced earlier this month that it might phase out over the next few years the health insurance it provides to its 50,000 employees. The company would instead give each employee up to $6,000 a year, which they could use to purchase health insurance on their own.

Ezunial Burts, president of the Los Angeles Area Chamber of Commerce, says Xerox's proposal is "one of a number of experiments we'll see over the next few years. Some companies will give their employees (cash payments). Others will make direct purchases from doctors or continue using managed care. We are right at the beginning of a major change in the way employers offer health coverage."

Businesses also face higher workers' comp premiums. In early November, state Insurance Commissioner Chuck Quackenbush urged insurance carriers to raise premiums by an average of 18.4 percent to help cover the rising cost of claims.

And that rise has been relentless. The current average cost per claim is $27,000, up from $17,500 in 1994, according to the California Workers' Compensation Institute. Over that same period, workers' comp premiums have fallen by about 45 percent, as a result of 1993 reforms followed by premium slashing by insurers eager to grab more market share.

If fully implemented, Quackenbush's recommended premium hike, which is not binding on insurance providers, could cost employers an extra $1.3 billion a year, the California Chamber of Commerce estimates. Toccoli says she's getting calls from members who are facing 30 percent to 40 percent increases in renewal rates.

Hauge points out that the recommended 18.4 percent hike may be misleading, though, because it's an average rate for all businesses. Premiums are based on loss rates for particular industries.

As such, Hauge expects rates to go up by nearly 40 percent for nursing homes, 33 percent for landscapers and between 20 percent and 25 percent for construction firms. "We knew the increase was going to happen, we just didn't know when or by how much," Hauge said.

Overtime costs for companies will go up as well. This year, the state Legislature passed AB 60, a bill sponsored by Assemblyman Wally Knox, D-Los Angeles. Beginning Jan. 1, employers will have to pay employees time-and-a-half when they work more than eight hours in a given day, rather than 40 hours in a single week.

Businesses that want to operate on four-day work weeks must pay overtime when employees work more than 10 hours in a single day. But such alternative work weeks must be approved by two-thirds of the affected employees. Otherwise, the eight-hour rule will apply. Employees who work more than 12 hours in a day must be paid double time once they hit the 12-hour mark.

Business groups tried to stop AB 60; the California Chamber of Commerce called it a "job killer" bill, saying that it would limit the ability of employers and employees to set up flexible schedules.

And that's not the only wage-related headache employers may face. Another increase in the state's minimum Wage is possible. The Industrial Wage Commission, which sets the rate, is holding a series of hearings across the state before it decides whether to increase the minimum wage. The Legislature may also consider a minimum wage hike.