Open up and say ouch! (Health Insurance).

Like most small CPA firms, Rowbotham and Co. isn't holding its breath for health insurance rates to drop. While making a conscious effort to offer a good, low-cost health plan, the San Francisco-based firm doesn't know how much longer it can hold off the rising insurance rates.

"If rates continue to increase, we probably will have to start looking at passing on costs to the employee," says Eileen Thomas, Rowbotham's director of administration. "Just as the insurance companies are looking to pass more costs back to us."

Thomas' lament is a common one. With the cost of health insurance spiraling, many employers are wondering which is worse: the cost of insurance or the ailments themselves.

Double-digit rate increases, a trend that has worsened in the last several years, could render health benefits prohibitively costly going forward.

As a result, many businesses are exploring ways to offset the cost--even if it means passing those costs onto their employees.

MORE COST SHARING

According to a recent survey of 434 employers by Watson Wyatt Worldwide and the Washington Business Group on Health, a whopping 83 percent indicate they would increase employee premium contributions, with an additional 80 percent planning to increase employee co-pays.

"Business just can't continue to absorb the health care cost increases," says Dave Romans, a senior consultant with Washington, D.C.-based Watson Wyatt. "How many businesses can you point to where sales are increasing 20 percent or profitability is increasing 20 percent a year? We definitely see more cost sharing being passed on to employees in the future."

A mountain of evidence backs up this trend.

A survey by the Henry J. Kaiser Foundation and the Health Research and Educational Trust found that workers paid 27 percent more for health care in 2002 than they did in 2001. And in a survey of 600 large and small businesses, the Robert Wood Foundation found that 92 percent are likely to increase the amount their employees pay for health insurance.

But there's one type of business that's having a particularly hard

time.

"The small employer market has obviously been hit the hardest with these cost increases," says Romans.

Mercer Human Resource Consulting recently found that premiums for companies of 500 employees or less are expected to outpace those of larger companies this year.

But for companies with 50 or less employees, the challenge becomes even greater.

"I don't know anyone that sees any mitigation of cost increases in any foreseeable future," says John Phillips, executive director of the Group Insurance Trust, a not-for-profit providing group medical, dental, vision, disability and life plans to CalCPA members.

But while there's no relief in sight coming from the insurance providers, there are alternatives in combating the rising tide of health care costs. Smaller firms are more aggressively exploring models such as health reimbursement arrangements, co-insurance arrangements and professional employer organizations.

HRAs--THE ROLLING HEALTH CARE SPENDING ACCOUNT

Health reimbursement arrangements are the latest incarnation of personal spending accounts, also known as flexible spending accounts.

A consumer-driven model, HRAs evolved out of the PSA concept in June 2002, when the IRS ruled that PSAs are tax-exempt, and any unspent balance--which in the past would've been lost at the end of the year--can now roll over into the next year.

At its heart, an HRA is an employer-funded plan. Employers can set aside a personal yearly budget, maybe $500 a year per employee, to be used for health-related services. That account would typically come with a high deductible (and often lower cost) health plan, which would be partially offset by the HRA account and partially by the employee's wallet.

While employees could save money with an HRA by signing up for a lower-cost health plan, the plan also cuts employer costs. "Smaller employers could be more attracted to the HRA, because it could help them manage health care costs, compared with offering no health plan at all," Watson Wyatt's Romans says.

Adoption of HRAs is just beginning to gather steam. Only about 6 percent of the companies surveyed in the Watson Wyatt/WBGH Survey offer such a plan.

What's more, "most employers that offer the HRA program typically only get about 10 to 12 percent enrollment," Romans says. "So that's only taking about 1 or 2 percent off your total costs. We don't see HRAs as the end solution."

Still, Romans says HRAs are one of many ways employers are seeking to educate employees about the true costs of health care.

"If it's only going to cost me a $10 co-pay, then there's no incentive for me to not go to the doctor and get 20 tests done," Romans says. But if one has to cover 20 percent of the costs, consumers may think twice.

For example, employers often have offered co-pay arrangements for prescription drugs, where the out-of-pocket costs for the employee may have been $10. But "we see them moving now toward a co-insurance type of arrangement," Romans says. So the employee has a clearer picture if they have to cover 20 percent of the actual drug costs.

GROUP BUYING POWER 

Group buying power is often seen as one alternative for smaller employers. By joining an association-sponsored health plan, small businesses can access many of the same benefits as larger firms.

The GIT, for instance, offers Blue Cross insurance plans to firms with less than 50 employees. The average firm size the GIT covers is about three people, Phillips says, due to the great number of sole practitioners in the plan.

"We have no profit motive, that's our cost edge," says Phillips.

Small firms find it more difficult to purchase insurance than large ones, partly due to what Phillips calls "the concept of adverse selection." To protect the interests of all of the other group members, a plan has to be protected from those who may be trying to join it to cover large unknown medical expenses. And in larger businesses, that risk is more spread out.

California health insurance reform legislation, AB1672, which became effective July 1993, greatly restricted the ability of health insurance companies to refuse insurance due to pre-existing conditions to small groups of three to 50. But the smallest firms were left to fend for themselves, says Phillips.

"Sole practitioners are not protected in any form under state law for group coverage," says Phillips. "So we offer group coverage to those members that they can't get anywhere else."

One of the biggest values of the GIT for the small firm is influence. "If you're a two-person firm and you have a problem with Blue Cross, you just don't have lots of influence," Phillips says. "So CalCPA's sponsored plan offers our members the ability to influence events that come from having advocates that represent a much larger plan."

PROFESSIONAL EMPLOYER ORGANIZATIONS

Lippow Development Co., a Martinez-based real estate investment company, has found another alternative to combat rising health insurance costs: the professional employer organization.

The concept is essentially an outsourcing of a firm's human resources function. When employees get their W-2 at the end of the year, it comes from the PEO, not the company they work for.

"We moved to it in 1998, when it became nearly impossible for us to get health insurance," says Richard Kirkham, CFO of the 14-person firm. "It gives companies our size the opportunity to access a much broader range of benefits.

"It's really good for us, since we don't have the time or expertise in-house, nor could a company our size bring a real human resource department in-house."

Like a group buying power, a PEO typically offers small firms the chance to access a broader range of health care benefits than would otherwise be accessible. As small firms typically pay higher health care rates--again, the concept of "adverse selection" comes into play--a PEO offers more plans and at a lower cost than a small firm can procure alone.

PEOs offer an integrated service that also includes personnel management, workers' compensation claims, payroll, payroll tax compliance and unemployment insurance claims.

RAISING DEDUCTIBLES

When Danville-based Impression Design was renewing its health insurance policy last year, it was surprised to find a 20 percent rate increase.

"We thought about having the employees cover a portion of the monthly premium, and we also looked at exploring other providers," says Kelly Scarinci, CFO of the eight-person graphic design company.

"We had a plan that was a zero deductible, and we wound up shifting it to a $250 deductible plan," she says. "We passed some of the cost onto the employees."

And at some point, Scarinci says, "We might have to raise the deductible again."

JUMPING CARRIERS A CHALLENGE

Some firms have simply changed carriers in the hopes of reducing their insurance costs. But they've found that in the long term, it's a strategy that won't work.

After being hit with a proposed 20 percent rate increase by Blue Cross last year, Rowbotham decided to change carriers.

But the new carrier, HealthNet, raised its premiums 22 percent this year. "At least we got to enjoy a year of lower rates," Thomas says. "Now, we're right back up there again."

In changing to HealthNet, Rowbotham's employees felt the hit. "The co-pays were slightly higher and there were certain things that were covered in Blue Cross that were no longer covered in HealthNet," Thomas said.

In addition, changing carriers "is never seamless," Thomas says. Some carriers don't have the same physicians, resulting in employees having to change doctors.

"We want to be able to provide them with good benefits, but we have to be realistic as far as what we can afford," Thomas says. "It really does come down hard on the smaller firms. It does seem unfair."

Jerry Ascierto is CalCPA's associate editor, You can reach him at [e-mail].