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What are small businesses offering? An employee benefits survey of Indiana companies.

It's taking plenty of creativity these days to offer good employee benefits without going broke. The spiraling cost of health insurance--the cornerstone of most benefit packages--is forcing many employers to seek new approaches to designing and funding benefits.

It's easy to see how health insurance has put the squeeze on small business. Human Resource Management Services Inc. of Indianapolis conducts an annual Compdata compensation and benefit survey in conjunction with the Indiana Chamber of Commerce. Of those who responded last year, 98.4 percent of the Hoosier companies with fewer than 100 employees said they offer major-medical insurance coverage. Nearly two-thirds of those companies said they pay the entire insurance premium. And those premiums tend to rise each year at a double-digit rate.

"In health insurance we see an increase of about 18 percent each year. That's pretty alarming," says Doug Conrad, president of Bedford Machine and Tool Inc., which pays the full health insurance premium for its 30 employees. "I think health care is the biggest issue of the year, or the decade."

What's a small business to do? Employers can't just eliminate benefits and expect to remain competitive, notes John Sloan, president of the National Federation of Independent Business, a small-business advocacy group. "In order to get good employees, small businesses must offer good benefits."

Nor would most owners of small businesses even want to reduce or eliminate their benefits. Most say they feel too close to their employees to consider such a move. "I guess we could decide not to offer anything, but how would you feel as an individual employee?" asks Lee Runciman, secretary-treasurer of Boatland Inc., an Indianapolis boat retailer. "It would hurt me not to offer something for the employees."

The answer lies in a reassessment of the goals of benefit packages. "Employers are learing to refine their thinking about what they're trying to accomplish," notes William O'Donnell, vice president for employee benefits at Wells & Co., an Indianapolis-based insurance agency.

Without question, insurance is the most prevalent employee benefit among Indiana's small businesses. Not only do nearly all of the small firms in the Compdata study offer major-medical coverage but more than two-thirds also have dental insurance. Fewer small companies, about a third, reported having a vision-care plan. Nearly all of the companies offer life insurance, and nearly all of the premiums for life coverage arepaid by the employer.

Because insurance benefits are so common and so costly, it is here that many of the attempts at cost cutting show up. O'Donnel says typical insurance deductibles are rising, as are the annual stop-loss ceilings where the insurance company begins paying 100 percent of the claim. Fewer plans, he says, are paying 100 percent from the start. Also, employees increasingly are being asked to pick up some of the premium, or more of the premium if they already were contributing.

Such cost sharing helps Michael Zoll offer health benefits to his employees. He is owner and president of A-1 Printing Inc. in Kokomo, which with only four employees is truly a small business. "Part of the benefits are paid by myself and part are paid by the employee," he explains.

At Ahlgrim Cadillac in Hammond, the cost of the premium in split 50-50 between the dealer and the employee. Everett Ahlgrim, the president and owner, also pays half of the premiums for health coverage for dependents. In one recent cost-saving move, Ahlgrim gave his 38 employees the choice of raising their deductible from $200 to $500. Such an action would save both dealer and employee an equal sum of money, and about a third of the workers opted for the higher deductible.

Spreading the risk as widely as possible is another way to control health-care costs, according to those in the insurance business. That can be a difficult task for firms with 20 or 30 employees, but creative solutions are possible. Ahlgrim Cadillac and A-1 Printing, for example, are able to join larger groups--A-1 gets its coverage through the Teamsters Union, while Ahlgrim belongs to the Indiana Dealers Association's group health plan.

Conrad of Bedford Machine and Tool Inc. found another way to achieve the same goal. "We also own a recycling business which has 18 people, so we work those two together."

Another alternative that doesn't necessarily spread the risk but does offer increased coverage options is the type of arrangement offered by many chambers of commerce.

The Dearborn County Chamber of Commerce got into the act a couple months ago, says William Mountsier, its executive director. "Our chamber is sponsoring a group medical insurance plan that allows business with as few as two employees to get insurance," he says. Sure, the small companies usually can get insurance on their own, but often their coverage choices are limited. The chamber's plan, he says, makes more features available. "You can get a prescription card, dental benefits and other things that you typically cannot get with the standard off-the-shelf product." Mountsier notes, however, that each company is evaluated on its own risk, so rates can vary from company to company.

As insurance rates rise, more companies are turning to the concept of self-insuring, where the employer assumes most of all of the risk and pays claims out of an insurance trust. In the Compdata report, 37.5 percent of the small businesses surveyed were self-insured. The concept becomes more prevalent among larger employers where the risk can be spread more widely.

Most employers who are self-insured protect themselves with stop-loss insurance. O'Donnell explains that there are two major kinds. Specific reinsurance will pay the portion of any single claim that exceeds a set amount, while aggregate reinsurance kids in when the group's total claims in a year exceed a set amount.

Those who don't choose self-funding often turn to managed care to keep a lid on costs. "We see a lot more managed-care health programs through the use of HMOs and PPOs these days," notes John Schumlas, regional manager for Fort Wayne-based Lincoln National Employee Benefits. Requiring or encouraging members to use only approved health-care providers, health-maintenance and preferred-provider organizations give insurers more control over the cost of services and what services are provided.

"Based on the scope of the benefits, premiums are adjusted," says Linda Boyd-Weddle, director of medical delivery ford HMO that serves 15 counties. She adds that HMO premiums in general are the same as or less than the rates for standard insurance, and she feels the coverage is better. "It promotes wellness, and that's a major distinction."

While standard plans normally don't cover routine physicals and office visits, HMOs do, the theory being that a little money spent now may save a lot later. That factor and restrictions on who may provide routine services allow HMOs to keep costs in check.

Companies also are controlling costs by changing the way they deal with circumsntances such as workplace injuries. More firms are sending injured workers to occupational medicine specialists. Phillip M. Harman, director of marketing for Methodist Occupational Health Centers in indianapolis, says that although such centers employ specialists, the overall bill to the insurance plan often is lower because the treatment time is shorter. He adds that going the occupational-health-center route also reduces lost productivity and saves on worker's compensation insurance costs.

While many firms have been scrambling to get benefit costs under control, some have sought to boost their benefits. One such firm is the South Bend-based chain of Hacienda Mexican Restaurants, with locations from Evansville to Michigan. Hacienda this year began offering a major-medical insurance program in an effort to reward employees and keep good workers on board, says William W. Shannon III, the founder and chairman.

"Historically, in the restaurant industry there have been few if any benefits," he says. "We felt our most important asset is the people we're working with. We really felt they should share in the rewards."

Because benefit packages aren't necessarily a given in the restaurant industry, Hacienda's could serve to attract good employees. "That's part of the reason we added the benefits," Shannon says, noting that most restaurants already must offer more than the minimum wage to compete for personnel.

Bedford Machine and Tool also needs a competitive edge, Conrad says. "We're hiring skilled trade people and they're hard to find. You have to be quite competitive."

Such competition may be one reason many small businesses take the next logical step in benefits: the dental plan. The Compdata survey found that 70.3 percent of the responding Hoosier businesses with fewer than 100 employees offer dental plans. The question, then, becomes how to approach dental coverage. There are two schools of thought.

"Dental health care is preventive and predictable in nature. You're not looking at catstrophic losses," says Jim Gould, the Indiana Dental Association's director of dental benefit services. Thus, he says, it is possible to write a plan for dental coverage where employees bring in receipts for paid dental work and are reimbursed by the employer, sort of like an expense account. "It's that simple. I have 175 employers who have tried it and are still doing it."

The idea of cost control fits right in, Gould says, if the plan has employees first pay the bill, then seek reimbursement. Added cost-control measures include having the employee share the cost and setting an annual per-employee benefit limit.

Steve Stegmaier, marketing manager for Delta Dental Plan of Indiana, counters that many employers prefer to have "truly qualified people examine the claims, review the claims, audit the claims." Otherwise, employers could end up reimbursing non-covered expenses on some occasions.

He recommends that employers start with a modest dental plan, one that covers mainly preventive and diagnostic services. Those services should be covered at 100 percent, he says, because encouraging good dental hygiene can save a bundle down the road. "As dollars become available, employers can add restorative services to their plans."

According to the recent Compdata study, just under two-thirds of the Indiana small businesses surveyed offer small businesses surveyed offer some type of pension plan for all fulltime time employees. About 70 percent said they offer a 401(k) or other type of "K" plan.

"The most common 401(k) setup is that the employer matches a portion of the contribution," says O'Donnell of Wells & Co. Though matching a portion of the employee's contribution in a 401(k) savings plan is not required, O'Donnell says many employers do it to encourage participation by lower-paid workers. This is necessary because the company must prove the plan is benefiting all employees relatively equally.

In addition to medical benefits, the Hacienda chain added a 401(k) plan at the start of the year, Shannon says. As is the health plan, the 401(k) program is designed to attract and keep good employees.

Ahlgrim Cadillac also helps employees fund their retirement, though it has no 401(k) plan. "We have a profit-sharing program here that we've had for a number of years, where we donate so much into the pot each year," Ahlgrim says.

"We're seeing a shift from defined benefits to defined contributions," adds Daryl Dean, president of The Nyhart Co., an Indianapolis-based benefits consultant. Employers, he says, are moving toward making a specified contribution for each year of employment rather than promising to pay retirees a certain amount every year for the rest of their lives. The puts a more predictable cap on the employer's cost. And, Dean adds, "it's easier to scale back contributions, if you need to."

A benefit that has been slower to catch on among small businesses is child-care assistance. Though a number of Hoosier companies offer either on-site day care or some type of financial assistance for child care, the Compdata survey shows that the practice is rare among the smallest employers. Just 1.6 percent of the companies employing fewer than 100 said they offer child-care assistance, as opposed to nearly a quarter of the companies that employ at least 1,000.

But there is a way employers can help out without incurring a major expense: flexible benefits. About 31 percent of the small businesses surveyed in the Compdata report said they offer flex plans, which usually allow employees to choose between a variety of benefits. The common denominator of flex plans is that the contribution required of the employee can be deducted before taxes.

For that reason, O'Donnell of Wells & Co. believes practically every employer should look into flexible benefits. "It's a way to pass along immediate savings to the employee." If, for example, an employee is being asked to contribute $100 each month for dependent health coverage, his or her takehome pay would be reduced by less than that--say $70 or $80, depending on the tax bracket--if it were deducted before taxes through a flex plan.

The most basic flex plans cover only health-insurance premiums. "The next step," says O'Donnell, "allows the employee to set aside money pretax for non-covered medical expenses," including vision or dental care if they aren't covered in the benefit package. Many flex plans also allow employees to set aside money before taxes to be used for child-care expenses; after paying the day-care bill, the employee can be reimbursed out of the flex account. The result: employees can get $100 worth of child care for $70 or $80.

The more elaborate the flex program, the more complicated it becomes to administer, but employee benefits companies offer administrative services that can help. Administration does cost money, and Schumlas of Lincoln National Employee Benefits says some smaller companies shy away from elaborate flex plans for that reason.

As such concepts move from the cutting edge to the mainstream, more new benefit ideas are appearing on the horizon. Long-term-care insurance is one such idea, says Dean of The Nyhart Co. More and more employees are wanting assurances that they'll be able to get the health and nursing care they may need in their golden years.

Dean also expects to see more onsite child care down the road. And an old idea that he thinks may return as a benefit is subsidized housing for employees, this time in the form of a tax-exempt trust fund. "These are the new approaches that are going to take decades to develop. And," he cautions, "how a benefit develops in the future always is highly dependent upon how Congress views it. Nobody can predict that."
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Author:Kaelble, Steve
Publication:Indiana Business Magazine
Date:May 1, 1991
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