Small businesses have been hit hard by the rising costs of health care. For the past 20 years, the cost of health insurance has consistently ranked as the most critical problem that small businesses face--an issue more pressing than paying taxes or finding quality workers.

Many factors contribute to this situation. Prescription drugs continue to rise sharply in their cost, managed care programs haven't delivered the savings that were expected, and while new medical technologies improve patient care, they are expensive.

As a result, many small business owners are forced to choose between making a profit and offering their employees competitive benefit packages. The percentage of small business owners offering health benefits to employees has been on the decline since 1996. In fact, of the over 46 million Americans without health insurance, most of them work for small businesses.

Advantages

Despite this, there are great advantages to those small businesses that do offer health benefits to their workers. Most importantly, they are able to attract and retain better workers. Secondly, money paid for health premiums is 100% tax deductible. While these things don't make health insurance cheaper, it does help to balance out the cost of investment.

Small Biz Options

If hiring and retaining high-performance employees is necessary to assure your business' success, then the decision to offer health benefits is a no-brainer. The tough part is figuring out what to offer.

The options you present to your employees should be based on:

• The number of employees you have
• Employee demographics
• The amount your small biz can afford to invest

Defined-contribution plans with tiered-benefits have emerged as the newest option for small businesses. It shifts the responsibility and risk of choosing and using a health plan from the employer to the employee. You contribute a set amount towards health care for each employee, and then offer a tiered menu of options to choose from. Employees pay the difference for more expensive insurance plans.

The types of plans offered typically include:

• Indemnity/Fee-For-Service (FFS). This was the standard type of insurance that was prevalent until the 1980's. They require more management on the part of the employer. It allows for greater freedom of choice in physician and hospital, but premiums are more expensive. Deductibles and co-payments are also higher than with managed care. These plans are best for employees that are adamant about using specific providers.
• Managed Care Plans. Health Maintenance Organizations (HMO) and Preferred Provider Organizations (PPO) use a network of providers to prevent health situations from becoming more serious--and costly. If your business has a larger number of married individuals with families, or employees with long-term health concerns, managed care products may be the best choice for them. Managed care plans have decreased in popularity due to rising costs, and in some areas, frustrating experiences.
  

• Savings Based Plans. Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) and Flexible Spending Accounts (FSAs) all work to the benefit of both employer and employee. They allow tax-deferred funds to be kept in an account for use towards qualified medical expenses.

HSAs and HRAs are coupled with high-deductible catastrophic plans. This is a great low-cost option for small business. If your business is a start-up, with mostly younger and unmarried employees, an HSA is a good way to attract and retain employees. Older employees in good health also prefer these plans, since they see the funds contributed build up in an account that can used in retirement.

HSAs aren't for everyone. Employees who don't understand the plan, or who have frequent visits to the doctor, may become angry and resentful at frequent out-of-pocket expenses.

If you offer tiered-benefits, be sure to provide your workers with informative resources that compare plans, hospitals and physicians. This is the best way to help your employees select a plan that will make them happy and save you money.