As a small business executive, one of the interesting things from the health debate has been the creation of small business risk pools. To some politicians, the solution is for the government to operate small business pools for health insurance purposes.
Like everything, bigger businesses get a better break because of the size of the risk pool. If there are 5000 or more employees paying for health insurance, the risk of a catastrophic disease is much lower than my business with only four employees. With more people sharing the risk, it’s easy from an economic standpoint to see why major health carriers charge a lower per person premium.
So, if the government is able to build a large pool of small businesses together, that would mean that collectively we would enjoy a lower rate for our insurance premiums.
In a Wall Street Journal article published several weeks ago, the newspaper reported that the Kauffman-RAND Institute for Entrepreneurship Public Policy, a Santa Monica, Calif., research group reported that median cost of health insurance for businesses with fewer than 25 employees rose 43.5 percent between 2000 and 2005.
Yet, here’s a question. If I am in an insurance group with 5000 other small business types with a 30-percent medical claim to premium dollar, how can I keep the group from seeing a traditional nine to 14-percent increase in health insurance costs?
Every year, the health insurance industry tell small businesses like mine that medical inflation has caused them to increase my rates by 10-percent. Stephen Geri, an insurance broker with 30 years of experience said if you were to do a simple analysis of the health insurance industry, you would see them doling out these amounts for each premium dollar paid from businesses like mine:
1. 30 cents to pay medical claims.
2. 21 cents to pay administrative costs to include claims processing
and commissions to agents.
3. 49 cents in profit.
As an accountant, I would have to question why a business that is making a 49-percent profit is telling me that because of medical inflation that my policy renewal will increase by 10-percent.
For a small business pool to stay competitive, it would need someone with the experience to monitor the claims to expense ratio for everyone in it. I believe that a government pool for small businesses would work, only if it was managed by sharp-mined auditors that would question medical inflation for any industry that has profit margins like this.
