Keeping health insurance costs down. (Indiana: Small Business Reference Guide).

Over the last several years, employers have seen unprecedented increases in the cost of providing health insurance for their employees. While inflation has averaged 3 to 4 percent annually, health-insurance premiums have seen double-digit increases. So why are costs escalating so rapidly? One

Most employees are not educated on the effect their claims have on their health-insurance costs. Many view their insurance card as a "debit card," and feel they must max out their coverage every month. As a result, they are seeing the doctor more often and their employer's health premiums are increasing.

What most people fail to realize is that insurance premiums are calculated using three simple criteria:

1. What is the cost of the expected claims (multiplied by 1.25% to protect the insurance company)?

2. What will it cost to process the claims?

3. What profit does the insurance company need to make?

If you add up these figures and divide the sum by the number of employees in the group, you will have the cost per employee, per year, for health insurance.

Because most groups stand alone and are relatively small, the risk cannot be spread out among a large group of people. And because claims and claims experience stick with you, a high claim year will affect premiums for several years to come. In order to minimize exposure, many employers are turning to PEOs (professional employer organizations). A PEO groups the employees from several small to medium-sized employers into one large group, giving them access to true group benefits. So instead of being a stand-alone group with 20 employees, they become part of a large group with several thousand employees. And if the PEG has a true group plan, a high claim year for one employer is spread out over the entire group, thus minimizing the risk.

Fifteen years ago most insurance plans had a $250 or $500 deductible with coinsurance of 80/20. Employees paid their own medical costs up to the deductible before their insurance would kick in. Because of this, they only relied on their health insurance when a serious illness occurred. The everyday common cold or the sniffles were taken care of at home with proper rest.

Today, we are seeing the opposite taking place. Health insurance should be called a "Health Cooperative." We have moved away from the true meaning of insurance, which is "to protect oneself from an unexpected loss." Although HMOs, PPOs and copays as low as $5 were intended to help overall health costs by encouraging people to go to the doctor earlier to "catch it before it gets worse," it has in fact backfired. People are now overusing their insurance and driving up premiums.

So how does a small-business owner turn back the escalating cost of his or her health plan? Don't be passive! Hear are some ideas:

* Educate your employees on how your insurance plan affects them.

* Educate employees on how they can help keep costs down.

* Utilize a "cafeteria plan" to keep out-of-pocket costs down.

* Design your plan so that employees feel some of the pain.

Over the years, I have spoken with both employers and employees who believe they should maximize every benefit that their plan provides without any regard for the cost. They are now feeling the result of this attitude and will continue to see double-digit increases in their premiums until they take control and make their health plan a true Health Insurance Plan again.

David Day is president and GRO of Indianapolis-based Management 2000, one of the top professional employer organizations in the Midwest. Day has written various articles on the PEO industry for national publications. For more information contact Day at 800/554-5945 or dday@management2000.com.