Searching for health coverage
Small business faces limited choices and higher prices

by Marjolijn Bijlefeld
for Virginia Business
January 2006

Joe R. Wilson knows that, actuarially speaking, the 97 employees at his PermaTreat Pest Control Co. are no prize. For the past several years, the company’s health insurance claims were higher than its premiums. As a result, the owner and CEO braced for an increase when his renewal notice from MAMSI Life and Health Insurance Co. arrived last July. Wilson wasn’t prepared, though, for a 43 percent increase that would boost his annual insurance costs by $120,000 a year.

So he and his insurance broker shopped around for a better deal. They had a hard time finding bidders. PermaTreat is based in Fredericksburg, but its employees live and work in a wide area, stretching from Washington D. C., to Petersburg. Three carriers with a large enough network of doctors and hospitals to serve Wilson’s employees declined to submit a quote, says Wilson, because they didn’t think their price would be competitive.

Wilson’s luck appeared to turn when he found Green Bay, Wis.-based American Medical Security (AMS) Life Insurance Co. AMS offered him a plan, with a $3,000 deductible, at a rate similar to what he had been paying. To make the switch, Wilson’s employees would need to cover the first $1,000 and PermaTreat would pay for health expenses between $1,000 and $3,000, at which point the insurance would kick in. If employees stayed healthy, the company would save money. And even if PermaTreat ended up paying the premium difference for its 62 enrolled employees, Wilson calculated it would put him about even with the higher MAMSI rate.

As part of the application process, Permatreat went through underwriting, with each employee and their dependents filling out a detailed health statement. It was so time-consuming, recalls Wilson, that he extended the MAMSI policy twice so employees wouldn’t be without coverage before the new policy was scheduled to take effect on Oct. 1.

In September, Wilson and AMS representatives hurriedly arranged meetings for employees to learn about the new plan. At one of those sessions, an employee disclosed that his 18-year-old son had just been hospitalized following a serious car accident. The employee wanted to know which insurance company — MAMSI or AMS — would be responsible for covering his son’s medical bills. “During the meeting, that was the first we knew about the accident,” says Fredericksburg insurance broker William Taylor, who worked with PermaTreat on its coverage. According to him, an AMS representative said the company would be responsible for the bills after Oct. 1, if AMS took on the plan.

The news about the accident came after underwriting was complete and AMS had given a premium quote and a commitment, says Taylor. No money had been paid though, as Taylor says PermaTreat was advised by AMS representatives to wait so that a correct amount could be computed after employees chose their plans.

Not long after the employee meeting, Taylor says AMS notified him that the company was withdrawing its offer. “They let it be known that they were pulling their commitment because of the accident and what they had learned in conversation [with the boy’s parent} that the condition was severe,” he says. When Wilson learned of the withdrawal, “I was so mad that I called the president of AMS in Green Bay to express my disappointment.”

Later, AMS contacted Taylor with a counter offer, saying the company would provide coverage at a premium 40 to 50 percent above the original one quoted. PermaTreat declined the offer.

AMS’s parent company, PacifiCare, declined to comment on its dealings with PermaTreat, calling it a legal matter. As of early December, Wilson had not filed a suit, but says he talked with his attorney who advised him to file a complaint with the state. “I have filed a complaint with the State Bureau of Insurance and will give them a chance to investigate,” he says. Wilson also shared his story while testifying in late November before Virginia’s Small Business Commission.

In a written response to the bureau about Wilson’s complaint, AMS says that after learning of a new risk for the PermaTreat group on Sept. 8, it contacted the employee to obtain “updated information on his dependent child. Based on the additional risk presented, we made a decision to decline the pre-quote. Even after that decision, we were asked to provide a rate quote taking into consideration all the risk presented. That rate quote was presented to Mr. Wilson on Sept. 19, 2005, and he declined it; therefore, the pre-quote process was completed.”

As explained by AMS in its response, a pre-quote provides a preliminary risk assessment of the prospective group. As part of its initial quote, AMS says it includes a statement, which says in part, “We reserve the right to adjust the rates, revise the rate guarantee, or decline the group for our plans based upon the enrollment information provided.”

Wilson says he thought negotiations had moved beyond a preliminary stage since his company had gone through underwriting. The dispute forced Wilson back to MAMSI. By raising his copays and making other adjustments, Wilson says MAMSI was able to drop the annual increase from 43 to 31 percent. He passed along some of his increased costs to employees. “When I started here 20 years ago, we paid 100 percent of the premiums for employees and their dependents. Now we pay 75 percent of the employee’s premium and 50 percent of the family premium.’’ Overall, the annual cost to the company is about $400,000. “Each time we raise the rate, a handful of people drop out of the plan,” adds Wilson. Meanwhile, the injured teenager is out of the hospital, says Wilson, and recuperating at home.

A small business owner for 24 years, and the incoming chairman of the board for Medicorp Health System — parent company of Mary Washington Hospital in Fredericksburg — Wilson supports legislation that would allow small businesses to pool together to spread risk more evenly.

The state’s Bureau of Insurance lists about 300 companies writing insurance policies in Virginia, but many of them, argues Wilson, are limited by region or by their panel of providers. Even more frightening, he says, is the consolidation in the insurance business, which reduces competition. Case in point: his current insurer, MAMSI, is part of UnitedHealthcare. AMS is a subsidiary of PacifiCare, which this summer announced it was merging with UnitedHealthcare. “How can they be competitive when they’re part of the same company?” Wilson asks.

PacifiCare spokeswoman Cheryl Ran-dolph says consolidation is not the reason for higher costs. “Premiums reflect the underlying costs of health care. Prescription drug costs, hospital costs, physician services and new technology drive the increase.”

Small-business employers’ options for health insurance are on the radar for Gov.-elect. Tim Kaine, who made them an issue during his campaign. As lieutenant governor, Kaine created a Commission on Small Business Health Insurance Costs, which recommended several approaches to ease the costs, including a public-private health insurance purchasing pool for businesses with 50 or fewer employees.