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Small Business Owners Uninsured After Steep Costs

As Sacramento wrangles over health care reforms, local businesses wrestle with stark choices when it comes to insurance — and many are going without.

You see them every day in different guises: The pretty stylist consulting with a client in a Santa Barbara beauty salon; the electrician on a Montecito job site, huddling with his tool-belted crew; the high-tech professional, crossing a busy intersection in Goleta. These faces belong to the uninsured — a growing number along the South Coast.

According to experts and everyday people, many business owners and self-employed professionals do not have health insurance because the cost is too steep.

"I can’t afford to pay $620 a month just to cover me," said Cheryl Ebner, owner of Santa Barbara Virtual Assistants. "Our system is very unfair."

For months now, Gov. Arnold Schwarzenegger and the Legislature have been wrangling over health care reform measures that could require entrepreneurs such as Ebner to buy expensive policies. Some proposals would compel some small business owners to cover their employees, or it would tax them to fund statewide coverage for the estimated 6.5 million uninsured residents. Some business groups point out that this employer mandate violates federal law (See Sidebar.), but local entrepreneurs see a more fundamental problem with the proposals.

"That will probably break a few of the businesses," said Dan Rohde, owner of Rohde Tile. "It will certainly force everyone to charge more for their products and services. It’s already very competitive here."

Santa Barbara workers are an entrepreneurial lot, creating small law firms, travel inns, restaurants, professional services and construction enterprises. Health care is one of their biggest costs. Sometimes, the owner of a small business will buy insurance for himself, his family and perhaps a full-time manager. But owners tend not to cover part-time workers, who are a growing sector of the South Coast population. Will these people be covered under the new law?

"We don’t know what the bill will look like yet," said Peter Harbage, who consulted on Schwarzenegger’s reform efforts. "But this is an opportunity to help small businesses get affordable coverage."

A reworked Democratic health care plan — ABX1 1, carried by Assembly Speaker Fabian Nuñez, D-Los Angeles — passed the Assembly Health Committee in mid-November on a 10-5 party-line vote. Further action by the Legislature is expected soon and Nuñez has said financing for the proposal is proceeding on a separate, but parallel, track with a goal of placing it on the November 2008 ballot. While no financing language has been presented, Nuñez’s outline calls for a sliding scale employer tax (2 percent to 6.5 percent of Social Security wages), a 4 percent tax on hospitals and a $2 per pack increase in the tobacco tax.

A surprising number of coastal firms have never purchased insurance for themselves or their employees. Rohde, for one, has always been covered under the policy of his wife’s employer.

"I’ve been lucky in that regard," he said. "All of my employees had working wives who were covered by other plans, too."

When Delco Electronics closed its doors in 2004, Rohde’s wife, Karen, lost her job. Her family had to pay $1,200 a month to keep medical coverage under the health benefit law called COBRA.

"It’s been a huge problem," Rohde said. With his wife out of work and his construction business slowing, he had to start paying for an expensive policy. He wasn’t willing to pay "medical roulette" with his two children by letting the family’s coverage lapse — even though it would have saved $14,000 a year.

He watches other business owners struggle, too. The big contractors, with 25 employees or more, already offer benefits. "But a lot of sub-contractors in town don’t have health coverage," he said. "And they sure can’t afford it for their employees."

The cost of health insurance policies has nearly doubled since 2000. The average cost of insuring one employee on a private — as opposed to a government — policy is about $700 per month, according to surveys by both The Kaiser Family Institute and The National Association of Health Underwriters. It’s no wonder that 47 percent of America’s small business owners provide no health care coverage at all; in California, that figure is closer to 53 percent. That means most workers at small businesses are uninsured.

Yet, these workers are the most vulnerable under Schwarzenegger’s proposed plan, said Mark Dispenza, an agent with Holmes & Holmes Insurance.{mosimage}

"My concern is that these bills will hit small businesses the hardest," he said.

Most of Dispenza’s clients operate small firms, employing anywhere from three to 10 workers. Providing health benefits costs them 20 percent to 40 percent of their payroll. Gasoline and other costs keep rising, and workers comp rates are scheduled to jump next year.

"It’s just not right to cover the uninsured solely on the backs of small business," Dispenza said.

Local chambers of commerce agree.

"If you’re asking small businesses to put 4 or 7 percent into the pot, you’re not tackling the problem," said Lisa Rivas, executive director of the Regional Legislative Alliance of Ventura and Santa Barbara Counties. "You’re simply moving it around.

"What needs to happen first," she said, "is that the government-mandated programs must be fully funded. The state’s health care crisis worsened in August, after the governor cut $23 million in health care for needy children and another $250 million in health care for the poor.

"You can’t approach this (problem) halfway and expect things to run smoothly," she said.

Many taxpayers already support public programs for the uninsured. The Santa Barbara Neighborhood Clinics, for one, operate on the Eastside, Westside and in Isla Vista. In the last two years, those clinics have served 17,000 low-income residents — 70 percent of whom live below the federal poverty level, according to the clinics’ Sheba Lux. Yet, the other 30 percent include young adults from middle-class families who now work without benefits as waiters, hostesses and in phone sales in town.

"We forget that a lot of our hotel workers and single moms get their medical needs at these clinics," Rivas said.

High-tech start-ups along Hollister Avenue grapple with the issue, too. The Hollister Corridor is home to dozens of high-risk ventures and research facilities that don’t offer health benefits.

"A lot of these entrepreneurs don’t insure themselves," said Jay Wright, a New York Life representative who sells Blue Cross policies. Some founders are middle-aged with old knee injuries, high cholesterol or other "pre-existing" conditions that insurers cite to deny coverage. Other company founders don’t want to deal with the issue, he said.

"These guys are working night and day to get their startup going. Insurance is not high on their list," Wright explained.

A few prefer to gamble that saving insurance payments will outweigh their chances for falling ill.

"I know a highly educated computer expert who isn’t covered at all," said Rick Dochterman, a vice president of System Dynamics Inc.

Some high-tech firms don’t offer employee health benefits, but pay staff members enough that they can afford individual policies. Gordon Feingold, founder of System Dynamics, searched for a group health plan for his startup but couldn’t find an affordable group rate for his five-man operation.{mosimage}

So he and most of his employees opened their own Health Savings Account. Based on a 2003 federal law, this tool allows workers to put about $5,500 of pre-tax dollars into individual savings account. Dochterman, for one, shopped around and signed on with Blue Cross. He pays $240 a month to cover his family of three, or a fraction of the $800 he would have paid otherwise. He has a high deductible — $3,500 per person or $7,000 per family a year.

"But what happens after that is covered by my policy," he said. "The key is the negotiated rates."

After hurting his back recently, he took an MRI, which at retail prices would have cost $1,700. He sent the bill to Blue Cross, which received the discount rate of $600. Dochterman dipped into his health account and paid the bill.

But these accounts carry a different set of problems. "There’s always the question of whether you should use that money for preventive care, or save it for accidents," he said.

As for requiring small firms to pay for others’ care, he’s suspicious.

"It depends on how efficient the system is," he said. "But I think it’s bad for business owners and probably bad for employees."

Also suspicious are workers in the local beauty industry.

Colleen Belharrat, owner of the high-end Santa Barbara spa called Complexions, employs seven licensed aestheticians — all independent contractors.

Healthy Debate

Several versions of health care bills have been written in the past year and many have failed.

AB 1554 by Assemblyman Dave Jones, D-Sacramento, would have required insurers to defend their profit and administrative levels while seeking approval for rate increases. It died.

SB 840 by state Sen. Sheila Kuehl, D-Santa Monica, would have established a nonprofit board similar to Medicare, working with private doctors and existing hospitals to extend free care and free choice to all. It was approved by both the Senate and the Assembly but was vetoed by Gov. Arnold Schwarzenegger.

Most recently, two options were being seriously considered yet neither of them would limit the rise of premiums. AB 8 presented by Assembly Speaker Fabian Nuñez, D-Los Angeles, and state Senate President Pro Tem Don Perata, D-Oakland, called for extending health care to the working poor — about 4 million people. It would have levied a 7.5 percent payroll tax on small businesses to pay for those policies, required workers whose employers offer coverage to enroll in those plans, but would not have mandated health insurance for all.

Schwarzenegger’s proposal would have extended coverage to at least 5 million uninsured residents, paying for it with a 4 percent payroll tax on businesses. It also would have increased taxes on doctors and hospitals, and would have required all Californians to buy a private policy, capped at $7,500 per year per person. Small businesses with 10 or more employees would have to buy insurance for employees or pay the 4 percent tax into a state fund. The self-employed would have been required to buy insurance, too.

In both bills, insurers would have been required to spend 85 percent of premiums on patient care, compared to the 60 percent to 65 percent they spend now.

— Kathleen Sharp

"About 75 percent of workers in our industry here are contractors," she explained.

Belharrat would like to hire her staff as full-time employees with benefits, but she can’t. One big reason is that she pays dearly for her own Blue Shield coverage. Last year, she suffered a fall that put her out of work for several weeks; the bills piled up.

"I’m not happy with my health care policy, let alone the entire system," she said. "I pay a premium for insurance, but then I also pay every time I go to the doctor. I pay dearly for my prescriptions and then again for tests. But I feel pretty helpless about it."

She knows that the insurance industry is a powerful lobby, especially in Sacramento. It’s spent $4 million on California political campaigns since 2001, according to the Foundation for Taxpayer and Consumer Rights. Insurers contributed $578,000 to the campaigns of Schwarzenegger, $134,000 to Nuñez, and $30,500 to state Senate President Pro Tem Don Perata, D-Oakland, the same politicians who are trying to reform the system. The Big Five California companies that control 80 percent of the HMO market — Kaiser, Blue Shield, Blue Cross, PacifiCare and HealthNet — have increased their profits of $11.7 billion since 2002. Four of these companies have transferred $4.1 billion in profit to their out-of-state parent companies since 2002. All of this infuriates some policyholders.

Belharrat, Ebner, Wright and others question why entrepreneurs like them should subsidize the profits of private insurance companies, even the nonprofits.

"Sometimes I get angry about that because we’re paying all this money for health care and not getting much," Belharrat explained.

Added Ebner: "I feel like I’m in the middle of a larger game run by powerful people."

On a recent visit to Belharrat’s spa, many of her workers were excitedly discussing a flier that had been left on their car windshields. The flier advertised "affordable healthcare" with a discount program from The Provider Solution Family Healthcare. For a sign-up fee of $49, and $59.93 a month, one can join this group that claims to negotiate lower rates with some health care providers.

"I’m not sure if it’s legitimate but we’re going to check it out," said Belharrat. A quick search on the Web didn’t yield much information about the company, which made some wary.

Even if Sacramento does pass a law, looming problems must be solved. One key is to press for 100 percent funding of the current health care programs. Santa Barbara and Ventura counties have approximately 50,000 farm workers, most of whom are low-wage immigrants. "They contribute to our economy and we should help them," said Dispensa.

But a lot of native-born independent contractors, students and working parents tap into these programs, too. As Rivas said, one reason why there’s a health care crisis in the United States is because there’s been a drop in funding for many public services in the last 20 years.

"These are not simple issues that can be cured with a bill," she said.

California could also adopt the same federal laws that shelter money in health savings accounts, as Dochterman does. People who pay steep premiums for individual accounts can find a little relief in HSAs — if they can afford the high deductibles.

Americans could look at creating a true universal health care system — one that is funded by a single payer, the government, but treated by a network of private doctors, hospitals, pharmaceuticals and other suppliers.

According to a Harvard study, taxpayers already underwrite 60 percent of the country’s health care costs through public programs such as Medicare, Medicaid and other programs. All of this money flows to hospital chains, drug-makers, privately owned nursing homes and other care-givers.

"We have a system in which we’ve privatized the profits and socialized the risks," said Dr. Steffie Woolhandler, associate professor of Medicine at Harvard.

It’s gotten so that even people who make money on this system question it. Wright recently told a fellow insurance broker that he supported a single-payer system. His friend told him he was crazy.

"Think of all the business we’d lose if we couldn’t sell health insurance policies," the broker said.

But Wright sees it differently.

"Imagine all the money that would free up. We could make money in other ways, like investment policies," he told his friend.

Wright doesn’t know what his friend thinks, but he’s clear: "If I didn’t make another dime off health care I wouldn’t care, as long as everybody is covered."

Tom Widroe will be discussing Kathleen Sharp’s story on his radio show from 1 to 4 p.m. today, on Rincon Broadcasting Co.‘s KTMS 990 AM.

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