Rising costs of care

NATIONAL REPORT — Double-digit hikes in healthcare premiums, volatile fuel prices and swelling inflationary pressures are just a few of factors forcing practices to take a close look at raising fees.

There is a reason Ben Bernanke, who ascends to the most influential economist in the world next month as Federal Reserve chairman, quells inflation fears with every public address. An aging workforce with significant public retirement benefits, war in the Middle East and unprecedented Gulf Coast devastation have pushed tax dollars out the door faster than they are coming in, which could prompt the government to print more money to pay its bills.

Add to the mix rising fuel costs "reflecting the tight balance of global supply and demand," Bernanke says, coupled with healthcare-premium hikes more than three-times that of core inflation, and suddenly the 1970s aren't looking too far away.

"The inflation rate that is happening is really going to occur systemically because we have a society that is not working as hard, there are less workers in the economy; those workers who used to work are now not working and we have to honor the obligations of an actuarially unsound Social Security system, and three, we are going out and incurring massive dollars on armaments," says Owen E. McCafferty, CPA, CVPM, Dipl. ABFA, principal of Owen E. McCafferty, CPA Inc.

But there is good news: historical perspective. We have a valuable template from the 1970s for tempering inflationary impact on small businesses, McCafferty says.

Small businesses largely resisted price increases in spite of inflationary pressures in the early 1970s. By the mid '70s, "margins dwindled to the point where they had to play catch-up, so then there were massive rates of increase," McCafferty explains.

The result was several years of double-digit inflation rates from 1979-'81 coupled with prime interest rates that hovered around 20 percent.

"All of this is being replicated now," McCafferty says. "So in small business, you damn well better be raising your prices in an inflationary environment."

Although fee increases must be tempered with caution to keep client numbers stable, consultants say modest fee hikes might be tolerated if clients get some sort of added value in return, such as expanded hours and additional services.

"We typically look at pricing twice a year, and our increase depends on inflation," says Darryl Shaw, hospital administrator at Florida Veterinary Specialists (FVS) in Tampa. "We typically raise fees 2 to 3 percent semi-annually."

Shaw says he's seeing marginal increases in products and services, but for now, "they are pretty insignificant" compared to the overall price of doing business, but that won't stop him from hedging his bets in the marketplace.

"The cost of capital is pretty low, so we'll take advantage of discounts if we buy in bulk rather than keep inventory at a minimum," he says. "We'll do that with certain medications and certain items that we will use during the course of the year."

But by and large, practices aren't incurring unusual price pressures for products and services used in business, sources say. Mobile practices and those in cold climates will bear the brunt of recent vacillations in fuel costs, but increases are typically small compared to the overall cost of doing business for most practitioners.

"I suppose we've seen mild increases in fuel surcharges from the cremation service, medical waste and the people who bring us our oxygen, but it's minor compared to the bills we pay," says Bash Halow, practice manager of Heart of Chelsea Animal Hospital, which has four doctors and 22 total employees.

Tax breaks could soften the blow for practices struggling with gasoline and fuel prices. The proposed Small Business Fuel Cost Relief Act is scheduled to offer temporary income tax credit for small businesses and farmers to offset retail prices for gasoline, diesel fuel, heating oil and natural gas. House and Senate versions were in committee at presstime.

Healthcare hike

But the persistent pervasive obstacles to cash flow are the usual suspects, mainly employee costs including healthcare premiums, sources say. The rising cost of health insurance has propelled a five-year decline in the number of small businesses offering such benefits to their employees, according to the Kaiser Foundation 2005 Annual Employer Health Benefits Survey.

About 60 percent of firms offered coverage in 2005, down from 66 percent in 2003 and 69 percent in 2000. The drop stems almost entirely from fewer small businesses offering benefits, as 98 percent of businesses with at least 200 employees offer health insurance.

Although skimping on benefits likely isn't an option for practices in fierce competition for veterinarians and technicians, clinics are being forced to shift more of the burden to employees to stay afloat.

Healthcare premiums rose an average of 9.2 percent in 2005, which ended four consecutive years of double-digit increases, according to Kaiser.

Halow says the rising cost of employee healthcare makes him unable to improve the plan he offers, and renders the clinic less competitive for labor in New York City's competitive market. He plans to meet with a consortium of local practices to gauge interest about pooling employees to garner a better rate on insured lives.

Other practices are jumping plans every year to get the best "new customer" deal.

"It's worth it because it typically saves us more than $1,000 a month with about 10 employees on the plan," says Dr. Anthony Brizgys, owner of the McKillip Animal Hospital in Chicago.

Shaw converted about 80 FVS-insured lives to a so-called consumer-directed account this month to mitigate a 25 percent hike in premiums in 2006. Health Reimbursement Arrangements (HRA) and Health Savings Accounts (HSA) are tax-favored accounts that employees use to pay for medical expenses. Basically, the before-tax deduction goes toward a high-deductible health plan. Subsequently, the employee must make more decisions about what they want to spend their healthcare dollars on, and they are forced to fund them at a greater level than traditional plans.

"From a global perspective, healthcare is like giving someone a credit card to pay for health-related expenses where someone else pays the bill, so there is no motivation to manage that credit card at all, and pricing doesn't come into play." Shaw says. "HSAs fundamentally are going to be better because you are putting the initial purchase decision into the hands of the individual, who is actually making the decision and purchasing the services."

The transition will curtail the rising cost of health insurance for FVS from the expected 25 percent to about 10 percent using HSAs, Shaw says. About 20 percent of employers now offer a high-deductible plan, which is generally defined as plans with a deductible of at least $1,000 per year for single coverage and $2,000 for family coverage. But only about one in five companies offering a high-deductible plan permit HSAs or make contributions to HRAs, raising concerns that healthcare inflation, which already dwarfs wage increases, could eat up more than 25 percent of a worker's salary.

About 29 percent of monthly premiums currently are paid by the employee, according to a Robert Wood Johnson Foundation survey. The trend reveals concerns for about 79 percent of business owners, who fear their employees will drop coverage all together as the burden of healthcare inflation continues to shift.