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SMALL COMPANIES STRUGGLE TO OFFER COMPETITIVE BENEFITS

Anyone who doubts that "bennies" are key to recruiting and retaining workers in a tight labor market should talk to Clarence businessman Donald R. Scott Jr.

The president of Buffalo Valve and Fittings Co. lost one of his star sales associates to Xerox Corp., largely because the well-heeled corporation offered a better benefits package, including better health benefits.

"When you're a smaller company, the profit margins just aren't there to compete with these large corporations," said Scott, who employs 10 people in a company that distributes valves and fittings to clients in various industries.

It's a dilemma that's facing many of the nation's 6 million small- and medium-sized companies -- businesses that employ four out of every 10 workers.

More employees are placing greater emphasis on benefits at a time when the cost of providing health insurance has been increasing annually since 1996. Premiums have been rising fastest in the small business sector, largely because they typically lack purchasing clout.

Premiums rose an average of 6.9 percent for companies with fewer than 200 workers over a 12-month period, according to a survey by the Kaiser Family Foundation and the Health Research and Education Trust. Another study by Dun & Bradstreet found that two out of every three small businesses nationally saw health insurance costs increase in 1998, with the average hike hovering at 17 percent.

Local executives and benefits managers said there are ways to reduce costs while offering quality health benefits -- and perhaps even a broader range of options.

Marc Hudak is president of BeneSource, a Buffalo company that markets itself as "a one-stop shop" for employee benefits, including insurance and retirement products. About a third of his clients are small businesses and Hudak said many don't have benefits administrators on staff.

"Often, it's the bookkeepers or company owners who try to make decisions about benefits. They're not always well-versed on these issues and don't always understand the options that are available to them," Hudak said.

Buffalo Engineering PC, a Cheektowaga consulting firm, turned to BeneSource last year to help identify alternatives.

"Our health insurance costs are the third biggest expense we face, right behind salaries and rent," said President WalidS. Daham. "As we grew from two employees in 1990 to 32 today, we needed to take a close look at those costs."

Until recently, Buffalo Engineering found that the most cost-effective way to buy health insurance was through the Cheektowaga Chamber of Commerce. Several local business groups, including the Buffalo Niagara Partnership, negotiate with carriers for cheaper rates, then offer members an opportunity to buy health plans through their associations.

Buffalo Valve goes through the Partnership to obtain health insurance, a move that Scott estimates saves between 10 percent and 15 percent a year. Employees pay 15 percent of the cost.

But Buffalo Engineering's Daham said as the payroll continued to grow, so did administration and processing fees. In 1998, Buffalo Engineering began working with BeneSource to assemble a package that offers various health coverage ptions. Like many smaller businesses, the company pays for individual coverage; employees who desire family coverage pay the difference.

State leaders claim that the recently-approved Health Care Reform Act will cut costs by $110 million for businesses that provide employee health insurance. HCRA is being funded with proceeds from last year's settlement between the state and tobacco companies and by doubling the state's tax on cigarettes. It will make nearly 1 million uninsured New Yorkers eligible for health coverage.

But Daham said there's widespread skepticism about HCRA's ultimate impact.

"I've talked to a lot of my colleagues and the general feeling is that we'll believe it when we see it," Daham said. "You always tend to be skeptical. Sometimes, politicians find ways to use money to enhance their political positions."

Hudak said "tweaking" insurance policies to accommodate the demographics and specific needs of work forces can lower costs while improving overall benefits.

"Sometimes you can get quality health coverage for less money just by changing one variable," he said.

For example, a company that has a work force comprised largely of young, relatively healthy people, might be wise to boost the co-pay on prescription cards from $7 to $10. Or if no employees are using health plans for dependents who are over the age of 19, revising policies that cover dependents up to age 25 could produce savings without weakening coverage.

A growing trend in the small business sector is something called "defined contribution." More employers are offering a full range of health insurance plans, but they will only pay a specific amount of the tab. Hudak said providing a fixed-dollar contribution protects companies against unexpected cost increases.

When employees are responsible for paying sizable chunks of their health insurance, experts encourage companies to take advantage of Section 125 of the Internal Revenue Service Code. These plans allow workers to pay contributions from pre-tax instead of after-tax income.

Some companies with 25 to 50 employees have turned to self-insurance, an option that can offer increased flexibility and improved cash flow. But Hudak said self-insurance can be risky for enterprises with few workers.

"We primarily look at companies with over 500 employees as candidates for self-insurance," he said. "The smaller the pool, the less ability you have to spread risk. Two or three catastrophic illnesses in a year could inflate health care costs for a small company that self-insures."

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