Startups struggle to manage employee health insurance

Demands on startup companies, especially those with outside investors, can be overwhelming. How can the company’s cash burn be reduced to make financial resources stretch out for as many months or years as possible until it reaches significant cash flow? Is there a way to shorten the path from idea to product commercialization?

And a particularly tough challenge is how can the owners offer competitive employee benefits, especially health insurance, when the logistics of being small means it will be paying the most expensive enrollment rates?

“Cost-effective health care insurance is not readily available for startups,” said Helen Stimson, president and CEO of Delaware BioScience Association. “The challenge is in seeking to recruit scientists and having to compete with larger companies where health-care insurance is significantly less expensive.”

Bryan Tracy, CEO and co-founder of White Dog Labs, said, “I’ve founded two startups in the last nine years, and it’s not just the matter of affordable health-care insurance and other benefits being available. It’s challenging to find them. Most entrepreneurs are not experts at HR [human resources], and they don’t have a lot of time to try to find solutions. 

Delaware is particularly challenging. According to a study made by the Commonwealth Fund, the average combined employee premium contribution and deductible in the state is $8,279. That is third highest in the nation, trailing only Texas and South Dakota. 

Small companies have a handful of options in securing health care insurance:

• Enroll in group plans that have members from several small companies and can shop for discounted coverage.

• Self-insure as a company,

• Find other ways to compensate employees.

• Reduce other compensation and benefits while providing health care insurance.

• Look for lower insurance rates by outsourcing and bundling all HR functions, such as payroll and accounting, to a PEO or professional employer organization.

Perhaps the primary Delaware-based group plan is “Benefits Connection,” which was founded in 1980 by the New Castle County Chamber of Commerce in concert with Wilmington-based Allen Insurance Group and which now extends to chambers of commerce and other nonprofit organizations throughout the state.

“We recently signed an affinity program with Aetna – the Aetna Funding Advantage or AFA – which can be 20% to 25% less expensive than the Affordable Care Act,” said John Allen, vice president of marketing and sales for Allen. “It allows for customized benefits programs for companies, which is managed at no cost to the employees. We’re only the third in the country, following Texas and Illinois, to sign on with Aetna.”

Self-insurance “is risky, because a company is gambling that there will be no catastrophic incidents,” Stimson warned. According to the Self-Insurance Institute of America (SIIA), self- funding works like this: The employer pays for employees’ out-of-pocket claims as they incur, sets up a trust fund to earmark money to pay incurred claims, hires a third-party administrator to administer claims and purchases stop-loss insurance that kicks in once claims reach a certain amount to protect against unpredicted or catastrophic claims. 

According to the Employee Benefits Research Institute, self-funding has increased in recent years from 11.9% to 14.2% among employers with fewer than 100 employees. Two of the biggest reasons for the increase are that these plans are exempt from some of ACA requirements and are not subject to state insurance mandates. 

Michael George, a former executive at DuPont Pharmaceuticals in Wilmington, has in recent years served on the boards of several startup companies. George says that providing benefits as incentives to recruit experienced scientists and executives is seldom a consideration.

“It’s been my experience that small startups rarely pay benefits – it’s all about stock options and restricted stock awards. Investors don’t want to see them spending money on anything that doesn’t increase the valuation of the company,” he said.

For this reason, companies look for senior people who have already acquired health and retirement benefits at other companies and are now looking for companies that have the potential for a big equity payout, George added.

However, Tracy turns that equation around in hiring employees who are sometimes younger and who want a benefits package for their families. “That makes them feel like they are part of the company, and they are generally willing to have a reduced salary,” he said. “They are here for the future of the company and know we don’t want to run out of money.” 

Until now, Tracy’s companies have provided health-care benefits through group insurance plans, but that he is now testing out a PEO to handle more of his business services.

One such PEO is Insperity, which has offices throughout the country and lists bundled services such as employee benefits, payroll and HR administration, workers’ compensation, government compliance and HR technology. 

“The first thing we ask is where the organization is now and where it’s looking to go,” said Amy Marcum, a senior human resources specialist for Insperity. “That doesn’t mean any specific size company or industry, but there are more laws that apply when you hit 35 to 50 employees.”

Each client has a team of specialists, with each specialist devoting a certain amount of her or his time to the client company, Marcum says, and often it trains employees at those firms as part of the overall package.

All in all, Tracy said, “It’s not that you can’t find an insurance and benefits plan. But you may not have the time or experience to find the best plan. Having a consolidated place to do all this would be helpful.” 

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