Video: Warehouse insurance

By Bertha Coombs Reporter
CNBC
updated 7/26/2007 12:59:37 PM ET 2007-07-26T16:59:37

Gary Greenwood has an ear for trouble. The Ridgefield, Wash.-based rotating equipment technician can tell when machines are sick by listening to their sound.

What he didn't foresee when he left his old employer to launch his own business is that having diabetes would nearly derail his dream.

Because of his pre-existing condition, he was unable to get individual health insurance, and the health care costs were too high for him to stay in business.

"Health care providers told me no," he said. "It was a mountain I couldn't climb."

Small business' growing pain
For millions of small-business owners across America like Greenwood, health care coverage for themselves and employees is a pain they find increasingly hard to ignore. In a recent survey conducted by the National Federation of Independent Business, a small-business lobbying group, business owners say cost is the single biggest problem facing the health system today.

Even for small-business owners healthy enough to get insurance, the premiums for them and their employees are much higher then those for big corporations, because small firms have fewer people and their insurance risks are hard to spread.

Premiums are also increasing faster for small firms, at about 9 percent last year, comparing to 7 percent for larger firms, a Kaiser Family Foundation report found.

Greenwood said he wouldn't still be in business today except for the help he got from Costco Wholesale Co., one of the nation's biggest discount retailers. As an executive member of the warehouse store, he got his insurance through a Costco program that sets one rate for everybody and promises to turn down nobody in Washington state.

Discount health insurance
Costco now offers small-business health insurance plans in Nevada, Oregon, Hawaii, Washington and California. Offers in each state are different depending on which insurance company the retailer partners with, but the company promises to offer a better value then business owners can get by themselves.

By combining numerous small businesses together into one health care pool, Costco is able to get better insurance rates. The company also tries to negotiate cheaper high-deductible insurance policies that carry enough benefits to be feasible. The discount is also due to lower commission to Costco and lower administrative costs. Unlike other insurance brokers, who manage a large number of plans, Costco only manages one or two in every state — the same way the company runs its warehouse stores.

"(It's) all about high volume, low margins and driving value back to members," said John Conlon, Costco's vice president for the insurance unit.

The insurance service is not a profit driver for Costco, but the company says it fits perfectly into serving its most important customer base, small-business owners, who make up one-third of its members and contribute two-thirds of its revenue.

"It's important to work with small businesses, and small group health insurance was a natural fit," said Conlon.

The company says most of its insurance service customers are micro businesses with fewer than five employees, and about 45 percent of them had no previous coverage.

Few nationwide implications
But expanding the program into new states has been slow going. That is partly because Costco doesn't have a solid customer base in every state to support such group synergy, and partly because some markets are too fragmented for the company to find a partner who can offer competitive rates across the board.

Some state governments are also experimenting with insurance-pooling ideas to support small-business owners. Most recently, Oklahoma expanded a program under which the state pays 60 percent of the insurance costs for small businesses by moving some Medicaid dollars that were used to pick up the bills for the uninsured.

But one problem with most state-sponsored insurance pools is that they often experience low enrollment and higher administrative costs. Minnesota installed a public-administered program in 1993 but discontinued it five years later due to lack of financial viability.

Innovations from corporate America can mean life-saving opportunities for small-business workers.

A store manager in a Mattress Depot U.S.A franchise store in Seattle, Jim Carlson was not covered until his store enrolled in the Costco program two and half years ago. He went for a physical right after, and a blood test found he had cancer.

He said he probably would not have had the physical if not for the coverage.

"You think a physical would cost $200 to $300, then you keep putting it off and putting it off," he said. "It's a possibility I could be dead."

Just like for Carlson, health care coverage for America's small businesses can't come a moment too soon.

The Associated Press contributed to this report.

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