Best and worst states for health-insurance costs

by:Philipp Harper
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If you're like most small-business operators, the biggest challenge you face — next to simply staying afloat — is providing your employees with health insurance.


It's not a problem that figures to disappear. This already significant drain on the bottom line is accelerating at a rate that leaves most other business costs in the dust.

It may interest you that geography plays a big role in how much you pay for health insurance. For a variety of reasons, premiums can fluctuate significantly from state to state. So if you're trying to decide where to locate a new business — or relocate an existing one — factor the cost of health insurance into your deliberations.

Below, I'll tell you the 10 best and worst states for buying health insurance, based purely on cost. Here's a preview: If you decide to go for the lowest rates possible, make sure your policy covers frostbite — because the Dakotas lead the way.

In this regard, insurance premiums are like a state's regulatory environment or the tax bite it imposes on residents, which also vary geographically. I wrote about those two factors in earlier columns, and health-insurance costs are every bit as important.

A deck stacked against small business

Indeed, providing health insurance for themselves and their employees is the most pressing issue entrepreneurs face. That's not just a guess on my part. It's what small-business men and women have been telling pollsters from the National Federation of Independent Business every year since 1986.

Their concern is not surprising when you consider that during the year beginning in the spring of 2001, the cost of employer-sponsored health insurance increased by 12.7%, to $3,060 for single coverage and $7,954 for a family plan, according to a study by the Kaiser Family Foundation. The rate of increase was more than twice that of general medical inflation during the same period. The annual premiums calculated by Kaiser are national averages that take into account all types of coverage and all sizes of employers without regard to where they're located.

In practice, the businesses required to pay the most for health insurance are the ones that can least afford it. That's because providers of health insurance to small businesses can't dilute their risk by spreading it over a large numbers of employees, so they compensate by charging the small guys higher per-employee rates. For instance, in 2000, family health coverage in Massachusetts cost $8,468.86 per employee at companies with nine or fewer workers and only $7,087.33 at businesses where the work force numbered between 100 and 999.

That's almost a 20% penalty that small businesses are being forced to pay simply because they are small. And since it's almost a given that health benefits are more generous the larger the company providing them, small-business owners aren't simply paying more, they're paying more for less.

Despite this disparity, small-business operators are demonstrating a clear commitment to providing health coverage for their employees.

According to the Kaiser study, 55% of businesses with nine or fewer workers offered a health plan in 2002. The percentage increased to 74% at companies with between 10 and 24 employees and to 88% when the payroll was greater than 25 but less than 99.

The best and worst states for buying health insurance

So, if you're going to be on the hook for health insurance, where can you go to suffer the lightest financial hit?

The best source of price data is the Medical Expenditure Panel Survey (MEPS), a nationwide examination of medical care usage conducted annually by the federal Agency for Healthcare Research and Quality (AHRQ). One component of the survey looks at how much employers of different sizes and in different states (usually the 40 most populous) have to pay for different kinds of coverage.

I'm going to focus on the smallest employers (10 or fewer employees), but if your business falls in a different size category you can find it on the MEPS Web site (do a site search from the home page for "2000 Employer-Sponsored Health Insurance Data").

In 2000, the most recent year for which MEPS data is available, the states offering small business the lowest average family premiums were:

1. South Dakota $5,678.65
2. North Dakota $5,713.15
3. Missouri $5.790.45
4. Kentucky $5,894.18
5. Mississippi $5,901.51
6. California $5,945.61
7. Iowa $5,989.04
8. Virginia $6,009.21
9. Kansas $6,041.64
10. South Carolina $6,083.00

Conversely, the 10 most expensive states for the same year were:

1. Massachusetts $8,468.86
2. New York $8,427.50
3. New Hampshire $8,290.90
4. New Jersey $8,274.53
5. Connecticut $7,597.89
6. Maryland $7,268.98
7. Florida $7,206.48
8. Wisconsin $7,134.04
9. Pennsylvania $7,123.71
10. Texas $7,047.92

What the numbers don't tell you

It's important to understand that these numbers don't tell what you're getting for your money, which can vary substantially. "The numbers don't capture the difference in benefits from state to state or from small to large company," says Jessica Vistnes, a senior economist at the federal AHRQ. Among the variables she says can influence a state's health-insurance costs:

Age of the population.
Occupational risk levels.
Prevailing cost of medical care.
Mix of plan types. (States in which HMOs are popular generally will have lower rates than those dominated by fee-for-service plans, which give the insured maximum choice. That's why California, where HMOs are popular, ranks among the least-expensive states.)
The level of state-required benefits.

If cost isn't the only criterion you care about, plan on spending some time learning what you can expect in the way of coverage in the different states you're considering.

Still, Congress needs to allow small businesses to band together across state lines in association health plans (AHPs), which would lead to larger risk pools and lower premiums. Until then, small businesses will need every edge they can get in the fight to cut health-insurance costs. Playing the geography game is one of them.