Like most small-business owners, Allison KimCzerniak looked at ways to keep costs down when she opened her Alliway boutique shop last fall. One thing she wanted to avoid was the high cost of providing healthcare insurance to her employees so she made the tough decision not to hire anyone on a full-time basis.

Kim-Czerniak is just one of hundreds of small-business owners who have to deal with the rising healthcare costs. Hawai'i law requires that employers provide health insurance to employees who work at least 20 hours a week, and as the cost of health premiums goes up, so does the burden on small businesses.

"I'm from California, and it's completely different there than it is here," Kim-Czerniak said. "When I heard about the 20-hour requirement, I was flabbergasted. I couldn't believe it. I don't see how small businesses can make it because I think that's pretty crazy."

Hawai'i is the only state that mandates employer-provided health insurance. Under the Prepaid Health Care Act of 1974, an employee's share of the costs is capped at 1.5 percent of his or her gross salary or 50 percent of the premium cost, whichever is less.

At the time the law was enacted, premiums were at a level where employees and employers were sharing the costs equally. But with rates increasing each year, employers have seen their share jump to nearly 100 percent because of the 1.5 percent limit.

While mandatory health insurance is a tremendous benefit to workers — Hawai'i has one of the lowest uninsured rates in the nation at just below 9 percent — it has had a detrimental effect on businesses already saddled with high rent, taxes and other costs.

"It does automatically increase the cost of doing business in Hawai'i since it adds such a high percentage to the cost of having employees," said Jane Sawyer, spokeswoman for the U.S. Small Business Administration's Hawai'i district office.

STAFFING CONSEQUENCES

Sawyer said many business owners are backed into a corner and have to resort to staffing limits like Kim-Czerniak to survive.

"They may have more part-timers, may pay less wages in an attempt to control costs, so in many ways it puts an automatic limit on what a lot of small businesses are able to do," Sawyer said.

Kim-Czerniak said having just four part-time employees means she and her husband have to spend more time at their Ward Warehouse store.

"I definitely look at the possibility of not being well-staffed at times because of this problem because I don't have a manager per se who works so many hours for me," she said.

Although businesses large and small complain about paying the lion's share of costs, not much can be done to change that.

At about the same time that the Prepaid Health Care Act was being passed, Congress also was approving the Employee Retirement Income Security Act, or ERISA. The federal law prohibits states from implementing laws dealing with employee benefits, but Congress granted Hawai'i an exemption from ERISA and allowed the state to proceed with its own program.

Because of the exemption, the state isn't allowed to amend the terms of the Prepaid Health Care Act.

STATE'S HANDS TIED

State insurance commissioner J.P. Schmidt said the state law is more than 30 years old and needs to be adjusted because of "problems and things that don't quite work right." But he said the state's hands are tied when it comes to changing any portion of the law that could help businesses that see a greater proportion of their costs going to health insurance.

"There are some states that have 26 percent of their residents that don't have insurance, so that's been a benefit. On the other hand it does place a fairly heavy burden on all business, particularly small businesses," Schmidt said.

Schmidt said the National Association of Insurance Commissioners has proposed a bill in Congress that would grant states exemptions from ERISA and allow them to enact their own laws. He said an exemption would be the best approach to dealing with the healthcare crisis.

"States will try different things and we'll see what works," he said. "We allow the states to be the laboratories to come up with solutions to some of these difficult problems."

Tim Lyons, executive director of the Hawai'i Business League, agrees that business owners should be given more flexibility in how they divide up the benefits pie. He said not all employees, particularly younger workers, favor having medical coverage over higher pay.

Lyons said a "cafeteria-style" approach where workers can choose their own perks would work better because it would offer them things such as child care, long-term insurance, life insurance and dental and vision coverage.

"One of the drawbacks of having a mandate is that you're mandating benefits whether you want it or need it," Lyons said.

He added that in some cases employees suffer because businesses have stopped offering extended family plans as part of their basic benefits package.

WHAT EMPLOYERS CAN DO

Schmidt said there are ways companies can reduce health insurance costs, and that's by shopping around for the best rates and implementing programs to improve the health of workers.

"Preventive actions always cost less and result in significant savings over dealing with the problem after the fact," Schmidt said.

With health insurance unavoidable, business owners are encouraged to do a better job of promoting health insurance as a valuable perk, rather than just the wage aspect of a job.

At King Food Service in Waipahu, all 45 employees, even part-timers, have their benefits covered by the company. Dana Chun, company president, said that averages to about $800 for a family plan and $300 for an individual plan for part-time workers.

"We've always looked at our employees as more than just employees. They're your friends and neighbors and it's a tighter group versus a larger corporation," Chun said.

He acknowledged, however, that there are limits to which the company is willing to pay for health insurance. If premiums exceed a set amount in one year, workers will be assessed the difference, although Chun said he couldn't recall if that policy has ever been implemented.

He also said there has been talk about doing away with the company's practice of covering 100 percent of the premiums.

"Sometimes you wonder why you did it. You keep looking at the prices of healthcare and it just keeps going up and up and up and you sort of tied yourself to a rampaging bull," Chun said. "Our employees mean a lot to us and we're doing whatever we can at this point, but time will tell whether or not we're able to continue doing this."

A CONTINGENCY PLAN

At Koga Engineering, where there is a mix of unionized and nonunion workers, 80 percent of the costs are for the union workers. Health insurance payments account for 18 percent of a union worker's annual base pay, while 12 percent of a salaried worker's pay is for health insurance, said Glenn Nohara, Koga Engineering president.

Nohara said Koga is able to keep costs down because it is a member of the General Contractors Association, which negotiates as a group with healthcare providers. That allows the cost to be spread across a large group, thus keeping rates manageable.

Nohara said before paying into the association's health and welfare trust funds Koga's insurance rates were about 12 percent higher. He said it can't really control insurance costs for Koga's salaried employees, who are covered 100 percent by the company.

Like Chun, Nohara said there have been times when the company has thought about reconsidering its benefits program.

"That comes up every so many years, especially when the economy's down," Nohara said. "We always have to have a contingency plan in case the economy tanks and we need to cut costs. We would look at those things first as far as co-paying the insurance before we have to lay off people."

Reach Curtis Lum at culum@honoluluadvertiser.com.