Health and Disability Insurance
Insurance Options for the Health of Your Business
Health and disability insurance for employees is one of the greatest challenges many small businesses face. As business owners know, group health insurance is a powerful benefit for recruiting and retaining the best workers. Cost and availability are the key issues.
Types of Health Insurance Coverage
There are several types of health insurance available for purchase within a group plan. Plans typically cover a comprehensive array of healthcare needs including doctor visits, prescription drugs and hospital care. Benefits are delivered in a variety of ways including:
- Indemnity plan – This major medical plan typically carries a deductible – an amount the insured must pay before the insurance company begins paying benefits. After covered expenses exceed the deductible amount, benefits usually are paid as a percent of actual expenses. These plans usually provide the most flexibility in choosing where and from whom the insured can receive care.
- Health Maintenance Organization (HMO) – This plan typically requires the insured to choose a primary care physician (PCP) from an approved list of network providers. The PCP is responsible for all healthcare decisions. If a patient needs care from a different healthcare provider, he or she must get a referral from the PCP. Medical treatment by out-of-network providers may not be covered by the HMO at all, or may be covered at a reduced level.
- Preferred Provider Organization (PPO) – In this plan, the insurance company enters into contracts with selected hospitals and doctors to furnish services at a discounted rate. As a member of a PPO, if you choose to receive care from a doctor or hospital not listed as a preferred provider, you will likely pay a higher deductible or co-payment.
- Exclusive Provider Organization (EPO) – This plan is similar to a PPO, but more restrictive. The insured must only use providers from the specified network of physicians and hospitals to receive coverage. Typically, except for emergency situations, there is no coverage for care received from a non-network provider.
- Point of Service (POS) plan – The POS plan is a hybrid of the PPO and HMO models. The plan is more flexible than HMOs, but does require the insured to select a PCP. Like a PPO, employees may choose to receive care from an out-of-network provider and pay additional costs out of pocket. However, if a PCP refers the employee to an out-of-network doctor, the POS provider will likely cover the care.
Health Savings and Spending Accounts
Small businesses also may offer special health savings and spending accounts to help employees offset out-of-pocket medical costs.
- Health Flexible Spending Accounts (FSA). A Health FSA allows an employee to set aside a portion of earnings for qualified medical expenses. Money is deducted from an employee's pay before payroll taxes. Under new terms of the Patient Protection and Affordable Care Act (ACA), employees can carryover up to $500 in the account into the following year – you no longer forfeit funds not spent by year-end.
- Health Savings Accounts (HSA) with High-Deductible Health Plans (HDHP). An HAS allows employees to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. To open an HSA, the employee must be covered by a High Deductible Health Plan (HDHP). Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is a less expensive health insurance plan that does not pay for the first several thousand dollars or more of healthcare expenses, i.e., the deductible, but covers health expenses after that.
Today’s business owner can choose from a wide variety of options when purchasing group health insurance:
- Individual Health Insurance. A relatively simple solution for small businesses is to direct employees to their state’s health insurance marketplace or healthcare.gov to purchase individual health insurance. Eligible employees can access information about premium discounts and tax credits online. Employers may choose to offer a defined contribution allowance to reimburse employees for the unsubsidized portion of their premiums. This approach allows small businesses to offer health insurance as a benefit at whatever contribution the business can afford.
- Private Health Exchange. Another type of defined contribution is the Private Health Exchange. These exchanges let small businesses offer employees a set financial contribution to use towards a set menu of plan options. Private exchanges offer insurance plans for individuals or groups.
- SHOP Marketplace. The Small Business Health Options Program or SHOP Marketplaces are new state- or federally-run health insurance exchanges designed specifically for small businesses. Marketplaces offer group health plans for employers of 50 or fewer employees who meet certain requirements. Businesses with fewer than 25 employees who purchase insurance through a Marketplace may be eligible for special tax credits.
- Health Insurance Cooperative (Co-Op). Health insurance co-ops promise small businesses the opportunity to increase their buying power by spreading health risks across a larger base. Each co-op is structured differently. A co-op’s competitiveness versus purchasing insurance on the open market or through a Marketplace depends on regional insurance laws and the co-op itself.
- Private Group Insurance. Small businesses can still purchase group health insurance directly from an agent or broker. Businesses may choose this option to access more choices and carriers than the state Marketplace provides.
No matter which option you choose, remember small business group health benefits can vary. And premiums differ from state to state. Use online marketplaces to compare and contrast.
Group Health Insurance Tips and Considerations
- Group health plans typically are required to treat all eligible employees equally regardless of individual health.
- In some states, there are legal limits on the amount an insurer can raise the premium when a health policy is renewed (e.g., a maximum of 15 percent per year due to claims experience).
Compare the costs of equivalent coverage from several insurers to be sure you get the best deal for your business.
- Ask about premium cost increases over the past 5 years.
- Talk to other small business owners to find out about their experiences with different kinds of health plans and insurers.
- Before you decide, ask lots questions. If you’re not getting the answers you need from one insurer, contact others.
- Choose the right coverage for your team. For example, if most of your staff is young, married and planning children soon, pregnancy-related coverage will be extremely important.
- Pay close attention to the type of health plan you select. HMOs are typically less expensive than PPOs; both often are less expensive than indemnity plans.
- Specific benefits levels also affect costs. For example, higher deductibles typically equate to lower premiums. Similarly, choosing a higher co-payment – the out-of-pocket amount the employee must pay towards a doctor visit or medical services – can reduce premiums.
- Pay attention to coverage limits. Lifetime medical is the maximum amount your insurance provider will cover per individual over the course of his or her life. Some medical plans also have a maximum out-of-pocket limit the employee can expect to pay for healthcare in each calendar year. Once the limit is reached, the insurance company typically will cover all costs at 100 percent.
- Many group health plans include prescription drug, dental, vision and other benefits for a small additional cost.
- Educate your employees. The more they know about how premiums are shared between them and the company, and exactly what is and is not covered, the better you can manage costs. Be sure employees understand any pre-admission provisions in your plan. And especially for complicated procedures, encourage employees to ask doctors about fees up front, and not to be afraid to seek a second opinion.
- Encourage employees to engage in healthy habits. Provide information about exercise, weight loss, smoking cessation, etc.
- Make sure you understand insurance portability laws where you live. The Federal Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers with 20 or more employees to offer their employees (and their dependents) the option to continue membership in your group plan at their own expense after they leave their job.
- Be wary of health discount cards that offer reduced fees for doctor visits or other medical services. These cards are NOT health insurance plans, and are therefore not regulated by the state insurance department. If you have questions, contact your state insurance commissioner.
Disability Insurance: A Can’t-Ignore Topic for the Small Business Owner
When your livelihood depends on a few key people, making sure you have the resources to keep the business running in the event of a personal mishap is a must. Disability insurance is designed to replace income or other expenses if you or your employees are unable to work for an extended period of time due to a physical or mental illness or injury. Like other insurance, small businesses typically can save money by purchasing disability coverage within a group policy.
There are two types of disability insurance:
- Short-term disability insurance covers a portion of the policyholder’s salary for a short period, typically three to six months following a disability. The specific time period and percent of income replaced vary. According to the Small Business Administration (SBA), employers may specify a number of days of sick leave to be paid at 100 percent of salary. Employees can use specified sick days before short-term disability begins.
- Long-term disability insurance coverage typically begins after the policyholder is unable to work for at least six months. Coverage can extend for a specified number of years or until the insured retires or reaches age 65 depending on the policy.
Note that most states require employers to purchase workers’ compensation insurance, not disability insurance to protect employees injured on the job.
Disability Insurance Tips and Considerations
- If you choose to offer disability insurance to employees, be sure you understand all the implications. Regardless of who pays the premium, group disability insurance rates generally are less expensive than individual policies. If the employer pays the premium, benefits payout could be taxable to the employee. Benefits from disability coverage paid by the employee typically are tax-free.
- When a group disability policy that covers all employees is not an option, some small businesses choose to purchase individual coverage only on key employees. Since the company pays the premiums and is listed as beneficiary, if a key person is disabled the company can use insurance payouts to cover related costs until the employee can return to work or a replacement can be hired.
- For one or two-person companies, another option may be to add a business overhead insurance rider, or amendment to a personal disability policy. This type of provision covers standard business expenses such as payroll, utilities, rent, etc., while the business owner recovers from a disability. Note that most overhead insurance does not cover the business owner’s salary.
- Companies also may offer voluntary, employee-paid disability coverage via payroll deduction.