Figuring out small business health insurance can be daunting. We help you cut through the noise to understand what is right for your business.
As a progressive small business owner, you know the powerful role of health insurance in attracting and retaining qualified people. But the health insurance industry is a giant domain, which can be intimidating to small employers seeking group coverage.
How do you cut through the noise and make the right choice? It starts with knowing that every business is unique, so there’s no single best health insurance plan for all small businesses. Also, the rising cost of health insurance poses a tricky balancing act, where employers must provide health insurance that meets their employees’ needs while keeping their budget intact.
Below are some benchmarks and options to help you determine the best health insurance plan for your small business.
Most popular health insurance plans
A 2019 survey by SHRM reveals common employer-sponsored health insurance plans:
- Preferred Provider Organization (PPO) — 85%
- High Deductible Health Plan (HDHP) paired with a Health Savings Account (HSA) or a Health Reimbursement Account (HRA) — 59%
- Health Maintenance Organization (HMO) — 33%
- HDHP not paired with an HSA or HRA — 19%
- Point of Service (POS) — 18%
- Exclusive Provider Organization (EPO) — 8%
- Indemnity (fee-for-service) plan — 5%
With regards to the 2019 Kaiser Family Foundation survey of plans offered by all small firms (3 to 199 workers), the actual numbers differ from the SHRM survey. Still, both surveys show PPO, HMO, and HDHP plans in the top 3.
Here’s a graphic from the Kaiser survey:
Now, let’s examine the pros and cons of PPO, HMO, and HDHP plans.
- More flexibility for enrollees to see doctors within or outside of the network
- Enrollees do not need to choose a primary care doctor
- They also do not need a referral to see specialists, including out-of-network specialists
- Higher premiums and out-of-pocket costs
- Usually has deductibles
- Lower premiums and out-of-pocket costs than PPO
- Usually has no deductibles. If they do, the amount is typically lower than other plans
- Enrollees cannot see doctors outside of the network, except for medical emergencies or if the necessary care isn’t available within the network
- Enrollees must obtain referrals from their primary care doctor in order to see specialists
- Low premiums
- Similar benefits and coverage as HMOs and PPOs
- Can be combined with a tax-advantaged HSA or HRA
- Employers can contribute to the accompanying HSA or HRA
- Higher out-of-pocket costs, including deductibles
- Enrollees must pay for all healthcare costs until the high deductible is met
- Enrollees might end up delaying care because of high costs
Based on these comparisons:
- PPO may be best for employees who want access to both in-network and out-of-network providers and do not mind paying more for that privilege
- HMO may be best for employees who value cost over network flexibility or do not need specialist referrals often
- HPHP may be best for employees with limited healthcare expenses, or those who prefer to pay less upfront in monthly premiums and more out of pocket when they need care
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
An HRA is an employer-funded arrangement that reimburses employees for qualified medical expenses not covered by their group health plan. The QSEHRA is a type of HRA enacted in 2016 by Congress specifically for employers with fewer than 50 full-time equivalents (FTEs) employees and does not offer group health plans.
Through the QSEHRA, small employers can give their employees tax-free money to buy individual health insurance either on or off the ACA exchange. Similar to a traditional HRA, QSEHRA funds can be used to cover premiums and out-of-pocket expenses for medical, dental, vision, and other qualified care.
Many small employers view the QSEHRA as a viable alternative to providing group health insurance because it allows them to establish their own budget and eliminates much of the complexities that come with administering group health plans.
Also, small employers often have a tough time securing affordable group coverage on their own, and for many of them, the QSEHRA is a welcomed option.
Key elements of the QSEHRA:
- You must have fewer than 50 FTEs
- You cannot offer group health insurance, including medical, dental or vision
- For 2020, employers can contribute (tax-free) up to $5,250 for self-only coverage and up to $10,600 for family coverage
- The employee must submit proof of their qualified healthcare expenses in order to be reimbursed
- The QSEHRA benefit must be reported on each eligible employee’s Form W-2
Businesses with fewer than 50 FTEs may be eligible to purchase health insurance for their employees through the Small Business Health Options Program (SHOP). In some states, employers with up to 100 FTEs may qualify for SHOP insurance. Go to healthcare.gov to see if your small business qualifies for SHOP insurance, to compare SHOP plans and pricing, or to find a SHOP-registered broker or agent in your area.
SHOP generally has 4 levels of coverage:
How you and your insurance plan split costs
Note that eligibility requirements may vary by state so be sure to examine the requirements for your specific location. Also, you may qualify for a “Small Business Health Care Tax Credit” if you enroll in a SHOP plan and your business meets the criteria.
Evaluating your small business’ needs
How to determine the best health insurance plan for your small business is an intricate endeavor, as many components must be considered.
Some questions to ponder:
- How important is cost to you and your employees?
- What type of coverage is most crucial to your staff?
- Will coverage extend to spouses and/or dependents?
- How many employees are interested in joining the group health plan?
- How many employees already have coverage under their spouse or parent or an individual plan?
- How much cost-sharing can you contribute as the employer?
- Would your employees prefer to pay higher monthly premiums with a lower deductible, or vice versa?
- Which types of health benefits are most valuable to your employees?
- How will you obtain coverage? For instance, will you go directly through the insurance carrier or your state’s SHOP exchange; partner with another entity — such as an “association” — to fortify your buying power; or hire an insurance broker or agent?
To answer many of these questions, you’ll likely need to survey your employees. When seeking employee feedback, avoid infringing on their health privacy rights.
Along with choosing a health insurance plan, you must pick a structure for the plan. The most common structures are: fully insured and self-insured.
A fully-insured plan is the most traditional structure for employer-sponsored health insurance. In this case, you pay a premium directly to the insurer for the fully-insured plan. Your premium rates are established as a fixed amount for the year, and are billed monthly. Premiums can change according to your company size, employee health, and healthcare usage. (Note that the insurer’s profit is factored into your premium.)
Employees pay their share of the costs through copayments, deductibles, and other out-of-pocket expenses. The insurer is responsible for processing all claims from healthcare providers. On the plus side, the insurer shoulders the financial risk by paying the claims. A potential downside, however, is that the employer pays the same premium, regardless of healthcare usage. So, if your employees or their dependents hardly visit the doctor, you will not be reimbursed for the under-usage.
Smaller businesses tend to go with fully-insured plans because the insurer assumes the financial risks. However, small businesses seeking ways to control healthcare costs for the long-term might benefit from a self-insured plan.
With a self-insured plan, you secure your own health plan instead of buying a fully-insured plan from the insurer. Rather than paying a premium to the insurance company, you pay for each claim out of pocket as they arise. On the upside, you save on any profits the insurer would have included in your premium for a fully-insured plan. But since you’re responsible for paying all claims, you must have the cash flow to fulfill this obligation.
Also, employers with self-insured plans should be prepared for catastrophic and unpredictable losses. To mitigate this risk, some employers purchase stop-loss insurance, which relieves some of the liability caused by catastrophic or unpredictable medical claims.
Self-funded plans are more prevalent among large businesses on strong financial ground. Small employers with poor cash flow may want to pass on this option. But if your small business is in good financial standing and has a positive revenue outlook, then a self-insured plan may be more cost-effective in the long run.