Your small to medium-sized business (SMB) is your life and your livelihood. The time and energy you put into your business rewards you with independence and satisfaction. But the nuts and bolts of being a small business owner extend far beyond the product your produce or the service you provide.
Whether you employ hundreds of staff members or work as a sole proprietor, healthcare coverage has become a responsibility for business owners. For many SMBs this is uncharted territory: but failing to understand the basics could create costly scenarios for you and your workers.
We unpack the ABCs of health insurance coverage to better help you understand what you’re buying, what it’s costing, and what some of the industry lingo means in plain language.
Healthcare insurance coverage
This overarching term can include medical, dental, and vision coverage for yourself and employees. The majority of businesses that do cover their staff members with healthcare insurance do so with medical insurance. Medical can cover everything from doctor and hospital visits, prescription drugs, and catastrophic care.
Depending on the plan you select, the amount of coverage available to you or your employees can increase or decrease, as will the cost. The more the plan offers (wellness checkups, lower copays, and deductibles) the higher the cost. The more basic the plan, the lower the cost to you and/or the staffer.
Some companies add to their healthcare coverage with dental and/or vision coverage and wellness programming. While these are attractive to employees, most businesses and employees prioritize medical coverage over any other plan.
Health insurance premium
Premiums are the amount you and/or your staff members pay on a monthly, quarterly, or annual basis to purchase coverage for medical, dental, and/or vision plans. For most businesses, a pro-rated payroll deduction is made with each employee’s paycheck to cover the cost of the plan for the year. Typically, an employer will make monthly payments to the plan/plan administrator to keep employee coverage current and paid to date.
Under many healthcare plans, as well as coverages under the Affordable Care Act, a deductible is required to be met before the carrier will begin to pay healthcare providers or services. This means the employee will have to pay out-of-pocket a pre-determined amount before their insurance will take over payments and/or reimbursements.
Some plans have generic deductibles that apply to any healthcare costs incurred during the plan year, while others have deductibles that are higher or lower for certain services.
Deductibles can be as low as $250 per year to as high as thousands of dollars annually. Typically, higher-end plans have a lower annual deductible, while less expensive plans have a higher annual deductible. When choosing a healthcare plan, businesses should balance how much out-of-pocket expenses will need to be met in order to get any benefit from the coverage.
At the same time, many healthcare plans have deductibles employees will have to pay before insurance will go into effect, there are out-of-pocket limits as well. This means there is a cap to how much an insured will have to spend of their own money, no matter what services were provided.
An out-of-pocket maximum can include copayments, deductibles, and coinsurance payments, but typically do not include premium costs. Once the employee has reached their out-of-pocket maximum, every other expense should be paid for by the insurance company.
The co-pay is a flat amount a covered employee will pay for specific services or products. The healthcare insurer sets predetermined co-pays for doctor visits, prescription drugs, emergency room visits, etc.
For some doctor visits, like specialists, co-pays can be higher than for primary care physicians. Clinic visits, for example, generally have a lower co-pay than for emergency room visits. These variances in co-pays steer employees to choose the least expensive option when the situation is not life-threatening.
Some plans use a co-insurance option rather than a co-pay for covered visits, products, and services. Instead of a flat rate determined ahead of time (like a $40 co-pay for every doctor visit) co-insurance is based on percentages.
Depending on the service or product provided, coinsurance can be as low as 10% of the overall charges billed to the employee but co-insurance percentages can go much higher. If the healthcare plan includes an annual deductible, co-insurance costs are payable after the deductible is met.
Health insurance providers often impose lifetime or annual limits of how much coverage they will provide to each insured employee. Some set a $1 million lifetime cap, others set limits on how much they will pay for specific services — like organ donations. Carriers can preset these limits for general care or for designated services or procedures.
Drug formulary or drug formulary lists are the lists of prescription drugs covered under a healthcare plan. These include the most common drugs like antibiotics, to advanced medicines used for chemotherapy, and beyond.
Insurance carriers create lists of drugs that are covered under their plan (most exclude experimental drugs) and how much they will pay for them. Many plans require employees to choose a generic equivalent of a drug, if available, over a name brand.
Drugs that are not on a healthcare formulary list are generally not covered under the plan. In some instances, doctors or employees can petition the insurance carrier to cover a drug not on their formulary list, but the process can be slow and isn’t guaranteed to get results.
The plan year is the period of time the insurance coverage is effective. Typically, following open enrollment, the plan year begins January 1 and ends December 31. For new employees, or employees who enroll mid-year the plan year is the calendar year beginning their first day of eligibility under the insurance plan through December 31.
There are 4 common types of private healthcare networks available in the U.S.:
Note: Under the Affordable Care Act other options are available through government programs. For private insurance, each of these has different costs and limitations.
Health Maintenance Organizations (HMO)
HMOs are the most common and one of the lowest cost options for private healthcare coverage. HMOs require employees to use the services of pre-selected providers, hospitals, and specialists within their network.
HMOs often provide more preventative care options (like annual wellness checkups) but may not cover out-of-network care. Employees choose a primary care physician (PCP) for their basic health needs and are usually required to be referred by that PCP for any specialist care.
Preferred Provider Organizations (PPO)
PPOs have a larger network of healthcare providers, specialists, and hospitals. They generally do not require referrals for specialists or services. In exchange for more healthcare options, PPOs generally have higher premium costs than HMOs.
Point of Service (POS)
POS plans are another low-cost option. In these plans, employees generally use the services of healthcare providers within a network, but they can also go outside the network for services at a higher cost. In many cases, out-of-network services will need to be paid for by the employee, who files their own claim with the insurance company for reimbursement.
Exclusive Provider Organization (EPO)
EPO plans limit the providers’ employees can use to only the doctors and hospitals within their specific network. With the exception of life-threatening emergency situations, no other coverage is provided unless it’s performed by a pre-determined EPO provider.
Primary care physician
Primary care physicians or PCPs are required for employees who enroll in HMOs and some EPO plans. The PCP essentially becomes the employee’s health manager for the plan year.
This physician (or nurse practitioner) is the employee’s resource for advice and referrals to specialists for additional care. It’s important for the employee to select a PCP and meet with them as soon as possible once they become eligible for coverage. This provider will be needed to provide any written referrals the employee needs during the plan year.
In-network and out-of-network
Depending on the type of healthcare plan chosen, in- or out-of-network designations can be critical to be covered or reimbursed for healthcare costs. HMO, POS, and EPO plans provide lists of doctors, specialists, hospitals and clinics that are in their network and covered under their plan. Any other service would not be paid for by the carrier unless it was a life-threatening emergency.
Most PPOs have such extensive networks they don’t offer lists. All employees should check with the provider to assure they are within their specific network, no matter what their plan, before scheduling an appointment.
Dependent care coverage means the spouse and children (biological, adopted, or step) of a covered employee. Employees cannot purchase coverage for their spouse or child without purchasing coverage for themselves. Some plan options include coverage for domestic partners and others include foster children, but these are generally more costly for the business and the employee.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that allows covered employees and/or their covered dependents who lose coverage under a healthcare plan to continue that coverage for a period of time, at their own expense.
Separated employees, retirees, spouses, ex-spouses, and dependents must be allowed access to insurance coverage through the employer plan and at group rates if they lose coverage for any reason. Generally, coverage is extended for up to 18 months but can go as high as 36 months in some instances.Companies must notify separated employees and their dependents who were covered under any plan about their rights under COBRA and provide sufficient time for the employee/dependent to make their premium payment(s).
Unpacking the basics of healthcare lingo can help small business and their employees better understand what they’re purchasing when it comes to healthcare coverage. The more you know about the plans available to you, the more you can get for your premium payments.