Startups and Small Businesses
Complete Health Insurance Guide
Small business health insurance is complicated and costly. Learn everything you need to know about health insurance to make more informed decisions and save money.
Startups and Small Businesses
Complete Health Insurance Guide
Small business health insurance is complicated and costly. Learn everything you need to know about health insurance to make more informed decisions and save money.
Business health insurance can be complicated and costly, but it is absolutely necessary. It’s the most requested employee benefit and can help your company attract and retain top talent.
Offering your employees health benefits is a great way to show them you are investing in their health and well-being. Employees tend to take better care of themselves when they have insurance, and healthier and happier employees are more productive. It’s a win-win.
Unless you live and breathe health insurance, you likely have a question or two about how it applies to businesses and what it all means. Learn everything you need to know about health insurance for startups and small businesses in our helpful FAQ guide so you can make the most informed decisions.
Startups and small businesses are not required to offer health insurance, but depending on your business’s size, you could face fines if you don’t. Companies with fewer than 50 full-time equivalent (FTE) employees are exempt from the Affordable Care Act’s employer mandate.
The government requires businesses with 50 or more FTEs during the preceding calendar year to offer minimum essential coverage that is “affordable” and provides at least the “minimum value” to their FTEs and their dependents. Otherwise, you’ll pay a fine to the IRS. These fines are called the “employer shared responsibility” or the “employer mandate.” Fine amounts are slightly complicated to calculate, but they could range from $2,000 – $3,000 per employee. To learn the details, visit the IRS website.
Health insurance benefits are hugely popular. America’s Health Insurance Plan (AHIP) reported in their survey findings that 46% of respondents said health insurance was either the deciding factor or a positive influence in choosing their current job. For those already employed, 56% of employees said employer-provided health coverage is a key factor in whether they stay or leave their job.
While startups and small businesses don’t have to offer benefits, those who do tend to attract and retain more employees, giving the company a competitive advantage. This holds true even more so for top talent and higher-level employees who often have multiple offers or know they can easily find another job.
If a small business has fewer than 25 employees and provides health insurance, it may qualify for a small business tax credit of up to 50% to help offset those insurance costs. In addition, unlike salaries, the cost of health insurance is not subject to payroll and income taxes, even though it is considered a form of compensation. You benefit from being able to offer employees an attractive compensation package while reducing your taxes. Your employees can also write off their healthcare premiums, giving them a tax break as well.
Of course, you want your employees to be healthy and happy, but did you know that healthy, happy employees are more productive? Many companies prioritize engagement and wellness to promote a better workforce culture, greater employee satisfaction and productivity, and increased profitability. Employees who utilize their benefits also tend to take fewer employee sick days. Here are a few stats that may get your attention:
Without health insurance, many people don’t go to the doctor or take their children to doctors unless it is critical. They are less likely to go for preventative checkups and treatments, as well. This can lead to more and worsening conditions that cause employees to miss work or work while ill. All of these factors can bring down the morale of the whole team.
By offering healthcare benefits, you support your employees and their families in taking care of themselves. In turn, they are happier and able to perform better on the job.
The first step is to determine what you want in business health insurance – the plan type, what your business can afford, how much risk you want to take on, and how much administrative support you will need. Talking with your employees will help you figure out what they want, helping you pinpoint the type of plan that is best for your company.
Step two is to choose your plan. “Employer-sponsored” is the highest-level classification. It includes “fully-funded” plans, as well as a subset called “self-funded” plans. These plans are distinct from individual plans where people secure their own coverage instead of through their employer.
HMOs, PPOs, and POSs (the differences between these types are below) are types of networks that can be utilized regardless of how a plan is funded. Fully-funded plans are typically more expensive and limited for small businesses, but they reduce your risk and take care of the plan’s administrative duties.
Alternatively, you can choose a self-funded or level-funded health plan. Small businesses can save money with these plans while gaining greater plan flexibility. No matter which type of plan you choose, make sure you are comfortable with the cost-sharing contributions for employee premiums you choose.
Step 3 is to shop providers. Talk with each candidate to learn more about their pricing model, coverage and deductibles, what you and/or your employees will be responsible for. Make sure you understand whether they have an “in-network” policy or “open/all-access policy.” Support can vary from provider to provider, so find out the level of support they provide. Finally, ask about other health benefits that may be included, such as telehealth and mental health coverage, maternity care, and administrative tools.
It is up to you as to what types of coverage you want to provide. The Affordable Care Act does not require coverage beyond basic medical. However, keep in mind that many companies offer their employees health benefits that include medical, dental, and vision benefits.
Dental and vision insurance are relatively inexpensive, and providing your employees with comprehensive preventative care makes sense. Did you know that undetected mouth and vision issues can lead to serious health conditions? Certain mouth and eye conditions provide doctors with early clues about chronic issues, such as diabetes, high blood pressure, and heart disease? The longer your employees wait to seek medical care, the more likely medical costs will increase.
With a fully-funded health plan, the employer will pay a monthly premium to the health insurance company (also known as the “carrier”). The carrier will cover the cost of the employees’ healthcare, no matter how many or few claims employees make or how expensive those claims are. You have no risk if claims are excessive.
You will also know the plan’s exact cost each year, making it easier to budget with fewer surprises. There are a few downsides, too. One is that your rates will change from year to year, and you have no control over what the carrier will charge. They base their rate calculations on how much they spent on your employees’ claims the prior year, as well as market influences, healthcare costs, and administrative costs.
Other disadvantages are that you pay the same to the insurance company whether your employees used their benefits or not, potentially resulting in wasted spend. Fully-insured plans are also mostly one-size-fits-all and not customized to your needs. Additionally, fully-funded health plan carriers do not give you access to member data, preventing you from understanding your healthcare costs or implementing measures to reduce costs. And finally, fully-funded plans charge you a large premium for taking on the risk of being on the hook for claims that exceed your premiums.
In a self-funded health plan, the employer pays employees’ health claims as they occur instead of paying a predetermined premium. The employer typically sets aside money collected from company funds and employees to cover these costs.
If your employees don’t have claims, you don’t pay anything. Alternatively, if you have a lot of claims or expensive claims, your costs can quickly escalate. If employee claims exceed your earmarked budget, “stop-loss” insurance will cover the rest.
Self-funded plans are generally more appropriate for larger businesses, and the stop-loss insurance comes in at a higher threshold than it does in level-funded plans. No matter their size, most companies opt to hire a third-party administrator (TPA) to manage the claims. Self-funded plans are more customizable to the needs of employees.
Level-funded health plans are a type of self-funded health plan. Level-funded health plans combine the cost predictability of a fully-funded plan with the potential cost savings of a self-funded plan. They also reduce your risk of having to pay unexpected high fees.
With a level-funded health plan, the employer pays a monthly fixed amount to a third-party administrator or insurance carrier to cover both the employee claims and the administrative costs to manage the claims on your behalf. There is a cap on how much you have to pay.
If claims end up being low, the carrier will reimburse you at the end of the year. If claims are high and go over your cap, then your carrier’s stop-loss insurance will cover the overage. Level-funded plans are becoming increasingly popular for small businesses as the stop-loss coverage kicks in at a lower level than it does with most self-funded plans.
Most people are familiar with traditional health insurance plans (aka “fully-funded health plans”) that offer HMOs and/or PPOs. There are other types of health plans, as well. First, let’s start with the HMO.
HMO stands for “Health Maintenance Organization.” According to HealthCare.gov, an HMO is “a type of health insurance plan that usually limits coverage to care from doctors who work for or contract with the HMO. It generally won’t cover any out-of-network care except in an emergency. An HMO may require you to live or work in its service area to be eligible for coverage.”
HMOs are typically the least expensive plan type because of their limitations, both in monthly premiums and out-of-pocket costs with no deductibles. Employees have to pay the entire cost of medical services for out-of-network providers. HMOs also require referrals from primary care providers before a patient can see an in-network specialist. Employees who already have providers may have to choose a different provider if they are not in the HMO’s network.
A PPO is a Preferred Provider Organization. HealthCare.gov defines a PPO as “a health plan that contracts with medical providers, such as hospitals and doctors, to create a network of participating providers. You pay less if you use providers that belong to the plan’s network. You can use doctors, hospitals, and providers outside of the network for an additional cost.”
PPOs are more flexible than an HMO, allowing employees to see both in-network and out-of-network providers, but employees will pay higher deductibles and copays to do so. They also do not require referrals to see specialists. Once employees meet their annual deductible, the PPO begins sharing the cost, covering a portion of the claim. This is called “coinsurance.”
A POS is a Point of Service plan. HealthCare.gov says it is “a type of plan in which you pay less if you use doctors, hospitals, and other health care providers that belong to the plan’s network. POS plans also require you to get a referral from your primary doctor to see a specialist.”
As you can see, a POS is a hybrid of an HMO (with the referral requirement) and a PPO (with the ability to choose your own doctor at a higher price). But there is a difference with a POS.
Unlike a PPO, a POS plan typically does not have a deductible as long as the employee chooses a primary care provider within the network and gets referrals to see specialists. For out-of-network care, the POS plan may offer coinsurance.
An EPO stands for “Exclusive Provider Organization.” HealthCare.gov defines it as “a managed care plan where services are covered only if you go to doctors, specialists, or hospitals in the plan’s network (except in an emergency).”
Like a POS plan, an EPO plan is a sort of hybrid HMO/PPO plan, but in the opposite way. Employees do not need a referral (as with a PPO), but they are responsible for paying out-of-pocket to see an out-of-network provider (as with an HMO).
Employees will have a deductible and copay, and once the deductible is met, coinsurance kicks in to share in the costs.
“In-network” is a term that refers to a health insurance plan that limits its members to choosing medical providers who are in the plan’s network to receive coverage. Insurance carriers with an in-network provision have contracted with providers to provide health services to their members at a pre-negotiated rate.
In general, providers can set their own fees for appointments and procedures. For insurance providers to keep their costs in check, they focus on contracting with providers who agree to keep their fees within the limits that the carrier deems reasonable. By doing so, the carrier reduces their costs, the plan’s cost, and the cost to the member.
The downside of these networks is that your employees must either choose an in-network provider in their plan or pay out-of-pocket to see a provider out of the carrier’s network. If they want to reduce their cost, they will have to leave any existing out-of-network providers and go to only in-network providers, including specialists.
Not all health plans require providers to be in-network. HMOs and EPOs require members to use in-network providers if they want their plan to cover costs. Employees will have to pay out-of-pocket to any out-of-network providers. They will also need a referral from their primary care physician to see any out-of-network specialist.
PPOs and POSs allow members to choose their providers, even if they are out-of-network. However, your employees will likely pay a higher deductible and copay to do so. With a POS plan, members will still have to get a referral from their primary care physician to see an in-network specialist.
All-Access plans, like Sana’s, do not require providers to be in-network, and members will not have to pay higher rates to see their chosen providers.
An open access network (or open access plan) can be part of a health insurance plan. If a plan has an open access network, employees can see the healthcare providers they choose instead of being limited to “in-network” providers to receive claims coverage. In an open access network, employees do not need referrals from a primary care physician to see a specialist.
HMO plans with open access networks will allow employees to see in-network specialists without a referral, but they will not cover out-of-network providers. PPO plans with open access networks enable employees to see out-of-network providers, as well as specialists without a referral. Still, your employees will spend more on deductibles and premiums for this flexibility.
While having an open access network provides more flexibility, it can be expensive for your company and your employees. People want to see the doctors of their choosing, but many can’t or don’t want to pay for that privilege.
As an alternative, Sana offers only All-Access Plans, enabling employees to see any provider they wish – without a referral, increased deductibles or premiums, or additional fees. Employees are free to choose whichever physician fits their needs, and Sana will negotiate pricing with that provider.
A PEO is a Professional Employer Organization. PEOs typically offer payroll services, benefits administration, and compliance and tax support.
In the PEO model, your small business’s employees technically become employees of the PEO. The insurance rates you get from that PEO are the blended rate of all the different customers that the PEO has in your insurance group. If you have a low-risk group, you’re unlikely to see the benefits of that, because you’re getting the same blended rate as all the companies in your group.
With Sana, we quote each company based only on their own employees. The rates you get are the rates your company deserves based on its risk profile.
Another thing to consider is that the PEO model generally sells plans from legacy carriers like Aetna, Cigna, etc. Those plans will have the same advantages and disadvantages as the ones we mentioned above in the “fully-funded health plan” section.
While the carrier will cover the cost of the employees’ healthcare, and you will know the exact cost of the plan every year, you will pay the same premium even if your claims were low. Plans are limited and rates will change from year to year without your control. The lack of transparency makes it challenging to understand the reasons behind the rate increase.
Some health plans are customizable; however, most of the larger companies’ plans are less flexible than self-funded and level-funded health plans, particularly for small businesses.
With a self-funded or level-funded health plan, you can choose the type of health plans you want to offer your employees. For instance, you can choose to provide medical, dental, and vision coverage. You can also choose between the types of plans, giving your employees a choice between less-expensive HMOs and EPOs or less restricted PPOs and POSs.
There are also differences in what carriers may offer with their plans, such as telehealth, expanded mental health coverage and maternity care, discounts for wellness apps, and health savings accounts (HSAs).
Ask your employees what type of health plan they prefer, and you will inevitably get all kinds of answers. That’s because your employees are unique and have varying needs. While cost is always an issue, each employee will want to consider the type of coverage and flexibility in choosing their own doctors.
It is a good idea to give your employees a range of options that span the spectrum of both cost and coverage. Some may prefer a high-deductible plan with a higher out-of-pocket max because they don’t visit doctors often. Others may need more coverage. Employees can change their plan every year during Open Enrollment, allowing them to align their plan with their most current requirements.
While your employees will value health insurance benefits, none have to sign up and some will choose not to. You should offer it to all of your full-time employees, but you can expect some of your employees will decline coverage.
Typically, the primary reason they won’t participate is that they are already covered under their spouse’s or parent’s health plans. You may also have employees who prefer to purchase individual health insurance on the open market, although it is unlikely they will find a less expensive plan this way, and they will miss out on being able to deduct their premiums from their taxes. Because employers share in the cost of a plan, employer-provided health care is usually less expensive than individual insurance.
Just because an employee declines to participate one year doesn’t necessarily mean they will never want to enroll. If they have a change in status (called a “Qualifying Life Event” in insurance speak), such as losing their current coverage, getting married, or having children, they may choose to enroll at that time. They do not have to wait until the next Open Enrollment if there is a Qualifying Life Event. If there isn’t a Qualifying Life Event, they must wait until the next Open Enrollment Period to sign up.
Alternatively, you may have employees who choose to drop their coverage under your company’s plan. They can do so at any time if your company is not having their premium contributions deducted pre-tax. If they are, they must wait until Open Enrollment or a Qualifying Life Event.
Your employees always have the option of purchasing health insurance on the open market; however, if they sign up for health insurance benefits with your company, they can enroll when they are hired or during the regular Open Enrollment period.
It is up to your company to educate your employees on their health benefits and when they can sign up. Your company can choose the length of your Open Enrollment period, typically two to four weeks before the carrier requires all forms to be submitted.
SHRM suggests the following advice for companies to help their employees understand their benefits options. Specifically, tell them to:
Once your employees are ready, they can complete the paperwork provided by the carrier. The carrier will determine the date that coverage begins.
Your company’s health insurance plan may or may not automatically renew, but it’s better to set it up not to automatically renew. Before the plan is set to expire, ask your carrier to send you updated plan information.
Prices and coverage may change from year to year, and it is essential that you and your employees know about those changes before you sign on the dotted line. You may decide to change plan types, modify employer cost-sharing contributions, or switch carriers. Your employees will want to see if their costs and converge changes, too. They need time to review the changes, assess their current and future healthcare needs, and adjust their plan accordingly.
Your health insurance plan cost and terms can change each year, particularly if you choose a fully-funded plan through a traditional carrier. Remember that when the carrier takes on all of the risk, they will try to reduce their risk exposure every year. They can do that by changing their terms and/or their pricing. This makes it challenging for small businesses to budget from year to year.
For pricing, traditional carriers calculate how much your plan cost them the previous year and combine that with market and health cost changes to determine what they are comfortable with charging you the following year. Any plan changes you request are also calculated into the quote.
If this is your company’s first time purchasing health insurance for your employees, the carrier will offer you a quote based on your answers to questions about your company and your employees. Most carriers will require employees to fill out medical questionnaires as part of the process, though Sana has eliminated that part of the process. Carriers will estimate their risk, calculate any plan changes you request, and then provide you with a price.
The most stable type of plan is the level-funded plan, because it places a cap on your costs and then stop-loss insurance kicks in to cover the rest. You will know from year to year exactly what your plan cost will be.
Of course, the first thing most small businesses and startups want to know is how much health insurance will cost them. Plans vary widely in cost and you likely have a budget in mind, but cost is not the only factor to consider. You should consider risk, plan flexibility and customization, plan options, plan extras, and administrative support to see which plan delivers the most overall value to your business and your employees.
Look at all of the pros and cons for each plan. For instance, a pro for a traditional plan is that your company is only responsible for a set premium, and if your claims are high, the carrier will cover the overage, not you. Your risk is low. But the cons to this is that you pay the set premium whether your claims are low, too. That means you could end up paying more than what your claims totaled, wasting money.
On the other hand, with a level-funded plan, you have a cap on your total out-of-pocket expenses. Stop-loss insurance kicks in to pay claims overages, or you receive a reimbursement for any overages you paid. Either way, you are only paying for what was used. Nothing more. Nothing less. A con to a level-funded plan is that you are responsible for plan administration; however, TPAs can pick up the slack for you. Alternatively, some plans include administration into the cost of the plan.
The key is to prioritize what’s most important and what you are willing to pay to get what you and your employees want. You may want to perform this cost-benefit analysis annually.
Beyond comparing health insurance plans, you should also do a side-by-side with insurance companies to see which ones you can trust are focused on your best interests. For instance, which ones will:
Just because a carrier is big or well-known doesn’t mean they are the best. Look at all of your options, and do your homework. One size doesn’t fit all, and this is your opportunity to think out of the box to find a health insurance plan that truly fits your needs.
Unfortunately, not all traditional carriers put much effort into guiding and supporting their clients. Sana provides businesses with an account manager and a member advocate team who are there to answer your questions, help with onboarding and paperwork, and walk you through different steps and technology.
They may also provide helpful online tools that put everything into layman’s terms so you and your employees can more easily understand the world of health insurance, as well as details about plans, benefits, enrollment, coverage, and billing. Talk with each insurance company as you are evaluating carriers to see what they provide.
Telehealth coverage is a hot topic these days with COVID-19. Many insurance carriers have expanded their telehealth coverage, changing their policies and reimbursements to follow federal mandates. There is no consensus yet as to whether these changes will be permanent or if they will expire once the pandemic is over.
One thing we do know is that telehealth has been widely adopted by both providers and patients who see its benefit. Telehealth claims increased 3,060% nationally from October 2019 to October 2020. Convenience is a major factor, driving more people to opt for virtual appointments. We also discovered that many health issues can be managed well with telehealth, reducing costs while maintaining good (or even better) outcomes.
If telehealth coverage is important to your employees, be sure to talk with each carrier to determine whether they provide telehealth options and if coverage will be permanent. Be sure to ask about reimbursement levels and qualifying conditions. Some carriers limit the number of telehealth visits, how much they will pay, and which types of appointments are covered.
Most insurance plans cover prescriptions, but the types of drugs and how much members may pay ranges dramatically. Insurance companies often have a drug list called a “formulary.” These are the drugs the plan covers, and the out-of-pocket costs for each one. They break the drug list down into one of four tiers, with Tier 1 being the cheapest (usually generic drugs) and Tier 4 being the most expensive (usually newer drugs).
Insurance plans will cover all or a portion of a prescription. It all depends on which tier the drug is in, and carriers can differ in which medications they cover. An employee can ask for an exception if a drug they need is not covered, but they will need to have the prescribing doctor confirm that the medication is both medically necessary and other covered drugs have or will not be as effective.
One thing to understand about prescription drug costs is that each carrier utilizes their own Pharmacy Benefit Management (PBM) company that negotiates drug prices with drug manufacturers on behalf of the insurance company. PBMs are not required to reveal how they set their pricing, and PBMs can keep any rebates from drug manufacturers instead of passing them onto insurance carriers, who can then pass them onto members. This means members are stuck with higher prescription costs. Employers and employees have no way to understand what’s behind prescription drug costs, and patients often have to select a drug that may not be the best for them.
It is up to the insurance carrier to choose which PBM they use for Rx administration. Be sure to ask if they partner with a “transparent PBM” that shares data and passes through all discounts and rebates to the carrier, who can then pass along the cost savings to the patient. You and your employees can save a lot of money on prescription drugs and know why a drug costs what it does if your carrier uses a transparent PBM.
We hope our health insurance guide for startups and small businesses helped you understand more about business health insurance. Insurance is complicated and can come at a significant cost. Make sure you know your options. Of course, if you have more questions or would like to talk with an expert, we’d love to hear from you.
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