Health Insurance

Health insurance is a major cost of being in business, and therefore, has been the top concern for small businesses for the past twenty years according to the National Federation of Independent Businesses.  Costs have risen significantly since 2000, and many small business owners have been forced to terminate employee health plans.  Percentages of employees being offered health benefits is falling annually by almost 5 percent. In Texas, more than 27 percent of the population under the age of 65 does not have health insurance. Because of the rising costs, small business owners must find alternative ways of obtaining health care plans.

Concerns of small business owners include deciding what kind of health insurance to obtain for themselves and their employees. Many small business owners are downsizing other areas of their companies to pay for health insurance, or just not offering it period. Approximately 60 percent of uninsured Americans are employed by small businesses according to the U.S. Chamber of Commerce. Owners are having an increasingly difficult time overcoming the rising cost associated with health care.  From the table inserted below we can see how from the given index, prices have risen 27.2 percent in the past 10 years.  However, hospital services have risen 74.9 percent in the same time period.  This is an extremely high increase above the rising cost associated with daily living.  Rising health care costs are directly correlated to the rising cost in health insurance.  One report suggests that in the United States the average small business owner’s policy has doubled in price since the year 1995. According to a study by the Actuarial Research Corporation only approximately 47% of small businesses with 10 or less employees actually offer health insurance plans to their employees. Price is obviously the major determining factor with small businesses because costs increase due to added administrative costs of the insurance company to maintain the health plans.  Not only do smaller companies have less money coming in, but it is more expensive to obtain the same coverage as a larger employer.  Small business owners should also be aware that the reason half of Americans file for bankruptcy is in part due to medical costs. The following table lists statistics about firm size and the cost of health insurance.

Small business owners are finding ways to combat these costs by obtaining insurance through some sort of group policy or trade organization. Additionally, Texas is helping uninsured citizens group together to decrease the burden of health insurance.

Certain steps should be followed when considering the purchase of health insurance. Companies should always begin by searching the wealth of information on the Internet. Small companies should become familiar with different options available to them so that the proper questions can be asked and answered later. Small business owners should also research their rights with health insurers. Employees should be surveyed to determine what type of coverage is most important to them and owners should use trustworthy contacts to collect referrals and references about different insurance agents. Only after preliminary research has been done should owners contact the agents for a consultation meeting. It is advisable to interview several agents to find one that best meets the needs of the company. Finally, review the options and choose the best insurer.

The state of Texas does not legally require small businesses (2-50 employees) to provide health insurance coverage for their employees. However, if small business employers choose to provide coverage for their employees, under Texas insurance law it is the business’ number of eligible employees that determine whether or not it is considered a small employer, not the total employees. A positive aspect of small employer status is that there are some percentage caps on annual rate increases and insurance companies cannot arbitrarily drop the plan. Coverage must be made available to all eligible full-time employees, their spouses, and dependents under the same conditions. Small business employers should be aware of four major laws that set forth the legal requirements and obligations of the employer. These laws are the Health Insurance Plan Portability and Accountability Act (HIPAA), Consolidated Omnibus Budget Reconciliation Act (COBRA), and Employee Retirement Income Security Act (ERISA).

HIPAA is a federal law that protects health insurance coverage for workers and their families when they change or lose their jobs. Although HIPAA is primarily concerned with privacy and security of patient information, it has provisions regarding coverage that are important for small business owners. This law limits restrictions that a group health plan can place on benefits for preexisting conditions. Group health plans may refuse to provide benefits relating to preexisting conditions for a period of 12 months after enrollment into the plan. In other words, if an employee with a preexisting condition is hired by a small business that provides coverage for its employees, then the employee would not be covered for that condition until the 12 month waiting period is over. The purpose of this rule is to protect insurance carriers from employees who purchase into the plan for the sole reason of needing serious treatment for preexisting conditions. HIPPA shields these carriers from an influx of employees who will excessively increase the cost of providing coverage. The law gives incentive to carriers to provide coverage for preexisting conditions because there is less chance that the employee will use the coverage benefits and then shortly quit thereafter.

COBRA deals with employees’ ability to continue their coverage after leaving the place of employment. This law generally applies to businesses with at least 20 employees and allows such employees to maintain the coverage after termination of employment. This is contingent on the employee or dependent to pay the full premium cost that their previous employer paid. Employees and dependents lose coverage if they fail to make timely payments of these premiums. COBRA does not apply to employees when the small business has decided to end the coverage plan altogether.

Some employers may choose to fund coverage for their employees out of their own pocket. This is called self-funding and requires employers to accept the legal responsibilities of a typical insurance carrier. Additionally, electing to self-fund leads to a lot of risk because it requires a great deal of resources. For these reasons, it would be rare for a small business owner to self-fund; however, it is still an option. Self-funded plans are subject to regulation by a broad piece of legislation called ERISA. HIPPA and COBRA are amendments of ERISA. This law is significant to small business owners who elect to self-fund because ERISA enforces the promise of lifetime coverage to their employees. One of the reasons the law was enacted is because of business owners who promised certain coverage benefits to their employees and then reneged on these promises. It is extremely important for small business owners to understand the implications of electing to self-fund before choosing to do so.

Along with understanding the laws associated with health care coverage, small business owners should be understand the different types of plans available. There are various types of health care plans to choose from when searching for coverage. These include HMOs, PPOs, POSs, and fee-for-service plans. Each of these plans differs in cost, coverage, and care. The previously mentioned plans fall into two basic categories: managed-care health plans, and indemnity or fee-for-service plans. In both types of plans, premiums for small employers are calculated using 5 criteria: age of employees, gender, number of plan participants, industry, and geographic area. Health care needs and an individual’s budget determines which type of health plan is best to obtain.

Managed-care health plans focus on preventive medical care and often cost less than indemnity plans. Choices of care givers tend to be fairly limited. HMOs, PPOs, and POSs are the different type of managed-care plans offered. Health maintenance organizations or HMOs are the most well known managed health care plan. HMOs are prepaid through a fixed monthly fee known as a premium. Members may have to wait longer for appointments than fee-for-service plans and must present a card at doctor visits. HMOs provide comprehensive care for the primary carrier and dependents which include: doctor’s visits, immunizations, well-baby checkups, mammograms, physicals, hospital stays, emergency care, surgery, lab tests, and therapy. Coverage also includes medical services from a specific network of physicians. The primary care physician, required by a HMO, is responsible for an individual’s health care, makes referrals to specialists, and approves further medical treatment. Finally, HMOs require a co-payment for medical services received. For example, there might be a payment of $5 for a doctor’s visit or $25 co-payment for emergency room treatment. The advantages of HMOs consist of not having to complete extensive paperwork, they are fairly inexpensive, and they focus on preventive medical care. On the other hand, the disadvantages of HMOs are the limited choice of physicians and specialists, and the fact that medical services from outside providers are never covered.

Another type of managed-care health plan offered by insurance companies is the Preferred Provider Option or PPO, and this plan tends to be more flexible than HMOs. This type of plan is a combination of traditional fee-for-service and a HMO. Holders do not have forms to fill out; they simply present a card at arrival. There is a network of providers, but no primary physician is required and referrals for specialists are not needed. If employees choose to use non-network care, costs will increase. A PPO is the most expensive of the managed care plans because it allows for the most individual freedom. Holders of this type of plan will pay monthly premiums, coinsurance, or co-payments. For non-network care, a higher co-payment and deductible is required. To summarize, advantages of PPOS are low costs for network care, the option to consult any specialist, including non-network ones, and a primary physician is not required. Disadvantages include larger co-payments than with other managed care plans and holders may have to pay a deductible.

A sub-type of health plan that merges attributes of managed care and indemnity coverage is a Point of Service Option or POS plan which are offered by HMOs. POS plans offer lower cost insurance but with limits on choice. Health care is administered from a physician within the insurance network but referrals outside the network can be made. A POS plan is more expensive than an HMO but cheaper than a PPO. Costs include monthly premiums, a co-payment for network care, and a deductible for non-network care. Positive aspects of a Point of Service Option include the ability to use non-network providers for free, low co-payments and no deductibles for network care, and limited annual out of pocket costs. The negative sides of POS plans are that co-payments for non-network care are high, there is a deductible for non-network care, and referrals for specialized care may be difficult to obtain.

Indemnity or fee-for-service health plans, administered by insurance companies, offer more comprehensive coverage but are also more expensive. They emphasize comprehensive medical treatment and allow individuals more freedom to choose a care giver or physician. Additionally, indemnity plans are flexible when it comes to specialist referrals. The increased expenses come into play with monthly premiums, a yearly deductible, and a per visit out of pocket payment. Fee for service health plans can be subdivided into basic health insurance and major medical insurance. The basic plans cover hospital room and board, surgery, and some doctor visits. Major medical plans cover treatment for high cost illnesses or injuries and in-patient and out-patient expenses. Comprehensive insurance is also an option and is a combination of basic and major medical insurance.

After small business owners understand their options for different types of coverage, they should research different ways of obtaining the most affordable insurance that also suits company needs. One way to obtain affordable healthcare coverage is the use of Health Savings Accounts or HSAs. According to the Small Business Administration (SBA), a HSA is a “tax preferred account owned by an individual used to pay for current and future medical expenses, including deductibles, co-payments and other forms of cost-sharing.”  These accounts are financed by tax deductible contributions and both employees and employers can add to the account. HSAs are open to individuals covered by “HSA-eligible” accounts such as high deductible plans. HSAs also allow the individual ownership of resources in the account; therefore, the individual is not dependent on a certain employer. The account is portable in that it travels with the employee if he or she changes jobs or retires. Also, HSAs allow individuals flexibility in the use of the funds. A person has the option of utilizing the funds to pay for current medical needs or saving the money for future issues. Important advantages of HSAs are the security against high or unexpected bills and the ability for the individual to have control over the account. This is extremely important to small business owners because they avoid administrative time and costs because employees manage their own HSA. Additionally, small business owners have options of how much and how often they will make contributions to employees’ accounts. Consumers are taking advantage of this opportunity as over 3 million consumers across the nation have enrolled in HSAs since they became available in 2004.

Similarly, Health Reimbursement Accounts or HRAs are an option for small businesses. These arrangements are funded solely by the employer and, therefore, remain with the employer should an employee leave. Employers determine how much money is deposited into the account. Funds are used by employees to pay for regular, preventive health care services. These accounts tend to help keep premiums affordable and allow employees flexibility in obtaining health care specific to their needs. It is believed that because employees have more say in their health management with these plans, that they become more conscientious in the use of health services. Along with lower premiums, small businesses also benefit with tax advantages because reimbursements to employees are deductible, easier administration, and plans that fit individualized needs.

Another alternative for more affordable health care coverage to small business owners is the option of joining a group. Group plans can be offered through industry associations, professional organizations, unions, or even college alumni associations. Most small group plans cover between 2-50 employees, but there are similar plans for self-employed individuals. Premiums lower in cost as the groups get larger. Mean monthly premiums for individuals in groups of 10 or fewer employees were $330, according to America’s Health Insurance Plans. This average falls to $287 a month for groups with 26-50 employees. Therefore, firms with fewer than 10 employees should consider partnering with other businesses or individuals to lower the cost. Aside from lower premium costs, group plans also offer more extensive coverage and tax deductions are available for contributions to small group plans.

There are a few guidelines that small business owners should follow in the process of obtaining insurance. One way to reduce small business health insurance costs is to keep employees healthy. Wellness programs can save companies money as well as increase employee satisfaction. Employers should also consider joining a group to lower premium costs. Additionally, employers should shop around to ensure they are getting the best possible deal. Searching the Internet, meeting with agents, and contacting knowledgeable people are all ways to gather helpful information.  Lastly, make sure the health coverage is coming from a company that is registered to sell insurance in the state and check out its documentation of complaints.

Small businesses should also be aware of things to avoid when purchasing insurance. First, do not think insurance is too expensive for the company. If something should happen and the company does not have insurance, the consequences could be insurmountable. Secondly, do not purchase the cheapest insurance.  Typically, if the price is below all other quotes, the company may be unstable or not offer all that is needed in the policy. Finally, do not withhold information from the insurance agent. Carriers could see this as misrepresentation and not provide the company with the necessary type of insurance.

Although small business health insurance has cost implications and can lower revenue, there are definite benefits to offering it to employees. Better employees will be attracted to the offer of benefits and there will be a higher retention of existing workers. Small business employers must weigh all the pros and cons of health insurance and make the decision that is best for their company.


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