Establishing a Health Plan
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Health insurance is one of the most desirable benefits you can offer employees. There are several basic options for setting up a plan:
- A traditional indemnity plan, or fee for service: Employees choose their medical care provider; the insurance company either pays the provider directly or reimburses employees for covered amounts.
- Managed care: The two most common forms of managed care are the Health Maintenance Organization (HMO) and the Preferred Provider Organization (PPO). An HMO is essentially a prepaid health-care arrangement, in which employees must use doctors employed by or under contract to the HMO and hospitals approved by the HMO. Under a PPO, the insurance negotiates discounts with the physicians and the hospitals. Employees choose doctors from an approved list, then usually pay a set amount per office visit (typically $10 to $25); the insurance company pays the rest.
- Self-insurance: When you absorb all or a significant portion of a risk, you are essentially self-insuring. An outside company usually handles the paperwork, you pay the claims, and sometimes employees help pay premiums. The benefits include greater control of the plan design, customized reporting procedures and cash flow advantages. The drawback is that you're liable for claims, but you can limit liability with "stop loss" insurance--if a claim exceeds a certain dollar amount, the insurance company pays it.
- Medical savings accounts (MSAs): Congress recently concluded a four-year test of MSAs, special savings accounts coupled with high-deductible insurance policies. Accounts are funded with employees' pretax dollars; disbursements are tax-free if used for approved medical expenses. Unused funds can accumulate indefinitely and earn tax-free interest. MSAs can be used by self-employed individuals or by employees of a company with 50 or fewer employees.
The rising cost of health insurance has forced some small businesses to cut back on the benefits they offer. Carriers that write policies for small businesses tend to charge very high premiums. Often, they demand extensive medical information about each employee. If anyone in the group has a pre-existing condition, they carrier may refuse to write a policy. or, if someone in the company becomes seriously ill, the carrier may cancel the policy the next time it comes up for renewal.
Further complicating matters, some states are mandating certain health-care benefits so that if an employer offers a plan at all, it has to include certain types of coverage. Employers who can't afford to comply often have to cut out insurance altogether. The good news: Many states are trying to ease the burden by passing laws that make it easier for small businesses to get health insurance and that prohibit insurance carriers from discriminating against small firms. (MSAs, described earlier, are in part a response to the problems small businesses face.)
Until more laws are passed, what can a small business do? There are ways to cut costs without cutting into your employees' insurance plan. A growing number of small businesses band together with other entrepreneurs to enjoy the economics of scale and gain more clout with insurance carriers.
Many trade associations offer health insurance plans for small-business owners and their employees at lower rates. The carrier issues a policy to the whole association; your business's coverage cannot be terminated unless the carrier cancels the entire association. Association are able to negotiate lower rates and improved coverage because the carrier does not want to lose such a big chunk of business. This way, even the smallest one-person company can choose from the same menu of health-care options that big companies enjoy.
Associations aren't the only route to take. In some states, business owners or groups have set up health-insurance networks among businesses that have nothing in common but their size and their location. Check with your local chamber of commerce to find out about such programs in your area.
Some people have been ripped off by unscrupulous organizations supposedly peddling "group" insurance plans at prices 20 percent to 40 percent below the going rate. The problem: These plans don't pay all policyholders' claims because they're not backed by sufficient cash reserves. Such plans often have lofty-sounding names that suggest a larger association of small employers.
How to protect yourself from a scam? Here are some tips:
- Compare prices: If it sounds too good to be true, it probably is. Ask for references from other companies that have bought from the plan. How quick was the insurer in paying claims? How long has the reference dealt with the insurer. If it's less than a few months, that's not a good sign.
- Check the plan's underwriter. The underwriter is the actual insurer. Many scam plans claim to be administrators for underwriters that really have nothing to do with them. Call the underwriter's headquarters and the insurance department of the state in which it's registered to see if it's really affiliated with the plan.
To check the underwriter's integrity, ask your state's insurance department for its "A.M. Best" rating, which grades companies according to their ability to pay claims. Also ask for its "claims-paying ability rating," which is monitored by services like Standard & Poor's. If the company is too new to be rated, be wary.
- Make sure the company follows state regulations. Does the company claim it's exempt? Check with your state's insurance department.
- Ask the agent or administrator to show you what his or her commission, advance or administrative cost structure is. Overly generous commissions can be a tip-off; some scam operations pay agents up to 500 percent commission.
- Get help. Ask other business owners if they have dealt with the company. Contact the Better Business Bureau to see if there are any outstanding complaints. If you think you're dealing with a questionable company, contact your state insurance department or your nearest Labor Department Office of Investigations.
Excerpted from The Small Business Encyclopedia, Start Your Own Business and Entrepreneur magazine ("Needs to Know"). All information is intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an insurance agent.