Introduction to Group Health Insurance
Providing health insurance for employees – by far the single most expensive benefit offered by employers – is one of the greatest challenges many small businesses face today. As business owners know, health insurance is extremely important to most employees and is therefore a very powerful benefit in recruiting and retaining the best workers. Cost and availability of health insurance are the key issues.

Among small private-sector employers (firms with 50 or fewer employees), 63.5 percent of all employees worked at firms where health insurance was offered, according to 2002 information posted on the Health and Human Services Web site (www.ahrq.gov). More recent data indicates that, in 2005, only 59 percent of small business (those with under 199 workers) offered health insurance, and less than half (47 percent) of the smallest companies (those with 3-9 employees) offered health benefits to their employees, according to a 2006 Employer Health Benefits study conducted by the Kaiser Family Foundation and the Health Research and Educational Trust.

Small group health insurance provided by insurers is regulated by the states. However, federal law mandates that an insurer cannot deny coverage to a small business due to the health status or illness of its employees or their dependents. In addition, self-insured health plans (where an employer insures itself), are regulated by a federal law called ERISA (Employees Retirement Income Security Act of 1974). It is rare for a small company to self-insure its health insurance.

Small business owners are not legally required to offer health insurance. However, in an effort to provide health insurance to those citizens without it, several states recently introduced legislation focused on providing universal health coverage. Check with your state insurance department to understand the current laws in your state and how they might affect small businesses.

What Kind of Health Insurance Best Fits Your Business?
To help small business owners determine what kind of health insurance best fits their employees’ needs and their company’s budget, the NAIC provides the following information.

Types of Health Coverage
Small businesses commonly offer several different types of health insurance. Major medical plans typically cover a comprehensive array of healthcare needs, including doctor visits, prescription drugs and hospital care. These benefits can be delivered in several different ways:

  • Indemnity plans – These major medical plans typically have a deductible – the amount you pay before the insurance company begins paying benefits. After your covered expenses exceed the deductible amount, benefits usually are paid as a percentage of actual expenses, often 80 percent. These plans usually provide the most flexibility in choosing where to receive care.
  • Health Maintenance Organization (HMO) plans – These major medical plans usually make the insured choose a primary care physician (PCP) from a list of network providers. Your PCP is responsible for managing all of your healthcare. If you need care from any network provider other than your PCP, you may have to get a referral from the PCP to see that provider. The insured person must receive care from a network provider in order to have the claim paid through the HMO. Treatment received outside the network is usually not covered, or covered at a significantly reduced level.
  • Preferred Provider Organization (PPO) plans – In these major medical plans, the insurance company enters into contracts with selected hospitals and doctors to furnish services at a discounted rate. As a member of a PPO, you may be able to seek care from a doctor or hospital that is not a preferred provider, but you will probably have to pay a higher deductible or co-payment.
  • Point of Service (POS) plans – These major medical plans are a hybrid of the PPO and HMO models. They are more flexible than HMOs, but do require you to select a PCP. Like a PPO, you can go to an out-of-network provider and pay more of the cost. However, if the PCP refers you to an out-of-network doctor, the health plan will pay the cost.

Health Savings Accounts (HSA) and High Deductible Health Plans (HDHP)
A Health Savings Account is not health insurance. Rather, it is a savings plan that offers an alternate way for consumers to pay for their healthcare. HSAs enable you to pay for current health expenses and save/invest for future qualified medical and retiree health expenses on a tax-free basis. Health Savings Accounts (HSAs) were created by the Medicare bill signed by President Bush on December 8, 2003.

In order to open an HSA, an individual must be covered by a High Deductible Health Plan (HDHP). Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is a less expensive health insurance plan that does not pay for the first several thousand dollars or more of healthcare expenses (i.e., the “deductible”) but will generally cover health expenses after that. 

For example: In 2007, to be HSA-qualified, the HDHP minimum deductible was set for $1,100 (self-only coverage) or $2,200 (family coverage). The annual out-of-pocket expense (including deductibles and co-pays) for 2007 could not exceed $5,500 (self-only coverage) or $11,000 (family coverage).

These minimum values are set by the United States Department of Treasury and are likely to increase from year to year due to inflation. For current HSA minimum values please visit: www.ustreas.gov.

An Overview on Costs

The average premium for small group health insurance was $311 per month ($3,730 per year) per employee and $814 per month ($9,770 annually) for family coverage, according to a survey conducted in 2006 by America’s Health Insurance Plans (AHIP). AHIP surveyed 21 of its member insurers that offer coverage to more than 650,000 small groups (defined as firms with 2-50 employees) that employ 4 million workers and their 3.2 million dependents.

  • Average costs vary by state. To look up your state, go to www.ahip.org.
  • Types of coverage:
    • 57% of the small group coverage was for PPOs, while 39% had HMO coverage.
    • Approximately 4 percent of enrollees had an HSA with a qualifying HDHP.
  • Deductibles:
    • For PPO plans, individual deductibles averaged $849 with annual out-of-pocket limits of $2,700 and co-payments of $21 for in-network physician visits.
    • HSA plans had an average deductible of approximately $2,220 and average annual out-of-pocket limits of approximately $2,800

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Tips & Considerations Concerning Group Health Insurance
To help you choose which health insurance policy best fits the needs of your employees and your business’ financial resources, here are some important factors to consider.

  • Before purchasing any insurance, interview several licensed insurance agents who specialize in serving the health insurance needs of small businesses.
    • When reviewing the health insurance options presented, make sure you compare the costs of equivalent coverage from several insurers to be sure you’re getting the best deal.
    • Ask about premium cost increases over the past 5 years.
    • Talk to other small business owners to find out about their experiences with different kinds of health plans and insurers.
    • Health insurance is complex; don’t hesitate to ask lots of questions before you decide on a health plan. If you fail to get the answers you need from one insurer, contact others.
    • If you shop for insurance online, make sure your online source has approved Internet privacy protection from an organization like TRUSTe.
  • Before selecting a health plan, it’s a good idea to survey your employees to find out what kind of coverage is particularly important to them.
    • Know your employees. For example, if a number of your employees are young marrieds who may want to have children, pregnancy-related coverage will likely be extremely important to them. Other companies may have mostly young employees who rarely see a doctor.
    • Remember, small business group health plans are not standardized, and benefits may vary greatly from one plan to another. In some states, group health insurance must cover childhood immunizations, mammograms, pap smears, prostate screening and diabetic supplies. In other states, these may not be mandated. Know the law in your state.
  • Understand the factors that can affect the cost of your small group health premiums.
    • The premium rates an insurer can charge a small business are typically set in a range by state law for employers offering plans with the same benefits design and which have similar “case characteristics” (e.g., age and sex of employees, geographic location of the business and other objective information.) States vary with respect to the methods they permit for calculating premiums.
    • For example, in some states insurers may calculate premium rates based on other characteristics – such as health status of employees, claims experience and smoking status of employees.
    • In other states, a method called “community rating” is used to determine premiums, where everyone in a specific geographic area pays the same rates for health insurance.
    • Some health insurance cost factors are clearly outside of your control; other cost factors can be managed. For example:
    • The type of health plan you select. For example, HMOs are typically less expensive than PPOs; both are less expensive than indemnity plans.
    • The specific benefits design you select. For example, you can choose the following:
      • The level of the deductible – A general rule of thumb: the higher the deductible, the lower the premiums. (The deductible is the amount the employee must pay out-of-pocket before payments from the insurance company begin.) Typical deductibles might range from $50 to $250, though there are some policies with much higher deductibles (e.g. $1,000 to $5,000) for “catastrophic” coverage. You’ll need to decide what size deductible works best for your company and employees.
      • The level of co-payments – Similarly, selecting a PPO or POS health plan with higher co-payments (e.g., the out-of-pocket amount the employee must pay towards a doctor visit or medical services) can reduce premiums.
      • The lifetime medical coverage – This is the maximum amount covered by the health insurance policy per individual over the course of his/her life. At least $1 million is often recommended to cover serious illness.
      • Maximum out-of-pocket limit – Note that many plans have a cap – a maximum limit on the amount of out-of-pocket expense that an employee is expected to pay for healthcare in each calendar year.
      • Other health coverage – Many employers choose health insurance plans with prescription drug benefits; some include dental insurance benefits. Note that every benefit you add will raise the cost of your premiums
    • The amount of health insurance costs you transfer to your employees.
      • Most small businesses ask their employees to bear a portion of the cost of their health insurance premiums for themselves and their dependents.
    • Educate your employees about your health plan coverage and healthcare.
      • The more they understand exactly what is – and what is not – covered and follow the right procedures, the better you’ll be able to manage your premiums.
      • Be sure your employees understand provisions in your plan that pertain to the need for pre-admission certification before entering a hospital or using an emergency room.
      • Encourage employees to ask their doctors about fees and the cost of procedures and to check their doctor and hospital bills to be sure there are no errors.
      • When appropriate, they should seek second opinions before complicated or expensive procedures or surgery.
      • Encourage employees to engage in healthy habits. Provide information about exercise, weight loss, smoking cessation, etc.
    • Know your rights with health insurers by checking with your state insurance department.
      • Small group health plans are typically required to treat all of your eligible employees (generally full- or part-time employees who work at least 30 hours a week) equally and may not discriminate against those who are ill or become ill. (Note, however that small employer plans can exclude coverage for pre-existing conditions for up to 12 months – or whatever is specified by the plan – after an employee’s enrollment date.)
      • In some states, there are legal limits on the amount an insurer can raise the premium when your health policy is renewed (e.g., a maximum of 15% per year due to claims experience).
    • Contact your state insurance department to see if there are any special programs designed to assist small business owners in providing employees (and their dependents) with health insurance.
      • Some states offer tax credits for small businesses with 50 or fewer employees that contribute to insurance plans or health savings accounts for their employees.
      • Your state insurance department may offer guidance, educational materials and other sources of information on health insurance for small business.
    • Explore joining a trade association for small businesses in your industry operating in your state.
      • By joining a trade association, you may gain entrée into group health insurance that is more affordable than a plan you could purchase on your own.
      • Note that some states have introduced legislation to allow small companies to band together to buy health insurance. Check with your state insurance department.
    • Do some other research on the insurer offering the health plan you’re considering. Cost is not the only factor you should consider.
      • Ask about the insurance company’s customer service policies, whether there’s a toll-free number and what their grievance procedures are.
      • Find out how many small businesses they insure in your state, and ask for references for small firms in a similar line of business.
      • Look into the complaint history of the insurer you’re considering. You can find that out by contacting your state insurance department or accessing the National Association of Insurance Commissioner’s Consumer Information Source (CIS) complaint database at www.naic.org.
      • You may also want to check on the financial strength/stability of the insurer offering the health policy. A number of independent organizations rate insurers, such as A.M. Best Company, Moody’s Investor Services, Standard & Poor’s and Weiss Ratings, Inc.
    • Understand COBRA and other federal regulations for small employers offering health plans.
      • As mandated in the Federal Consolidated Omnibus Budget Reconciliation Act (COBRA), employers with 20 or more employees that have a group health plan are required to offer their employees (and their dependents) the option of continuing their membership in the group plan at their own expense after they leave their job.
      • Some states require an employer to alert terminated employees with a written notice that specifies the date on which their employee benefits will be cancelled.
      • The Federal Health Insurance Portability and Accountability Act of 1997 (HIPAA) guarantees the rights to group health insurance for employees who have pre-existing medical conditions. It also prevents insurers from charging higher rates to individuals in the same group based solely on their health status.
    • Take advantage of the tax benefits available to your company.
      • Businesses can generally deduct 100 percent of the premiums they pay to qualifying health plans for their employees. Be sure to discuss this matter with your accountant or tax advisor.
    • Be wary of health discount cards, which offer a reduced fee for doctor visits or other medical services.
      • Discount cards are NOT health insurance plans, and are therefore not regulated by the state insurance department.
      • Some discount cards have been the subject of numerous scams in recent years, so be sure to check these out carefully.
    • Always take the time to protect your business against being scammed by fake health insurance companies.
      • Before you purchase any group health plan, make sure the insurer offering the plan is a legitimate company licensed to sell health insurance in your state. It’s very easy to protect yourself and your employees – just call your state insurance department and check out the insurer or visit your state’s insurance department Web site.
      • Be particularly on your guard if one insurer offers you a health plan that’s significantly cheaper than other plans with comparable benefits.

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Introduction to Group Disability Insurance
As a small business owner, you may want to consider offering disability insurance to your employees should they become ill and unable to work.

There are two types of disability insurance.

  • Short-term disability covers a portion of the policyholder’s salary for a short period, typically from three to six months following a disability. The specific time period and percentage of replaced income vary with different policies.
    • Some states require employers to carry short-term disability insurance for their employees. Check with your state insurance department to find out whether you are required to offer short-term disability insurance to your employees.
    • According to the Small Business Administration (SBA), employers may specify a number of days of sick leave paid at 100 percent of salary. The employee can use these before short-term disability begins.  
  • Long-term disability coverage typically begins after the policyholder is disabled and unable to work for at least six months. It can extend for a specified number of years or until the insured retires or reaches the age of 65, depending on the policy selected.  

See the section of this site on Workers’ Compensation for how to protect yourself and cover an employee who is injured on the job.

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Tips & Considerations Concerning Group Disability Insurance

  • Some business owners purchase a group disability plan that may include short-term and long-term disability insurance coverage or packages whereby the employer pays the premiums and the employees share costs. Generally, rates for group plans are less expensive than individually-purchased policies. The benefits payout from such policies can be taxable to the employee if the employer pays the premiums. Conversely, benefits from policies paid by the employee are tax-free.
  • If group disability coverage is not an option, a business owner may choose to purchase individual long-term disability coverage for key employees or provide voluntary employee-paid coverage that can be deducted from the participating employee’s paycheck.
  • Business owners may want to consider an added rider to a personal disability policy for business overhead insurance. This type of coverage ensures that a business can continue to function while the owner is recovering from a disability and that standard business expenses, such as payroll, utilities, rent, etc., continue to be paid. However, the business owner’s salary is not covered.
    • Some small businesses choose to purchase long-term disability insurance for key employees. In this case, the company pays the premiums and is the beneficiary. If a key person is disabled and unable to perform his/her usual duties, the company can use the disability payouts to cover costs until the key person is able to return to work or a replacement can be hired.
    • In some cases, a small business may choose to provide disability insurance as a benefit or perk to its key employees, and in those cases the employee would be named as the beneficiary.

For more information about disability insurance in general, see the disability sections under health for each life stage in the Consumer InsureU Web site.

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