Small Businesses by fionan

VIEWS: 132 PAGES: 14

									Guide to
Health Insurance Options
Small Businesses


 3 Do insurance companies have to sell health insurance to my small business?
 3 What are my options if I am self-employed? Is this Guide useful to me?
 3 What tax advantages are available to me and to my employees if I purchase insurance for my company?
 4 What tax advantages are available to an individual who purchases insurance in the individual market?
 4 What types of insurance plans are available to my company?
 4 How much does health coverage cost?
 5 What is employee cost sharing?
 5 What is provider choice?
 5 Box: How to Estimate the Full Costs of Medical Care: A Simple Illustration
 6 How much do plans vary with respect to the benefits they offer?
 6 What is the relationship between premiums, employee cost sharing and provider choice?

 6 What about purchasing insurance through a professional or trade association?

 7 What if an employee or dependent has a pre-existing medical condition?
 7 Chart: Relationships Between Plan Types, Premiums, Employee Cost Sharing and Provider Choice
 8 Chart: Comparisons of Other Health Benefit Options
 9 If I find group coverage unavailable or unaffordable, are there any other options available to my employees, our dependents and me?

 9 What should I know about federal protections, laws, regulations and resources when purchasing insurance?
10 What should I know about state protections, laws, regulations and resources when purchasing insurance?

This Health Insurance
Guide Is for You
As a small business owner, you might think that offering health insurance
coverage to your employees is beyond your reach, but it may be easier
than you realize. This Guide is intended to help you find out.
  Many employers like you have              What if an employee or dependent has         thought of as a discount to the cost
decided that providing a health             a pre-existing medical condition?            of health insurance.
insurance benefit to their employees is
a sound business decision. Here are just                                                 ❚Employees may make their
some of the reasons:                        Important Facts About                        premium contributions on a pre-tax
                                            Health Insurance                             basis through payroll deductions,
➣ Offering health insurance helps                                                        which makes coverage more
attract and retain high-quality, key          Lack of information may keep some          affordable for workers.
employees. The U.S. Department of           small business owners from exploring
Labor estimates that, on average,           health insurance options for their           ❚Self-employed persons may deduct
recruitment and employee turnover in        employees or themselves. Below is a list     100 percent of the cost of their
small businesses account for 30 percent     of important facts to keep in mind           health insurance premiums from
of salary costs.                            when thinking about health insurance.        their adjusted gross income.

➣ Evidence shows that insured persons       ❶ Businesses may benefit economically        ❚Health insurance payments are
are healthier, and better health            by providing health coverage for             excluded from base payroll when
increases worker productivity, which        workers and their families. Health           calculating an employer’s Medicare
can enhance a company’s performance.        insurance may help employers:                and Social Security payments. An
                                                                                         equivalent amount paid in wages
➣ The health insurance premiums your          ❚ Recruit high-quality workers             would be subject to Medicare and
company pays are fully tax-deductible and     ❚ Reduce staff turnover                    Social Security taxes.
are non-taxable income for employees.         ❚ Reduce the cost of absenteeism

                                              ❚ Limit disability and workers’          ❹ Typically, health insurance costs
➣ Health insurance provides workers           compensation claims                      substantially less when you buy it as
and their families with protection from                                                a member of a group rather than on
catastrophic financial losses that can      ❷ Employees consider health insurance      your own.
accompany serious illness or injury.        to be, by far, the most important
                                            fringe benefit.                            ❺ Health insurance coverage gives you
  This Guide explains the key concepts                                                 access to the price reductions that health
you need to understand to make an           ❸ There are tax benefits when you offer    insurance companies negotiate with
informed decision about health insurance    health insurance to your workers:          doctors and other health care providers.
for your company, or, if you are self-
employed, for yourself. It answers            ❚The health insurance premiums           ❻ Even if an employee or dependent is
questions such as: How much does health       your company pays are fully tax-         in poor health, federal law prohibits
coverage cost? What types of insurance        deductible as a business expense.        insurers from denying coverage to the
plans are available to my company?            This tax deduction may be                company, the employee or the dependent

based on health status, although the         insurance can often pool his employees                ➣ Neither employers nor insurers can
cost of insurance may be higher              with thousands of employees in other                  condition eligibility of employees and
depending on your state of residence.        small firms. In this way, if an employee              their dependents on their health status.
                                             falls ill, the cost of that illness is spread         This is called nondiscrimination.
❼ All states offer low-cost or free health   across the entire small business pool
care coverage to eligible working            rather than across your business alone.               ➣ Insurers may require employers to
families. To determine the income                                                                  pay a minimum share of their workers’
limits for this coverage, or to learn                                                              health insurance premiums.
more about this type of coverage in               Employees consider health
your area, call 1.877.KIDS.NOW or                                                                  ➣ Insurers can refuse to renew
visit                 insurance to be, by far, the most                     coverage for nonpayment of premiums
                                                                                                   or if the insured commits fraud.
❽ Alternatives to traditional health               important fringe benefit.
insurance include health savings
accounts (HSAs), health reimbursement                                                              WHAT ARE MY OPTIONS IF I AM SELF-EMPLOYED?
arrangements (HRAs), and association-        DO INSURANCE COMPANIES HAVE TO SELL HEALTH            IS THIS GUIDE USEFUL TO ME?
sponsored plans. HSAs and HRAs have          INSURANCE TO MY SMALL BUSINESS?
added tax advantages.                                                                                Yes, it is. In most states, the laws that
                                                Under federal law, health insurance                govern health insurance sold to the self-
                                             companies cannot refuse to sell                       employed are different from those that
Understanding the Basics:                    coverage to small businesses (typically               govern insurance sold to small
What Small Businesses                        defined as 2 to 50 employees) on the                  businesses. It is important for the self-
Need to Know About                           basis of health status or other factors               employed individual to understand the
Health Insurance                             related to the use of health care. This is            impact that certain federal laws relating
                                             called guaranteed issue. In addition,                 to health insurance have on them. In
   Health insurance plans come in many       an insurance company cannot cancel a                  2003, federal tax law began allowing
shapes and sizes. Important plan             business’ policy because someone in the               self-employed individuals to deduct the
features — such as how much it costs         group becomes sick. This is called                    full cost of health insurance from their
employers, how much it costs                 guaranteed renewability. However,                     adjusted gross income. However, federal
employees and how much choice is             insurers may increase premiums, which                 law does not require that all insurance
allowed when selecting physicians — can      is the amount an insurance plan costs                 companies sell coverage to all self-
vary tremendously from plan to plan,         per month. Federal law does not require               employed individuals.
making it more likely that at least one      guaranteed issue and guaranteed
plan will meet your company’s needs.         renewability for self-employed                          Much of the general information
Such variety can seem daunting when          individuals. Some states do require that              about health insurance contained in this
trying to identify the right insurance       insurers offer at least one plan to                   Guide is relevant to the self-employed.
plan for your business , but it doesn’t      individuals without regard to their
have to. This Guide can help.                health status.
                                                                                                   WHAT TAX ADVANTAGES ARE AVAILABLE TO ME AND
  A small business that purchases              States may set certain criteria for                 TO MY EMPLOYEES IF I PURCHASE INSURANCE FOR
insurance can gain access to the same        providing coverage:                                   MY COMPANY?
hospital and physician discounts
enjoyed by larger firms. Insurance           ➣ Some insurers may require that a                       Tax advantages make the cost of
companies use the purchasing power           minimum percentage of eligible workers                purchasing insurance considerably less.
gained from all of their customers — large   participate in a group health plan.                   Consider this example: Assume the
groups, small groups and individuals —                                                             owner of an eight-person firm (with
to negotiate the best prices.                ➣ Employers may use other factors —                   seven dependents) offers insurance,
                                             such as full-time versus part-time                    everyone participates and the total
  Although there are exceptions in some      status — to determine which employees                 premium annually is $48,000 per year.
states, a small employer that purchases      are eligible for insurance coverage.                  If the employer pays 70 percent of the

                                                                                          Guide to Health Insurance Options for Small Businesses   3
premium, without the tax advantages,                                    employed person must pay the                     for a higher co-payment and possibly a
the employer would pay $33,600 per                                      employer’s and employee’s share) and             higher premium. An HMO or POS plan
year. However, after taking the tax                                     state income tax equivalent to the               is considered an open access plan
advantages into account the true costs                                  individual’s state income tax bracket.           when patients are allowed to self-refer
are about 40 percent less (assuming the                                                                                  to specialists for a higher co-pay.
firm is in the 27 percent tax bracket).
Here’s why: The employer is taxed on                                        Tax advantages can reduce                    ➣ Health savings accounts (HSAs)
the difference between revenue and                                                                                       and health reimbursement
expenses. Since the cost of health                                              the cost of purchasing                   arrangements (HRAs) are alternatives
premiums is an expense, the profit is                                                                                    to traditional insurance coverage that
less, thus saving $9,072 ($33,600 x .27)                                           health insurance.                     allow employers or employees to set
in federal income taxes in a single year                                                                                 aside pre-tax income to pay for medical
(or 27 percent of your premium                                                                                           expenses. These funding mechanisms
payment). When FICA taxes (Social                                       WHAT TYPES OF INSURANCE PLANS ARE AVAILABLE TO   are typically combined with a high-
Security and Medicare) and state taxes                                  MY COMPANY?                                      deductible health insurance policy,
(assumed at 5 percent) are included,                                                                                     which has a lower premium than the
the firm realizes an additional savings                                   Health plans take many forms.                  options outlined above. Funds from the
of $4,250, or 12.65 percent. See the                                    At one time, a traditional fee-for-              account are used to pay the deductible
example below:                                                          service plan represented the primary             and, sometimes, additional medical
                                                                        type of insurance. The two most                  expenses. For more details on these
Employer’s cost of health insurance premium                             common plan types available today are            options, see the discussion on page 6
without tax advantages ......................................$ 33,600   preferred provider organizations                 and the chart on page 8.
                                                                        (PPOs) and health maintenance
Savings in income tax per year                                          organizations (HMOs).
(premium is tax deductible) ................................$ 9,072                                                      HOW MUCH DOES HEALTH COVERAGE COST?
                                                                        ➣ PPOs encourage you to get care
Savings in FICA and state taxes ............................$ 4,250     from the doctors and hospitals within              The cost of health insurance varies
                                                                        the plan’s network, but allow you to             widely, depending on the type, size and
Cost of health insurance premium with tax                               go outside the network if you are                location of your business, as well as the
advantages (40 percent savings to employer) ....$ 20,278                willing to pay more. Many PPOs do                features of the insurance plan selected.
                                                                        not require you to choose a primary              In addition, in many states, the health
  Employees also enjoy tax savings.                                     care doctor or get a referral to see a           status of your employees and their
Their premium costs can be deducted                                     specialist. Typically, PPOs require              families may affect the group’s premium
from their wages pre-tax, thereby                                       deductibles and have higher co-                  when you buy or renew coverage.
reducing those costs in a way similar to                                payments than HMOs, but they allow
the employer’s example.                                                 a broader choice of providers.                      The most obvious price consideration
                                                                                                                         is the monthly premium. Typically, this
                                                                        ➣ HMOs require you to get care from              amount is shared between the employer
WHAT TAX ADVANTAGES ARE AVAILABLE TO AN                                 the doctors and hospitals that are part          and employee. Insurers determine
INDIVIDUAL WHO PURCHASES INSURANCE IN THE                               of their network. Usually, a primary             premiums on an annual basis and may
INDIVIDUAL MARKET?                                                      care doctor coordinates all of your care         change these rates based on medical
                                                                        and refers you to specialists. HMOs              inflation, the number of employees and
  A self-employed person who                                            generally do not require deductibles             dependents covered, and changes in
purchases insurance (self-only or family                                (the amount the patient pays before              covered benefits or employee cost
coverage) in the individual market                                      insurance kicks in), but often do charge         sharing. Employees may pay their
realizes the same three types of tax                                    a small fee (called a co-payment) for            share of the premium through pre-tax
savings described above. This includes                                  services like doctor visits and                  payroll deductions, which effectively
federal income tax savings (at the                                      prescriptions. Most HMOs offer a                 discount the employee’s premium and
individual’s tax bracket), 15.3 percent                                 point-of-service (POS) option that               make health coverage more affordable
FICA tax savings (because the self-                                     allows an enrollee to go out-of-network          to workers.

   In many states, insurers may consider     time they seek medical services — such            How to Estimate the Full Costs of Medical Care:
health status to determine a firm’s          as a $10 payment when they see a                  A Simple Illustration
premium through a process called             primary care physician and a $30
“medical underwriting.” A firm’s             payment if they go to the emergency               An employee who injured his arm
premium costs could therefore                room. Health plans usually have                   while riding a bicycle seeks medical
increase — sometimes substantially —         separate co-pay requirements for                  attention at a nearby walk-in
if one or more workers or dependents         prescription drugs, with generic drugs            community health center, which is a
has a pre-existing medical condition.        requiring lower co-payments than brand            non-network provider. He has PPO
Nondiscrimination rules prohibit the         name drugs.                                       insurance coverage, his premiums
exclusion of specific (e.g., high-risk or                                                      have been paid every month and he
unhealthy) employees or dependents to        ➣ Coinsurance refers to the                       has already met his annual
participate in the health plan based on      percentage of a medical bill that
                                                                                               deductible of $300. He sees a
health factors if they meet participation    insured persons must pay. The most
                                                                                               doctor, who X-rays and sets his
eligibility requirements.                    common arrangement requires
                                             enrollees to pay 20 percent and the               broken arm and writes a prescription
  The monthly premium covers all             health plan to pay 80 percent.                    for a pain reliever. Under these
workers and their dependents, but does       Increasingly, plans are requiring                 circumstances, his health plan
not represent the full cost of health care   beneficiaries to pay higher coinsurance           requires that he pay 20 percent of
for employees. In addition to their          amounts — 30, 40 or even 50 percent —             the doctor’s fee ($350) and the
share of the monthly premium,                particularly for services provided                radiology fee ($100), and a $10
employees pay additional expenses out-       outside the plan’s network of providers.          co-pay for filling the prescription
of-pocket. See the box entitled, “How to                                                       with a $30 generic drug at a local
Estimate the Full Costs of Medical Care: A     Health plans often set annual limits            pharmacy.
Simple Illustration.”                        on employees’ out-of-pocket
                                             expenditures. Once the maximum is                 The employee’s out-of-pocket
                                             reached, the plan pays all covered                costs are:
WHAT IS EMPLOYEE COST SHARING?               medical expenses for the remainder of
                                             the year. However, plans usually place a          Coinsurance for doctor’s bill ......$ 70 ($350 x 20%)
  Employee cost sharing refers to the        maximum limit, or cap, on the total
portion of health insurance costs —          dollar amount they will pay out over              Coinsurance for X-ray................$ 20 ($100 x 20%)
above and beyond the premium                 the insured person’s lifetime (usually
contribution — that employees are            $1 million or more).                              Co-payment for prescription ......$ 10          (of $30)
expected to pay out-of-pocket. Employee
cost sharing expenses include deductibles,
co-payments and coinsurance.                 WHAT IS PROVIDER CHOICE?                          Total cost of injury....................$ 480

➣ A deductible is the amount that               Provider choice refers to the degree to        Total out-of-pocket charge..........$ 100
insured persons must pay for covered         which you can choose among doctors
services before medical expenses are paid    and other health care providers located           Total amount insurance pays......$ 380
by the health plan. Once the annual          in your geographic area. Traditional
deductible is met, the plan will begin       health maintenance organizations
paying toward an enrollee’s medical          (HMOs) use restricted provider
expenses. Annual deductibles typically       networks to contain costs and may              Thus, POS plans allow more provider
range from $100 to $500 per person,          offer relatively limited provider choice.      choice than HMOs. An open access
but the current trend is toward higher       Moreover, HMOs usually require a               plan is an HMO or POS plan that
deductibles. Some plans have separate        referral to see a specialist. A point-of-      allows a patient to self-refer to a
deductibles for pharmacy benefits.           service (POS) plan is an HMO that              specialist, and thus, it too adds a
                                             allows patients to go out of the HMO           degree of provider choice to these
➣ Co-payments are fixed dollar               provider network without incurring             plans. Preferred provider organizations
amounts that insured persons pay each        100 percent of the costs of doing so.          (PPOs) allow the broadest access to

                                                                                   Guide to Health Insurance Options for Small Businesses                 5
providers, both by having larger             Alternatives to                            the deductible. In contrast, because an
networks (typically) and allowing            Traditional Insurance                      HRA can only be funded by an employer,
access to out-of-network providers,                                                     it does not allow for this shared funding
but at a higher price than their in-            Health savings accounts (HSAs) and      arrangement. The chart on page 8
network coverage.                            health reimbursement arrangements          compares HSAs, HRAs and FSAs.
                                             (HRAs) are alternatives to traditional
                                             insurance coverage. HSAs and HRAs            For more information on HSAs and
HOW MUCH DO PLANS VARY WITH RESPECT TO THE   allow employees and/or employers to        how they compare with HRAs and FSAs,
BENEFITS THEY OFFER?                         set aside pre-tax income to cover          go to
                                             medical expenses. They are similar to      resources/n124HSAFSAHRA.pdf.
   Many plans cover hospitalizations,        flexible spending accounts (FSAs),         Contact a local insurance broker for
office visits, prescription drugs, lab       which also allow the use of pre-tax        information on how to obtain this type
work, X-rays, preventive care, and           income for medical expenses. FSAs,         of health insurance.
maternity and well-child care — the          however, are usually used as a
services and treatments that people are      supplement to traditional insurance,
likely to use. Some plans do not offer       not as an alternative. Also, deposits      WHAT ABOUT PURCHASING INSURANCE THROUGH A
specific services such as infertility        into HSAs and HRAs may accumulate          PROFESSIONAL OR TRADE ASSOCIATION?
treatment, routine vision or foot care.      from year to year, unlike FSAs, which
Very few plans cover experimental and        expire at the end of each year and           Association-sponsored plans allow
investigational treatments or cosmetic       require that unspent funds revert to       small business owners to purchase
procedures. Some states require that         the employer (commonly known as            coverage through their membership in a
plans offer certain benefits as a            “use it or lose it”).                      business, trade or professional
condition of selling insurance in the                                                   association for their families and
state. Health insurance plans may vary         HSAs must be, and HRAs usually are,      employees. Small businesses may be
with respect to the extent of coverage       combined with high-deductible health       able to find attractive coverage in some
for a specific benefit. Small business       insurance policies to provide a two-part   areas by buying through an association.
owners should read plan documents            health plan. Businesses may deduct         When state-regulated association-
carefully to see what is covered and         contributions to HSAs and HRAs, and        sponsored plans can reduce costs, small
what is excluded.                            their accompanying high-deductible         businesses may be able to better afford
                                             health plans, just like traditional        health insurance.
                                             insurance. However, HSAs and HRAs
WHAT IS THE RELATIONSHIP BETWEEN PREMIUMS,   also provide a tax advantage for             Small businesses may have more
EMPLOYEE COST SHARING AND PROVIDER CHOICE?   employee out-of-pocket spending for        plans to choose from when they
                                             medical expenses. Such medical             participate in association-sponsored
  The chart on page 7 is a                   expenses can include coinsurance,          plans, while spending less time and
simplification of the typical                co-payments and the deductible of          effort identifying and administering
relationships among premium amount,          the accompanying high-deductible           health coverage. You should, however,
employee cost sharing and provider           insurance policy.                          check with your state Insurance
choice. These relationships tend to                                                     Department to make sure the plan is
apply regardless of the size of the            There are some key differences           insured with an organization licensed
business seeking coverage. In general,       between HSAs and HRAs. For example,        with the state. Because many
plans with lower monthly premiums            contributions to an HSA can be funded      association-sponsored plans are multi-
require higher employee out-of-pocket        by an employer and/or employee.            state, you can also consult the National
expenses. Conversely, plans with higher      Therefore, an employer with very           Association of Insurance
monthly premiums require lower               limited funds to purchase insurance        Commissioners (NAIC) Web site
employee out-of-pocket expenses. The         could purchase a high-deductible           ( which provides
degree of provider choice is a function      health insurance plan for employees        consumer information about selected
of plan type, as described above under       and encourage them to make regular         health plans.
the heading “What types of insurance         tax-free contributions to an HSA to
plans are available to my company?”          fund their health care expenses up to

Beyond Perfect Health: You Do                                                         insurance until an employee falls ill,                                           National Association of Health
Have Options If an Employee                                                           most states allow insurers to charge a                                           Underwriters ( provided
or Dependent Is Ill                                                                   higher premium to firms with                                                     information on how much premiums
                                                                                      employees that have medical                                                      could increase for a small firm that is
  In some states your premiums can be                                                 conditions. However, most states                                                 not in perfect health and is located in
higher, sometimes substantially so, if                                                provide some protection if an employee                                           an “average” market.
one or more workers or dependents has                                                 already has a pre-existing condition.
a medical condition. To follow is more                                                Many states limit premium increases to                                             Rating up premiums on the basis of
information on how premiums might                                                     25 percent or less, and some states                                              health status is called medical
increase based on health status.                                                      have even stricter protections against                                           underwriting. Some states (e.g., New
                                                                                      further premium increases if one of                                              York, Massachusetts, Washington) do
                                                                                      your employees falls ill after you                                               not permit plans to increase premiums
WHAT IF AN EMPLOYEE OR DEPENDENT HAS A                                                purchase coverage.                                                               due to health status. Others (e.g.,
PRE-EXISTING MEDICAL CONDITION?                                                                                                                                        Virginia and Pennsylvania) provide no
                                                                                        To help you better understand how                                              limits on the extent to which plans can
  In order to discourage small                                                        premiums might be affected by pre-                                               rate-up on the basis of health status. On
employers from waiting to purchase                                                    existing health conditions, the                                                  average, most states provide some limits


            PLAN TYPE                                     FIRM’S MONTHLY PREMIUM                                  EMPLOYEES’ OUT-OF-POCKET COSTS                                                        PROVIDER CHOICE
                                                                                                                   (In addition to insurance premiums)
                                          Very Low         Low        Medium          High      Very High Very Low Low            Medium        High Very High Very Low                           Low        Medium          High       Very High

        PPO 1 HSA/HRA

               PPO 2

               HMO 1

               HMO 2


          OPEN ACCESS

               PPO 3

NOTE: Actual plans sometimes defy their traditional plan type labels. The purpose of this chart is to illustrate common relationships among plan type, premiums, out-of-pocket costs and provider choice. Often, specific plans prove the exception
rather than the rule.

1 HMOs tend to have smaller provider networks and require patients to get referrals to specialists. Out-of-network           4 PPO plans tend to have broader networks than HMOs and allow patients to see ”non-preferred”
care is not covered.                                                                                                         (or non-network) providers for a higher out-of-pocket cost.

2 POS plans are HMOs that allow patients to go out-of-network for a higher out-of-pocket cost.                               5 A Health Savings Account is a tax-preferred arrangement, with relatively high cost sharing, built on a PPO platform.

3 Open Access plans are POS plans that allow patients to self-refer to specialists.

                                                                                                                                                        Guide to Health Insurance Options for Small Businesses                                  7
                                                                            COMPARISONS OF OTHER HEALTH BENEFIT OPTIONS

              QUESTION                              HEALTH SAVINGS ACCOUNT (HSA)                                           HEALTH REIMBURSEMENT                                      FLEXIBLE SPENDING ACCOUNT (FSA)
                                                                                                                            ARRANGEMENT (HRA)

                                                                                                               Firms of any size. Owners of S corporations,
                                                                                                                  limited liability companies and the self-
                                                             Individuals and firms                             employed can fund HRAs for their employees
        WHO IS ELIGIBLE?                                                                                                                                                                           Firms of any size.
                                                                  of any size.                                      but not for themselves. Owners of C
                                                                                                              corporations can fund HRAs for themselves and
                                                                                                                              their employees.

                                            Yes. It must be coupled with a health insurance
                                             policy with a minimum deductible of $1,000
     MUST IT BE USED WITH                   for an individual or $2,000 for a family. There                    No, but it usually is. The deductible is not set
      A HIGH-DEDUCTIBLE                                                                                                                                                                                     No.
         HEALTH PLAN?                        is no maximum deductible, but total costs to                                 in law as it is with HSAs.
                                               the insured cannot exceed $5,000 for an
                                                   individual or $10,000 for a family.

                                            As long as funds are spent on qualified medical                                                                                    As long as funds are spent on qualified medical
                                                                                                                  As long as funds are spent on qualified
                                             expenses, there are federal and state income                                                                                       expenses, there are federal and state income
                                                                                                              medical expenses, there are federal and state
        WHAT ARE THE TAX                     tax savings and payroll tax savings (FICA) for                                                                                     tax savings and payroll tax savings (FICA) for
         ADVANTAGES?                                                                                            income tax savings and payroll tax savings
                                               employee and employer. Qualified medical                                                                                           employee and employer. Qualified medical
                                                                                                               (FICA) for employee and employer. Qualified
                                            expenses are defined in section 213(d) of the                                                                                      expenses are defined in section 213(d) of the
                                                                                                              medical expenses are defined by the employer.
                                                        Internal Revenue Code.1                                                                                                            Internal Revenue Code.

                                                  Employer and/or employee. If the
                                                employer contributes to the employee’s
          WHO FUNDS IT?                                                                                                               Employer.                                                Typically, the employee.
                                              account, the contribution must be the same
                                                           for all employees.

         WHO “OWNS” IT?                                             Employee.                                                         Employer.                                                        Employee.

      WHAT HAPPENS TO                                                                                                       Rollover is allowed at the
     UNUSED FUNDS AT THE                                     Rollover is allowed.                                                                                                            Forfeited to the employer.
      END OF THE YEAR?                                                                                                       employer’s discretion.

                                             Federal legislation sets minimum deductible
                                            and maximum out-of-pocket amounts. The full                            The employer has substantial flexibility                                   The employer can set the
                                               amount of the deductible can be funded                                     in designing an HRA.2                                                   contribution limit.
                                                         through the account.

                                                                                                                                                                                Balances are generally forfeited at termination.
                                                                                                                The account is owned by the employer and
     WHAT IF THE EMPLOYEE                     The account is owned by the employee and                                                                                           However, if an employee leaves mid-year and
       LEAVES THE FIRM?                                                                                           therefore portability of funds is at the
                                                   therefore the balance is portable.                                                                                              has already spent the entire account, the
                                                                                                                        discretion of the employer.
                                                                                                                                                                                      employer is liable for the balance.

1 Consult a tax adviser to determine the savings that would occur in your specific case. As a general illustration, assume an HSA is funded at $1,000. If the employer funds the entire account, the $1,000 is deductible as a business expense
by the employer. The $1,000 is excluded from determining employment or FICA taxes for the employer and employee, and is excluded from the employee’s income taxes. Alternatively, assume the employee takes $1,000 out of their wages
and funds an HSA. In this case, the employee can claim the $1,000 as an income tax deduction. Neither the employer nor employee would save FICA taxes on the $1,000 since it is included as income.

2 The employer can determine the amount the firm contributes to the HRA; the amount that can be rolled over to the next year; what happens to unused funds when an employee leaves; the timetable for the firm’s contribution; whether to
place a cap on the amount that can be accumulated over time and the amount of the cap; and the number of HRA plans to be offered (employers can establish different plan designs for different classes of employees).

on how much plans can rate-up. In this                         illness would be less than for a major,              extend this coverage to parents as well.
regard, Texas is an “average” state, thus                      life-threatening illness. However, this              Depending on their wages and other
the illustration provided here is for a                        adjustment based on illness severity                 family income, your employees and/or
small firm located in the Houston                              could be counterbalanced by the size of              their children may qualify for these
metropolitan area. The firm consists of                        the group being insured. Smaller                     programs. Coverage options may
seven employees with the following                             businesses will incur greater rate-ups               include Medicaid and the State
characteristics and health conditions:                         than larger businesses for the same                  Children’s Health Insurance Program
                                                               illness because there are fewer insured              (SCHIP), but these program names
GENDER AGE COVERAGE               HEALTH CONDITION             people to spread the risk across.                    often differ from state to state. To learn
                                                                                                                    more, call 1.877.KIDS.NOW or visit
Female   33   self only                                                                                    and
Male     23   not covered                                      IF I FIND GROUP COVERAGE UNAVAILABLE OR    
Female   49   self only           fibrocystic breast disease   UNAFFORDABLE, ARE THERE ANY OTHER OPTIONS
Male     51   self only           controlled hypertension      AVAILABLE TO MY EMPLOYEES, OUR DEPENDENTS AND ME?
Female   27   self only           benign cervical dysplasia                                                         Consumer Protection:
Female   24   self only                                          You and your employees could                       Overview of Federal and State
Male     42   employee & spouse   Graves disease               choose to purchase coverage separately               Health Insurance Regulations
                                                               in the individual health insurance
   In the first quarter of 2004, the                           market and each be responsible for
total monthly premium for this firm —                          your own premiums. The individual                    WHAT SHOULD I KNOW ABOUT FEDERAL PROTECTIONS,
assuming no pre-existing medical                               health insurance market operates                     LAWS, REGULATIONS AND RESOURCES WHEN
conditions — was approximately $1,800.                         differently from the small group                     PURCHASING INSURANCE?
If the firm did not previously have                            market. Healthy people generally can
health insurance, the rate-up due to                           get affordable health insurance in the                 There are two important federal laws
these pre-existing conditions cannot go                        individual market. However, in many                  that affect the provision of health
higher than 67 percent according to                            states, people with pre-existing                     insurance to small business employees.
Texas law. Thus, the actual premium                            conditions may be denied coverage,                   They are the Health Insurance
offered to this firm would range from:                         charged higher premiums or subjected                 Portability and Accountability Act
                                                               to a waiting period for coverage of their            (HIPAA) and the Consolidated
$1,800 — no rate-up, up to                                     pre-existing conditions.                             Omnibus Budget Reconciliation Act
$3,006 — full rate-up                                                                                               (COBRA).
                                                                 Some states operate “high-risk
  The size of the rate-up is determined                        pools” for individuals who are denied                  HIPAA is a 1996 federal law that
by the health plan and depends on many                         insurance on the basis of poor health                includes important health insurance
factors, including actual and expected                         status. Although no one can be turned                protections for small businesses and
medical claims, and market conditions.                         down for this coverage, the premiums                 their employees. In employer-based
                                                               are relatively high and there is usually a           health plans, HIPAA does the following:
  If the firm already has insurance,                           one-year waiting period for coverage of
and is renewing with the same plan,                            pre-existing conditions. In addition,                ➣ It guarantees availability of all small
the premium can increase no more                               some states require some or all insurers             group plans to all small employers.
than 15 percent due to health status.                          to offer individual health insurance                 With limited exceptions, it requires
However, for renewals in Texas, no                             policies on a guaranteed issue basis —               that all health plan policies be renewed,
limits are placed on premium increases                         which means that nobody can be                       regardless of the health status or claims
due to general medical inflation and/or                        turned down because of health                        experience of a firm.
changing demographics of the firm.                             problems. Contact your state Insurance
                                                               Department for more information.                     ➣ It limits benefit exclusions for
  It is important to note that the                                                                                  pre-existing medical conditions to no
severity of illness is taken into account                        All states offer low-cost or free health           more than 12 months from the
during rate-ups. Thus, the increase for a                      insurance to eligible children of                    effective date of coverage for those who
relatively minor, easily managed chronic                       working parents, and, in some cases,                 have been diagnosed or treated within

                                                                                                           Guide to Health Insurance Options for Small Businesses   9
the previous six months. Regardless            ❚ have exhausted COBRA (see below)        help pay the employer’s administrative
of enrollees’ coverage history, health         or any other continuation coverage        costs. COBRA continuation coverage
plans that sell to small employers are         that is available;                        generally lasts 18 months for previous
not allowed to impose a pre-existing                                                     employees and 36 months for
condition exclusion period for                 ❚ are not eligible for any other group    dependents in certain circumstances.
newborn babies or newly adopted                coverage; and
children, for pregnancy or on the basis
of genetic information.                        ❚ have not lost group coverage due to     WHAT SHOULD I KNOW ABOUT STATE PROTECTIONS,
                                               fraud or failure to pay premiums.         LAWS, REGULATIONS AND RESOURCES WHEN
➣ It requires that pre-existing                                                          PURCHASING INSURANCE?
condition exclusion periods be reduced,      ➣ With limited exceptions, HIPAA
day for day, for group health plan           provides guaranteed renewability of           Although state laws that regulate
participants by the amount of prior,         health plan policies to self-employed       health insurance vary across the
creditable health insurance coverage         persons.                                    country, virtually all states address the
they have had. Almost all types of                                                       following key issues:
major medical insurance are                  ➣ A person who “loses” individual
“creditable,” no matter what the source      coverage has no federal right to            ➣ Insurers pool small employers so
(public, private, group, individual).        guaranteed access in the individual         individual firms do not bear the full
                                             market.                                     cost of employees’ illnesses.
➣ It prohibits insurers from
discriminating against employees and                                                     ➣ The Insurance Department monitors
dependents based on their health                   HIPPA, a federal law,                 insurers’ business practices and requires
status. Thus, insurers cannot deny                                                       them to maintain adequate financial
eligibility to your employees or any           guarantees availability of all            reserves to pay claims.
enrolled dependents, or charge anyone
in your group more for coverage than              small group plans to all               ➣ Virtually all states require fair
any similarly situated person.                                                           marketing practices and have
                                                       small employers.                  established external grievance
➣ It requires that special enrollment                                                    requirements to give consumers options
opportunities be offered to employees                                                    if they believe a denied claim or service
and their dependents following a                COBRA, in effect since 1986, permits     should have been paid or provided.
change in family status or loss of other     employees and their dependents to
health insurance coverage.                   continue participation in their               Companies licensed to sell health
                                             employer-sponsored group health plan        insurance to small businesses must
  HIPAA provides the following               for a limited period of time after their    comply with certain state laws and
protections for self-employed individuals:   job ends. If the employer has 20 or         regulations. These provisions apply to
                                             more workers, its employees may be          small group health plans and to
➣ Under limited circumstances, there         eligible for COBRA continuation             individual plans, and they apply if the
is guaranteed access to at least some        coverage when they retire, quit, are        cost of the benefit is treated as a
insurance products in the individual         fired or begin working reduced hours.       business tax deduction, or if the
market with no pre-existing condition        Continuation coverage also extends to       employer pays any portion of the cost
exclusion periods for so-called “HIPAA-      surviving, divorced or separated spouses;   through reimbursement, payroll
eligible individuals.” HIPAA eligibility     dependent children; and children who        deduction or wage adjustment.
refers to persons with at least 18           lose their dependent status under their
months of prior creditable coverage          parents’ plan rules. An employee may          The laws and regulations that govern
with no break of more than 63                choose to continue in the group health      the business of health insurance in the
consecutive days and who:                    plan for a limited time and pay the full    states change from time to time. Thus,
                                             premium, including the share the            small business owners should contact
  ❚are leaving employer-sponsored            employer previously paid on the             the state Insurance Department with
  group coverage;                            employee’s behalf plus 2 percent to         specific questions.

GLOSSARY                                    portion of health insurance costs—above        limits to benefit exclusions due to
                                            and beyond the premium contribution—           pre-existing medical conditions.
Association-sponsored plans                 that employees are expected to pay
Professional or trade association-          out-of-pocket. Employee cost sharing           HMO
sponsored plans allow small business        expenses include deductibles,                  A health maintenance organization
owners to purchase health insurance         co-payments and coinsurance.                   (HMO) is an insurance plan that
for their employees through                                                                requires a person to get care from
membership in business, trade or            FSA                                            providers who are part of the HMOs
professional organizations.                 A flexible spending account (FSA) is           network. Usually, a primary care
                                            funded by the employee from pre-tax            provider coordinates care and controls
COBRA                                       income and is used to pay for medical          access to specialists. Most HMOs offer
The Consolidated Omnibus Budget             expenses. The entire annual amount of          a point-of-service (POS) option for
Reconciliation Act of 1986 (COBRA) is       an FSA must be made available to the           additional fees.
a federal law allowing employees and        employee at the beginning of the year.
their dependents to continue                However, unspent balances must be              HSA
participation in an employer-sponsored      forfeited to the employer at the end of        A health savings account (HSA) is an
group health plan for a limited period      the year.                                      alternative to traditional insurance
(generally 18 months) after employment                                                     coverage. HSAs must be paired with a
ends. Participants pay the full premiums    Guaranteed issue                               high-deductible health insurance policy,
associated with the plan, plus 2 percent    Federal law prohibits insurance                the contribution to which is tax-
to cover administrative costs.              companies from denying health                  deductible. HSA funds may be used to
                                            coverage to small businesses (usually          pay out-of-pocket costs (deductibles,
Coinsurance                                 defined as 2 to 50 employees) on the           coinsurance, co-pays). The employer,
Coinsurance is the percentage of a          basis of health status or other factors        the employee or both may fund the
medical bill that an insured person         related to the use of health care.             plan. HSA accounts are owned by the
must pay, after deductibles and/or                                                         employee, are fully portable and
co-pays are met. While coinsurance is       Guaranteed renewability                        remaining balances roll over year to year.
commonly 20 percent, it can be as little    Federal law prohibits insurance
as zero or as much as 50 percent (for       companies from canceling a business’           HRA
out-of-network services, for example).      insurance because someone in the firm          A health reimbursement arrangement
                                            becomes sick.                                  (HRA) is an alternative to traditional
Co-payment                                                                                 insurance coverage. HRAs are usually
A co-payment, or co-pay, is a fixed-        High-risk pools                                paired with a high-deductible health
dollar amount insured persons pay each      In some states, high-risk pools provide        insurance policy, the contribution to
time they seek care or purchase covered     a health insurance option for                  which is tax-deductible. HSA funds
items, such as office visits or             individuals whose poor health creates a        may be used to pay out-of-pocket costs,
prescription drugs. Co-pays sometimes       barrier to obtaining employer-based            including deductibles, coinsurance and
apply to inpatient hospital stays. Health   coverage. Premiums in high-risk pools          co-pays. The employer must fund the
plans usually have separate co-pay          are relatively high, and there is often a      HRA, and consequently may decide if
requirements for prescription drugs.        waiting period. However, many states           benefits are portable or if they roll over
                                            have nondiscrimination laws that               from year to year.
Deductible                                  eliminate the need for these pools.
A deductible is the amount that insured                                                    Maximum out-of-pocket expenditures
persons must pay for covered services       HIPAA                                          This out-of-pocket limit is the maximum
before medical expenses are paid by the     The Health Insurance Portability and           amount of cost sharing an insured
health plan. Some plans have separate       Accountability Act (HIPAA) of 1996 is          individual or family would have to pay
deductibles for pharmacy benefits.          a federal law that includes important          in a given year. Once a maximum out-of-
                                            health insurance provisions, including         pocket limit is reached, the insurer pays
Employee cost sharing                       nondiscrimination, guaranteed                  all additional covered medical expenses
Employee cost sharing refers to the         renewability, guaranteed issue and             for the year, up to the plan’s limit.

                                                                                Guide to Health Insurance Options for Small Businesses   11
Medical underwriting                         PPO                                        sharing. Typically, the employer and
Medical underwriting is a pricing            A preferred provider organization (PPO)    employee each contribute to the
practice used by insurance companies         is an insurance plan that encourages       premium payment.
to adjust premiums (usually upward)          enrollees to get care from providers
based on a group’s health status or          within the plan’s network, but allows      Provider choice
medical claims experience.                   access to providers outside the network    Different plan types (HMOs, PPOs,
                                             if one is willing to pay more. Many        POS plans and OA plans) vary with
Nondiscrimination                            PPOs do not require the insured person     respect to the degree of choice enrollees
Neither insurers nor employers are           to choose a primary care doctor or get a   have as to which doctors or other health
permitted to condition eligibility of        referral to see a specialist.              care providers they wish to see. HMOs
employees and their dependents on                                                       have the least provider choice, as they
their health status.                         Pre-existing medical condition             require participants to see professionals
                                             Pre-existing medical conditions, such      only within the plan’s relatively narrow
Open access plan                             as asthma, diabetes or cancer, may         network, whereas PPOs tend to have
An open access (OA) plan is an HMO           increase the cost and, in some cases,      broader networks of preferred providers
or POS plan in which patients are            the availability of insurance, subject     and allow access to non-network
allowed to self-refer to specialists for a   to federal and state laws and a            providers, but at a higher cost.
higher co-pay.                               carrier’s policies.
Point-of-service                             Premiums                                   A rate-up is the extent to which
A point-of-service (POS) plan is an          The premium is the amount an               premiums are increased, usually
option added to many HMOs allowing           insurance plan costs per month.            annually. Premium rate-ups are typically
enrollees to seek care outside of the        Premiums may vary as a function of         expressed as a percentage increase. For
HMOs network for a higher co-pay             market conditions, plan types, health      example, a premium that increases from
and, possibly, a higher premium.             status of enrollees, number of             $1,000 per year to $1,100 per year has
                                             enrollees and degree of employee cost      a rate-up of 10 percent.

                        Produced under the guidance of and with support from the             Healthcare Leadership Council

The Cover the Uninsured Week Small Business Working Group
America's Health Insurance Plans
Blue Cross and Blue Shield Association
Healthcare Leadership Council
The Robert Wood Johnson Foundation
U.S. Chamber of Commerce

This guide was prepared with assistance from Health Policy Consulting, LLC.
1010 Wisconsin Avenue N.W. • Suite 800 • Washington, DC 20007 • 202.572.2928 •

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