1. Determine Your Budget and Your Needs
There are two schools of thought on where to begin: One says it comes down to cost; the other says it depends on what your competition is offering.
There's no consensus on how much a business should budget for health care. According to a survey by the National Federation of Independent Business, or NFIB, nearly half of small businesses that provide insurance spend at least 7.5 percent of payroll on health care. But a quarter of those companies spend more than 15 percent. If you're going after highly paid, skilled workers, you will want to at least match the competition, says Jackie Breslin, a director at TriNet, an HR outsourcing firm.
Early-stage companies with a lot of young workers can often get away with covering employees but not their families. With more mature companies that need to retain older employees, Breslin says, "we spread those dollars differently. Family coverage is important."
Also, consider how much you want your employees to contribute in both premiums and out-of-pocket expenses. Most insurers will require you to cover at least half the premium, to encourage the youngest and healthiest among your staff to stay with your group (and dilute the risk inherent in an older, sicker population). Beyond that, it's really a value judgment. But bear in mind that most carriers will decline to write a policy if the plan doesn't attract at least three-quarters of your eligible employees.
2. Understand Your Options
Good insurance agents will guide you through the maze of possibilities, but it's important to recognize that their interests are not always aligned with yours, because they're paid by commissions embedded in the premiums. Nearly half of the small-business respondents to the NFIB survey reported that their representatives never mentioned high-deductible plans, which have lower premiums (and thus generate smaller commissions). Have a sense of what your options are before you sit down to discuss them with the agent.
Typically, insurance plans come in four flavors, though the distinctions are blurring, says Marian Mulkey, senior program officer at the California HealthCare Foundation, a nonprofit advocacy group for health care reform. In general, the higher the premiums, the lower the out-of-pocket costs.
Preferred Provider Organizations, or PPOs, assemble a broad network of doctors and hospitals but also let patients see doctors outside the network, normally with higher out-of-pocket costs. These plans cover about two-thirds of the employees at large businesses but only about one-third at the smallest businesses, probably because these plans are usually the most expensive. The Kaiser Family Foundation says the average annual PPO premium for individual coverage at small businesses was $4,881 in 2007, while the average deductible was $667.
Health Maintenance Organizations, or HMOs, provide an umbrella of care. A patient chooses a primary care physician, who can refer a patient to an in-network specialist. The insurer pays for everything apart from a co-payment for each service. Though often derided for the control they exercise over patients' care, they have become the vehicle of choice for the most comprehensive coverage, Mulkey says. That has made them more expensive over time; average annual premiums across all companies reached $4,299 for individuals; the average deductible was $401.
Point-of-Service plans meld elements of HMOs and PPOs. As in an HMO, a patient has a primary care physician who makes referrals. As in a PPO, those referrals can be out-of-network, though patients pay for service up front and seek (partial) reimbursement later. The result is that the average premium cost to small businesses was closer to that of an HMO -- $4,358 for individual coverage -- while the average deductible, at $751, was closer to that of a PPO.
High-Deductible Health Plans are a relatively recent innovation, usually offered in tandem with a Health Savings Account, funded by the employee or the employer, or a Health Reimbursement Arrangement, funded by the employer. Deductibles under these plans can reach $5,000 (though an employer can mitigate the cost; see "How to Choose a Health Care Plan: Three Ways to Save Money"), but the premiums drop significantly: According to Kaiser, the average cost for a single person was $3,881; the average deductible was $1,865.
There is no rule about which plan best serves which group. "It's all about tradeoffs," Mulkey says. Make sure, for example, to consider employees' existing relations with providers.
Cost has several dimensions, too. There's total premium and the employer's share versus the employee's. And there are also out-of-pocket costs for employees. Those include the deductible and co-insurance ratio (the share the insurance company picks up once the deductible is met), as well as co-payments for doctor visits and drugs. All tend to affect the premium, but not greatly, says Scott Leavitt, a broker in Boise, Idaho: "You only see a big change when you make a giant change in the deductible, especially when it gets above $2,000."
3. Pick Your Vendor
Most small-group health insurance is sold through agents. A so-called independent agent sells policies for many carriers, whereas a "captive" agent represents just one. Unless you're determined to go with a particular insurer, you're best off comparison shopping with an independent.
As always, rely on a professional who meets the standards of the field's leading guild, in this case the National Association of Health Underwriters. Agents seldom compete on price; you will have to rely on more subjective factors: experience, demeanor, and the menu of services each broker offers.
Insist that your agent show you not just a variety of plans from one insurer but also similar plans across carriers. A good agent will conduct employee education, run interference with the insurer when you or your employees have customer service issues, and reevaluate the policy every year.
You may, depending on your state, find attractively priced insurance through purchasing alliances. These organizations are designed to lower insurance costs by pooling risk. In practice, the cost savings tend to get eaten up by the additional administrative costs of running the alliance. That said, they allow a small business to offer employees more than one type of plan.
Finally, professional employer organizations serve as outsourced HR departments that manage payroll, compliance, and benefits. They possess the leverage of a single huge company in negotiating benefits. You will pay anywhere from 3 percent to 10 percent of payroll for the services of a PEO.