HEALTH INSURANCE OPTIONS



Health insurance is a contractual agreement between an individual or group and an insurance provider through which the insurance provider agrees to pay for some or all of the health care costs incurred by the person or group in exchange for their regular payment of a sum known as a premium. In this way, the insurance company assumes the financial risk of reimbursing health care costs, but it is able to offset that risk by collecting premiums from a large number of people, many of whom will have very low medical expenses. Traditionally, health insurance has been provided as an employee benefit by large companies, so many people have come to think of health insurance as part of an employment compensation package. But self-employed people and small business owners, lacking such coverage, must wade through the many available options to find plans that meet their own health insurance needs.

In recent years, many health insurance providers have begun offering plans for small businesses, even those with 15 or fewer employees. In some states, businesses are required to provide health insurance if they employ more than five workers. The type of coverage a business needs depends upon its work force. For example, a company with a work force consisting primarily of married people with dependent children will need more comprehensive coverage than a company with a mostly unmarried, childless work force. Many plans can be specifically tailored to the needs of a company's work force. For example, firms whose employees work at computers may wish to provide eye care as part of their health insurance plans, while other firms may find that employees would value a fitness program.

Many insurance companies offer computer models that enable small businesses to determine the most economical insurance plan given the previous year's health care expenses. Another option that can reduce premiums is pooling insurance with other small businesses through trade associations or other organizations. Experts note that business owners may find it helpful in comparing different plans to ask the providers for references to other small business clients. Even though health insurance coverage can be expensive for small businesses, plan costs are tax deductible. In addition, providing such benefits can help smaller companies compete with larger ones to attract talented employees and can act to reduce employee turnover. It is important to note that, under the terms of the Consolidated Omnibus Budget Reconciliation Act (COBRA), all businesses that employ more than twenty people and offer a group health insurance plan must give employees the option of continuing coverage at their own expense for a limited period of time when they lose eligibility for company-provided benefits.

Health insurance is also important for self-employed persons. Health care costs increase dramatically every year, and individuals need to protect themselves against the expense of an unforeseen illness, injury, or accident. But according to Lenore Janecek in her book Health Insurance: A Guide for Artists, Consultants, Entrepreneurs, and Other Self-Employed, between 27 and 37 million Americans have no health insurance, and another 60 million have inadequate coverage. About 60 percent of the working Americans who lack health insurance are employed by small businesses.

One of the main factors preventing small business owners from obtaining health insurance for themselves and their employees is the cost. In the late 1990s, small businesses were hit hard by rising insurance premiums. In fact, a 1999 study by the Kaiser Family Foundation found price increases of 6.9 percent for businesses with less than 200 employees—more than triple the inflation rate—and even more dramatic increases were expected in 2000. "Premium increases are hitting the smallest of businesses the hardest, most of whom already have a difficult time affording health insurance," said Kaiser Family Foundation President Drew Altman in the Indianapolis Business Journal. "These increases will make it even harder for small businesses to provide health insurance for their employees in the future." Many small business owners found it necessary to consider modifying their health insurance plans for greater affordability, requiring employees to pay more of the monthly premium costs, or dropping their group health care coverage altogether. This last option could pose a problem for small businesses hoping to remain competitive in the job market, however, since 88 percent of employees consider health care benefits to be more of an incentive than any other type of benefit.

There are a variety of health insurance plans available from commercial insurance companies, hospital and medical service plan providers, and health maintenance organizations (HMOs). Coverage can generally be purchased on an individual or group basis. Group plans may be handled through an employer or through various organizations, including professional associations, colleges, labor unions, and health cooperatives. These plans usually have lower premiums than individual plans, cannot be canceled, and do not depend on the physical condition of individuals within the group. Most types of policies cover part of the costs of hospitalization, diseases and illnesses, surgery, and injuries from accidents, but the extent of coverage depends on the particular policy. Most policies do not cover cosmetic surgery, self-inflicted injuries, or preexisting conditions. Supplemental coverage is usually required to pay for eye and dental care, special hazards (such as football, skiing, hunting), rehabilitation services, and travel accidents. Some policies have a deductible that requires the insured to pay a certain amount out-of-pocket before benefits kick in, while others have a co-payment that requires the insured to pay a percentage of the costs after satisfying the deductible.

The most popular types of health insurance plans in the United States are: fee-for-service plans, which encompass traditional indemnity insurance; and prepaid plans, which include popular managed care options such as HMOs. Other possibilities include self-insurance, which basically involves a company or individual covering their own health care costs, and medical savings accounts (MSAs), which allow people to set aside money before taxes to be used for medical expenses. In addition, government-backed health care plans are available to federal employees, members of the military, veterans, the elderly, low-income families, Native Americans, and other societal groups.

As a result of the proliferation of health insurance options, deciding upon a plan can be a complicated process for a self-employed person or small business owner. Experts recommend that individuals and companies choose a plan that protects them against experiencing financial harm from an unexpected injury or illness, but is not prohibitively costly to maintain. In deciding on an appropriate amount of coverage, it is important to consider the amount of money available for emergencies, the unusual hazards that may exist, the family or work force health history, the extent of protection already available, and the level of health care costs in the community.

TYPES OF PLANS

The most common types of health insurance plans are prepaid (also known as managed care) and fee-for-service. Under traditional fee-for-service plans, the insurer pays the insured directly for any covered hospital or physician costs. Under a prepaid plan, insurance companies arrange to pay health care providers for any service for which an enrollee has coverage. The insurer effectively agrees to provide the insured with health care services, rather than reimbursement dollars. Prepaid plans offer the advantage of lower costs, which result from reduced administrative expenses and a greater emphasis on cost control. However, such plans also restrict enrollees' choices as to the doctors and hospitals from which they receive service.

FEE-FOR-SERVICE Fee-for-service health insurance plans waned in popularity during the late 1980s and 1990s. In fact, the percentage of insured Americans covered by such plans declined from 96 to 28 percent between 1984 and 1991, and was expected to reach 20 percent by 2000. The primary reason for this decline was that fee-for-service arrangements do not emphasize preventative care or containment of costs. Feefor-service health insurance plans are available to both individuals and groups. By spreading the costs among a pool of enrollees, group health insurance offers benefits derived from economies of scale. Group insurance generally features lower premiums and deductibles, more comprehensive coverage, and fewer restrictions than individual policies.

Most fee-for-service plans cover basic costs related to: hospitalization, including room and board, drugs, and emergency room care; professional care, such as physician visits; and surgery, including any procedures performed by surgeons, radiologists, or other specialists. Insured persons generally have their choice of hospitals and doctors. More inclusive health insurance plans are referred to as major medical insurance. Two types of major medical plans are: 1) supplemental, which provides higher dollar limits for coverage or covers miscellaneous services not encompassed in some basic plans, such as medical appliances and psychiatric care; and 2) comprehensive, which usually covers all costs included in basic and supplemental plans, and may also eliminate deductible and coinsurance requirements. Basic, supplemental, and comprehensive plans usually do not insure dental, vision, or hearing care.

Most health care options related to fee-for-service plans relate to different degrees of coverage. For instance, insureds may select a high deductible as a way of lowering the cost of the plan. Likewise, different levels of coinsurance are usually available. For example, the plan participant may agree to pay for 20 percent of all costs incurred after the deductible amount, up to a total of, say, $50,000 (for a total disbursement by the insured of $10,000). A more expensive plan may reduce the participant's share of those costs to 5 or 10 percent. The total limit on insurer payments can also be adjusted; an individual lifetime maximum of $1 million is not uncommon.

PREPAID PLANS The second major category of health insurance is prepaid, or managed care, plans. Managed care plans typically arrange to provide medical services for members in exchange for subscription fees paid to the plan sponsor. Members receive services from physicians or hospitals that also have a contract with the sponsor. Thus, managed care plan administrators act as middlemen by contracting with both health care providers and enrollees to deliver medical services. Subscribers benefit from reduced health care costs, and the health care providers profit from a guaranteed client base.

Although they serve the same basic function as traditional health insurance, managed care plans differ because the plan sponsors play a greater role in administering and managing the services that the health care providers furnish. For this reason, advocates of managed care believe that it provides a less expensive alternative to traditional insurance plans. For instance, plan sponsors can work with health care providers to increase outpatient care, reduce administrative costs, eliminate complicated claims forms and procedures, and minimize unnecessary tests.

Managed care sponsors accomplish these tasks by: reviewing each patient's needs before treatment, sometimes requiring a second opinion before allowing doctors to administer care; providing authorization before hospitalization; and administering prior approval of services performed by specialists. Critics of managed care claim that some techniques the sponsors use, such as giving bonuses to doctors for reducing hospitalization time, lead to undertreatment. Some plans also offer controversial bonuses to doctors for avoiding expensive tests and costly services performed by specialists.

Managed care plan sponsors also have more of an incentive to emphasize preventive maintenance procedures that help patients avoid serious future health problems and expenses. For instance, they typically provide physicals and checkups at little or no charge to their members, which helps them detect and prevent many long-term complications. Many plans offer cancer screenings, stress reduction classes, programs to help members stop smoking, and other services that save the sponsor money in the long run. Some plans also offer financial compensation to members who lose weight or achieve fitness goals. For example, one plan offers $175 to overweight members who lose 10 pounds and gives $100 to members who participate in a fitness program.

Another difference between traditional insurance and managed care is that members typically have less freedom to choose their health care providers and have less control over the quality and delivery of care in a managed system. Members of managed care plans usually must select a "primary care physician" from a list of doctors provided by the plan sponsor.

Managed care plans can take many forms. The most popular plans are health maintenance organizations (HMOs) and preferred provider organizations (PPOs). Other services that mimic these two plans include point-of-service plans and competitive medical organizations. In addition to these established plans, many employers and organizations offer hybrid plans that combine various elements of fee-for-service and managed care options.

The most popular plan, the basic HMO, is the purest form of the managed care concept. HMOs are differentiated by four organizational models that define the relationship between plan sponsors, physicians, and subscribers. Under the first model, called individual practice associations (IPA), HMO sponsors contract with independent physicians who agree to deliver services to enrollees for a fee. Under this plan, the sponsor pays the provider on a per capita, or feefor-service, basis each time it treats a plan member. Under the second model, the group plan, HMOs contract with groups of physicians to deliver client services. The sponsor then compensates the medical group on a negotiated per capita rate. The physicians determine how they will compensate each member of their group.

A third model, the network model, is similar to the group model but the HMO contracts with various groups of physicians based on the specialty that a particular group of doctors practices. Enrollees then obtain their service from a network of providers based on their specialized needs. Under the fourth model, the staff arrangement, doctors are actually employed by the managed care plan sponsor. The HMO owns the facility and pays salaries to the doctors on its staff. This type of arrangement allows the greatest control over costs but also entails the highest start-up costs.

A PPO is a variation of the basic HMO. It combines features of both indemnity insurance and HMO plans. A PPO is typically organized by a large insurer or a group of doctors or hospitals. Under this arrangement, networks of health care providers contract with large organizations to offer their services at reduced rates. The major difference from the HMO is that PPO enrollees retain the option of seeking care outside of the network with a doctor or hospital of their choice. They are usually charged a penalty for doing so, however. Doctors and hospitals are drawn to PPOs because they provide prompt payment for services as well as access to a large client base.

OTHER OPTIONS Various other health insurance options exist for small businesses and self-employed individuals. One possibility is self-insurance, which requires a company to absorb most of the financial risk of its own health care coverage. An outside administrator may handle the paperwork, but the company pays its own claims. Self-insurance can provide a company with greater control over its health care costs and improved cash flow, but it can also be prohibitively expensive in cases of severe illness or injury. As a result, some companies choose to limit their liability by purchasing stop-loss insurance, which covers expenses after they reach a certain limit.

Another option is a medical savings account (MSA), which was approved by Congress for a four-year test in 1996. This option is available to self-employed persons or companies with 50 or fewer employees. It allows employees to fund special accounts with pre-tax dollars that can be used later to pay health care costs. Disbursements from the accounts are tax-free as long as they are used for approved medical expenses, and unused funds can earn interest and accumulate indefinitely. In most cases, the MSA option is coupled with a high-deductible insurance policy.

FURTHER READING:

Anastasio, Susan. Small Business Insurance and Risk Management Guide. U.S. Small Business Administration, n.d.

Blakely, Stephen. "Finding Coverage for Small Offices." Nation's Business. June 1997.

DiFiore, Bernard. "Small Companies Don't Have to Settle for Less." Dallas Business Journal. September 22, 2000.

Janecek, Lenore. Health Insurance: A Guide for Artists, Consultants, Entrepreneurs, and Other Self-Employed. Allworth Press, 1993.

Lynn, Jacquelyn. "A Quick Guide to Insurance." Entrepreneur. June 1997.

May, Troy. "Health Insurance Costs Put Small Firms in a Money Crunch." Business Journal. October 27, 2000.

"Premium Pain Relief: Association Health Plans." Business Week. June 12, 2000.

Rettig, Ellen. "Small Biz Feels Brunt of Premium Increases." Indianapolis Business Journal. October 16, 2000.



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