The Pratfalls and Pitfalls of Group Insurance

By: Rachel Vallo

Let me guess, you're one of those, go-getting, micro-business entrepreneurs or an old fashioned small business owner ... and that means its up to and you alone to decide whether or not you can provide a group health care plan to your close-knit workforce. These days, business owners in your position need more than just health insurance for themselves, the availability of group health has become an essential recruiting selling point. Besides, it's frankly in your best interest to be on a group plan rather than an individual plan. Group health plans often have richer benefits and lower premiums overall because of their "shared risk/shared cost" structure.

Once you've made the decision to offer a group medical plan, you should be aware of the types of health plans available and the many features and benefits they provide. There are many types of group insurance programs. However, I'll only focus on plans specifically designed to be comprehensive workforce oriented health care solutions rather than those focused on specific medical issues.

This is all simpler than its sounds. You see, most health insurance plans can be broken down into four major categories ... Comprehensive Major Medical, HMOs, PPOs and Self Funded Plans.

First Up, the Comprehensive Major Medical Plan

This type of group health policy will provide benefits for expenses incurred by an employee for most medical treatments. This includes benefits for treatments in a hospital, for physician services in or out of a hospital, for treatments needed for the care of accidental injuries, for treatments incurred during pregnancy, and most other medical costs incurred from a "medically necessary treatment.

Here are the four riders that can traditionally be attached to comprehensive major medical plans:

?Prescription Drug Card - allows for small co-payment by employee when purchasing prescription drugs.

?Supplemental Accident Benefits - provides first dollar coverage with no deductible for treatment of accidental injuries.

?Dental/Vision Benefits - provides insurance for the specific cost of dental and optical treatments.

?Skilled Nursing Care/Home Health Care - provides coverage for the cost of ongoing care in a skilled nursing facility or in the home.

Comprehensive major medical coverage is the favorite option of most small business owners and micro-business entrepreneurs. However, due to the enriched benefits provided by major medical plans, it can be a fairly costly choice.

Secondly, The Health Maintenance Organization (Group HMO)

The sometimes infamous: Health Maintenance Organization (aka HMO) is in reality mild mannered Bruce Banner (sorry, just kidding) HMO's are managed health care platforms. They apply built-in cost containment features to help reduce the risk of loss to the underwriting insurance company, thereby reducing the cost to business owners such as, well ... you. Here's an example: Many Blue Cross/Blue Shield plans have HMO options that provide benefit plans for employees who choose physicians from a approved / participating roster of health care providers.

Typically HMOs are organized in much the same way. The difference centers on the way the physician "panel is structured. You see, prepaid group practice HMOs include practitioners that are located together in an office/complex and are hired by the plan and paid a salary. Individual practice association HMOs include participating physicians who practice individually and are contracted by the HMO. In both cases, the HMO is receiving a prepaid premium from the plan participant.

Next Up, The Preferred Provider Organization (Group PPO)

The not so infamous at as all that Preferred Provider Organization is very similar to the HMO, at least in terms of base concept. Group PPOs are just groups of physicians and hospitals that contract with employers, insurance companies, or third party administrators to provide health care services at reduced fees. Like HMOs, PPOs may be structured as group or individual practices.

The primary differences between Group HMOs and Group PPOs play out as follows:

?PPOs do not provide benefits on a prepaid basis but on a fee-for-service basis as services are rendered.

?Fees are usually subject to a schedule used by all PPO participants.

?Plan participants do not have to use the PPO physicians or facilities. They can make a choice each time health care is necessary. However, PPOs usually have lower deductibles and lower co-payments.

Lastly, The Self-Funded Group Medical Plan

The Self-Funded Plan involves an arrangement whereby the employer assumes all the responsibilities and liabilities that an insurance company would normally assume. Basically, the employer is responsible for payment of all claims. However, can problems arise if your workforce incurs substantial claims. Therefore, most self-funded group medical plans will be less economically feasible for small business groups but will work quite effectively for firms with medium-sized groups due to the reduced risk.

There are various partially self-funded group health plans that are more feasible for small groups. An insurance company would underwrite this type of plan. The employer would be responsible for the co-insurance portion of the major medical plan, while the employee is responsible for the appropriate deductible. Traditionally, the co-insurance portion of a major medical plan is 80% of the $5,000 of medical costs that exceed the deductible. The insurance company is then responsible for all amounts exceeding the deductible and co-insurance.

The total annual aggregate out-of-pocket expenses for the employer work out to be what the average annual cost of a full-blown major medical plan would be for the same group. Therefore, if a company has a fairly good health history, it may save some money with a partially self-funded plan.

Remember ...two or more of the group-oriented health insurance plans above can be used in concert with a variety of tax saving strategies.



Before You Go, Here's a Note About Group Cafeteria Plans

Cafeteria Plans are available to business owners and their employees for the purpose of funding employee benefits with pre-tax dollars. The essence of a cafeteria plan, as described in IRC Section 125, is that it allows each participating employee to choose among two or more benefits. In particular, the employee may "purchase nontaxable benefits by foregoing taxable cash compensation. Benefits under a cafeteria plan are limited to cash and certain statutory benefits, including medical, disability and other accidental or health plan coverages, group term life insurance, dependent care, group legal services, and 401(k) plans.

There are many different methods of initializing cafeteria plans for small businesses. Every small business is different, and cafeteria plans should be approached with that idea in mind.

The choice of what type of group health insurance plan will best fit the needs of your workforce isn't easy one. However, having a basic knowledge of what is available can make the decision a little easier. The bottom line is a more important question. "Do you want a plan with quality features and benefits?" or "Do you want to save money?" In most cases, you will find it difficult to have both.

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