Discover All There Is To Know About Group Health Plans
Group health insurance is one of the most lucrative sales opportunities in the benefits space. Confidently selling a group health plan (GHP), also known as employer-based coverage, starts with knowing the various plans’ benefits and drawbacks from a client's perspective.
Read on to learn more about the different types of group health plans available, their pros and cons, and how you can better position this type of coverage.
The Different Types of Group Health Insurance
A group health plan is a health insurance policy that is purchased by an organization to offer to its employees.
There are some basic legal requirements that all employers must follow regarding health insurance coverage. The Affordable Care Act (ACA) requires employers with 50 or more full-time employees to provide health insurance to full-time employees and their dependents. Insurers, on the other hand, are required to make GHPs available to companies with as little as two employees. In certain states, self-employed individuals can qualify for a group coverage plan.
Fully Insured Health Plans
Fully insured health plans are the most popular type of traditional group health plan. With these, an employer buys coverage directly from an insurance company. In turn, the insurer charges the employer an annual premium, which is often partially paid for by the employees. Premiums are calculated based on the group’s size, overall health, average age, occupation type, benefits needs, and the employer’s claim history.
- Lower financial risk for the employer. Carriers take on the financial risk and responsibility of covering employee medical claims. This protects the employer from hefty medical bills and unexpected large claims.
- Less administrative tasks for the employer. The insurance carrier is responsible for leading Open Enrollment, claims handling, and other administrative tasks.
- Financial predictability. Fully insured plans come with fixed annual premiums, allowing employers to better forecast their finances.
- Less flexible. The carrier determines the plan design, rates, and network for fully insured plans, making them less customizable.
- Costs. Fully insured plans are typically more expensive than other plans. Plus, employers don’t get refunds for the leftover money not spent on claims at the end of the year.
- State and federal regulations. Fully insured plans are subject to state laws and taxes, which adds a layer of complexity and may incur compliance costs.
Self-Funded Health Plans
Self-funded plans, also known as self-insured plans, are a type of health coverage where an employer pays for its employee's medical claims directly, rather than paying a fixed premium to a carrier. The employer sets aside a certain amount of money per month to cover expected medical costs, which they will use to pay most or all of the medical claim costs as they arise. They may collect premiums from enrolled employees.
- More plan customizability. These plans are typically more customizable, as a carrier doesn’t predetermine their design. This allows your clients to create a plan that meets their employees’ unique needs, like incorporating a specific wellness program or excluding certain benefits.
- Cost savings. At the end of the year, the total amount of paid claims is compared to monthly costs, and the difference is typically refunded to the employer.
- Compliance exemptions. Self-funded plans aren’t required to comply with state insurance regulations, as they are covered by the Employee Retirement Income Security Act (ERISA).
- Lower taxes. Employers don’t need to pay taxes on gross premiums, underwriting costs, and other expenses typical of a traditional health insurance plan.
- Clearer data. With a fully-funded plan, the insurer owns the plan, along with the data. With a self-funded plan, employers own the plan, giving them a clear view of costs and claims.
- More financial risk. This type of plan puts financial risk on the employer and can make costs more unpredictable. Purchasing stop-loss or excess-loss insurance can help mitigate this risk — this can be used to cover claims that significantly exceed a set amount.
- Higher administrative burden. Unless they hire a third-party administrator (TPA), employers are responsible for handling the administrative tasks regarding their plan, such as managing claims, negotiating contracts, and more. Administrative fees may dip into the savings you aim to have with a self-funded health plan.
- Friction in the employee process. State by state, acceptance of these plans by providers can be more limited than more traditional plans. This can make it more difficult for employees to get the care they need, leading to frustration.
Level-Funded Health Plans
Level-funded plans are a type of self-funded plan. The main difference is that the cost of level-funded plans typically covers stop-loss insurance, maximum potential claim amounts, and administrative costs. Monthly payments are sent to the insurance carrier or third-party claims administrator to cover these expenses.
- Cost savings. Level-funded health plans typically have lower premiums than fully-funded plans. These plans are also exempt from state and ACA taxes on premiums. Plus, if claim costs are lower than expected, employers may receive a refund for the difference.
- Predictability. Stop-loss insurance helps eliminate the financial risk for the employer — the employer pays a set amount per year, regardless if the claims exceed this amount. With a predictable monthly rate, level-funded plans give employers more control over healthcare costs.
- Customizable plans. Level-funded plans give employers more control over what they want to include in their health plans.
- Size requirements. Because of their structure and benefits, level-funded health plans are a popular choice for startups and small- to mid-sized businesses. Some level-funded plans are restricted from companies that exceed a certain number of employees.
- Cost more than self-funded plans. Because administrative costs and stop-loss insurance are included in a level-funded plan, this option usually costs more than a self-funded plan.
Health Maintenance Organization (HMO) Plans
An HMO is a type of managed-care insurance plan where group members pay for certain services through monthly premiums. Through this plan, employees can utilize covered services from a predetermined (usually smaller) list of in-network providers. With an HMO, these services are covered by insurance after the employee pays their copay or meets their deductible.
- Affordability. This type of plan is a more affordable option compared to Preferred Provider Organization (PPO) plans for both employers and their employees. They typically have lower, fixed monthly or annual premiums, along with a low or no deductible and small copayments.
- Care coordination. A primary care provider (PCP) is typically needed to help coordinate the care of each group member. This process can help lower expenses.
- Less flexibility. Since care from only a select network of providers is covered, if a group member wishes to see an out-of-network provider for non-emergency services, they will have to pay the full bill.
- Referrals needed. With an HMO, a referral from a primary care provider is usually required to see a specialist or get certain services.
Preferred Provider Organization (PPO) Health Plans
A PPO plan is another type of managed-care insurance plan that has a broader network of approved healthcare providers compared to an HMO plan. With a PPO, employees cover their copay or deductible, and the insurer agrees to pay the healthcare provider the remaining amount.
- Flexibility. PPOs are a little more flexible than HMOs. These plans give employees access to a larger list of in-network providers, and employees can see an out-of-network provider and still have coverage, although they may need to pay more out of pocket.
- No referrals are needed. Group members can get care from a specialist without obtaining a referral from a PCP.
- More costly (compared to an HMO). A PPO costs more for employers and their employees. These plans typically include copays and/or a deductible that has to be met before an insurer will cover healthcare costs, along with a higher monthly premium.
High-Deductible Health Plan (HDHP) With a Savings Option (HDHP/SO)
HDHP plans offer higher deductibles with lower premiums. As the plan’s name implies, group members will need to pay more out-of-pocket to reach their deductible before their insurance covers the rest of their healthcare costs. These plays may have an embedded or non-embedded (aggregate) deductible.
A health savings account (HSA) can be used in conjunction with an HDHP. An HSA enables employers, employees, or both to make tax-free contributions to a savings account, which can be used to cover qualified health expenses.
- Lower premiums. Monthly premiums are typically lower with an HDHP, making it a great option for group members who don’t need many medical services.
- Tax-free spending account. If employers offer an HDHP with an HSA, employees can use the funds from their HSA to pay for qualifying medical expenses, ranging from copayments to major healthcare services. Plus, any leftover funds roll over every year, acting as a great savings option.
- Investment options. Many HSAs also have an option for investment once an employee has a certain amount in their account.
- Employee prioritization. An employee’s HSA contributions are portable, meaning that they stay with them should they choose to get a job elsewhere. An HSA also gives employees some tax benefits — leaving money in an HSA enables it to grow, tax-free, if it’s not used to cover healthcare expenses.
- Higher out-of-pocket costs. With a higher deductible, employees must pay more before their insurance kicks in.
- No copays. With an HDHP plan, group members must pay 100% of the healthcare costs until they reach their deductible—copays aren’t an option for this type of plan. Insurance carriers can negotiate discounts on bills before group members pay.
Health Reimbursement Arrangements (HRA)
There are two main types of HRAs: integrated and stand-alone.
- Integrated HRA. An integrated HRA is an HRA that’s used in conjunction with traditional group health insurance plans, like an HDHP, for example. There are two types of integrated HRAs: Excepted Benefit HRA (EBHRA) and Group Coverage HRA (GCHRA).
- Stand-alone HRA. Stand-alone HRAs aren’t connected to a traditional group health plan. Instead, these are typically used as an alternative to a group health plan. There are two types of stand-alone HRAs: Individual Coverage HRA (ICHRA) and qualified small employer HRA (QSEHRA). ICHRAs are ideal for companies of any size, while QSEHRAs are a good fit for companies with 50 or fewer employees.
HRAs are similar to an HSA; however, the employer is the only one who contributes to the savings account rather than the employee. With an HRA, employers set a fixed, tax-free monthly budget to reimburse employees for qualifying out-of-pocket expenses, such as deductibles, copays, prescriptions, coinsurance, and more.
- Lower, predictable costs. Because HRAs use a set monthly budget that can’t be exceeded, they inherently mitigate the financial risk that comes with other self-funded plans. HRAs are also exempt from annual premium rate increases, and using an HRA in combination with an HDHP can help cut healthcare costs for employers and employees.
- Flexibility. Employers can choose to allow some HRA funds to roll over into the next year.
- Tax benefits. The money that is reimbursed to employees is tax-free. HRA reimbursements are also tax-deductible for employers.
- Contribution limits. The IRS has set limits on how much an employer can contribute to certain HRAs. Employees cannot contribute to their HRA.
- Not portable. Since the money in an HRA is from an employer, the funds in an HRA aren’t portable — meaning if the employee leaves, the money in the HRA stays where it is.
- Not investable. Different from HSAs, HRA funds cannot be invested and gain interest over time.
- Delayed payment. To reimburse employees, employers can’t withdraw the funds beforehand. Employees must first pay their medical expenses and then wait to get reimbursed. This can be an issue for group members who don’t have the means to cover upfront costs.
Flexible Spending Account (FSA)
An FSA is an account that allows group members to save money to pay for qualified medical expenses, like copays, deductibles, medications, and more. These funds are deducted from employee paychecks before taxes. Employers decide how much their employees can contribute annually to an FSA, which is capped by the IRS at $3,050 per individual for 2023.
FSAs can be used in combination with other health plans, whereas their similar counterparts, HSAs, can only be used with an HDHP.
- Tax savings. Employer FSA contributions are tax-deductible. Employers can also avoid the payroll tax for Social Security and Medicare (FICA) on the contribution amount.
- Employee benefits. This option enables employers to help their employees lower their out-of-pocket health expenses and taxes, which can improve employee satisfaction.
- Redistribution of unused funds. If employees don’t use everything in their FSA, the remaining money will be refunded to the employers if there’s no grace period or rollover feature. This money can be used to help offset administrative costs or it can be equally divided among employees who enroll in an FSA for the next year.
- Administrative burden. FSAs are subject to compliance requirements. They are subject to ERISA regulations and HIPAA privacy standards, meaning that there are additional administrative tasks that must be done to ensure compliance. There is a risk of penalties if employers choose to handle these things in-house and make a mistake. This burden can be alleviated by outsourcing these tasks to a third-party administrator.
- Upfront annual election reimbursement. Under the Uniform Coverage Rules, employers must reimburse expenses that occur during the coverage period, up to the employee’s annual election amount, regardless of their FSA balance. If an employee leaves, employers can’t regain the funds they’ve reimbursed that exceed what the employee has contributed to date.
- Additional costs. If you choose to outsource FSA administration, there is an additional cost associated with this.
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With so many different group health coverage types to keep track of, things can quickly get disorganized. Using the technological tools at your disposal can help you better serve your clients, increasing sales and client retention.
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by Allison Babberl
on Tuesday, November 21, 2023