The ABC’s of Medical Insurance

Alan Thaxter Comments
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Every business owner strives to attract high-quality employees who will contribute to the growth and success of his company. To recruit and retain these people, many offer group health insurance as an employee benefit. The same strategy may be right for you.

Even if your company is small, you can offer group health. In most states, insurance companies that offer these plans are required to accept any group of two to 50 employees, provided you agree to insure 100 percent of eligible personnel. Before you can offer this benefit, you must decide whether you want the plan to be managed-care or fee-for-service and how much your employees will pay.

Definitions

Medical insurance, especially group coverage offered as an employment benefit, has its own language and can be difficult to understand. Following is a list of basic terms that will help you make decisions regarding company-sponsored health insurance:

  • Premium—The monthly cost of the coverage.
  • Deductible—The amount of expenses a patient pays before coverage from the insurance carrier begins. As with other types of insurance, a higher deductible will mean lower premiums.
  • Co-payment—The set amount a patient will pay for basic services such as office visits, emergency-room visits or prescriptions. A typical co-pay is $20 for office visits and $5 to $10 for prescriptions.
  • Reimbursement—The percentage of the bill the insurer will pay. It doesn’t mean the patient pays the whole bill and the insurance company reimburses him. Often, a doctor will bill the insurance company first, and send a bill to the patient for the rest. A typical reimbursement is 80 percent, with the patient paying the remainder. Depending on the coverage, the patient portion could be higher if he uses doctors who are not on the plan’s list of approved providers.
  • Maximum out-of-pocket expense— The most a patient will pay out-of-pocket during a year, including his deductible and bill portions.
  • Lifetime benefit—The total amount of coverage available over a lifetime. It could be $2 million or more.
  • Network—The group of healthcare providers contracted to provide services to plan members.
  • Excluded services—Some plans may not cover dental or vision care, mental-health services or maternity care. Common exclusions include braces, cosmetic surgery or surgery to correct vision.

Managed Care vs. Fee-For-Service

There are two major types of health plans: managed-care and fee-for-service. The plan that’s best for your business is determined largely by location, the physicians and hospitals available through the plan, options offered by the insurance company, and the constraints of your budget.

Managed-care plans are agreements between certain doctors, hospitals and healthcare providers and are designed to offer a range of services to members at a reduced cost. They go by many names, such as Health Maintenance Organization (HMO), Preferred Provider Organization (PPO) or Point-of-Service (POS) plan.

Most HMOs minimize members’ out-of-pocket expenses, as long as they use preferred providers and facilities. If members go outside of the network, they may be responsible for paying the entire bill. In addition, they must choose a primary-care physician and see that person first whenever they need medical attention. The doctor will make necessary referrals to specialists. With HMOs, per-visit or annual deductibles are usually lower than those of other plans.

PPOs are more flexible than HMOs but tend to cost more. They usually charge members to use providers and facilities outside of the network, but do not require referrals to see specialists. The per-visit or annual deductibles are usually higher than those for HMO.

POS plans provide a combination of HMO and PPO features. Members choose whether they want to pay a flat fee for a network provider or a deductible or coinsurance charge to see an out-of-network provider.

Fee-for-service plans, also known as indemnity plans, allow employees to choose healthcare providers themselves. This gives them a wide range of options that includes specialists such as cardiologists and surgeons.

Consumer-Driven Health Plans

As insurance premiums escalate, consumers look for ways to save money. A potentially lucrative tax shelter became available on Jan. 1, 2004, courtesy of the Medicare Act, which allows people to build “nest eggs” to cover out-of-pocket medical costs. A Health Savings Account (HSA) is a new investment vehicle that permits a taxpayer to shelter up to $4,500 annually. It is linked to a high-deductible health-insurance plan and designed, in part, to help consumers pay for health expenses until insurance benefits kick in.

There are only two requirements for opening an HSA: 1) It must be done in conjunction with high-deductible health coverage; and 2) A taxpayer must be under 65—the age of Medicare eligibility—when opening an account.

Let’s look at how an HSA works. First, consider the health-insurance portion. High-deductible health-insurance policies are now the rage. Their rates are much lower and increases more moderate, but the patient is left to cover more costs. An HSA has the potential to accumulate huge balances over years of contribution and investment gains. In theory, that puts consumers in a better position to pay for their own healthcare as they grow old.

An HSA also has tax benefits. Few Americans—particularly the young—will have the foresight to max out contributions to assist with medical expenses in old age. But the incentives are powerful for those who do, or for anyone who wants to build a modest account to cover routine healthcare costs.

In addition to carrying a generous annual limit, HSA contributions, investment growth and withdrawals for health-related expenses are all free from taxation. The law even allows an annual tax write-off equal to the deductible of the accompanying healthcare plan, though it can’t exceed $2,250 for an individual plan or $4,500 for a family plan. Limits will go higher in years ahead.

An HSA holder who uses the money for a non-health expenditure pays tax on it, plus a 10 percent penalty. After age 65, a withdrawal used for a non-health purpose will be taxed, but not penalized.

Who Pays for Insurance?

Most businesses that offer group health insurance contribute toward the cost of the coverage. Some pay for single coverage for all employees, but leave the premiums for family coverage as a decision for each individual. Other businesses pay a percentage of the total cost.

The amount you choose to pay will depend on your own situation. First, think about how your contribution will affect your budget. Second, consider how it affects the desirability of your plan to present and future employees. Many businesses choose to have staff make a contribution toward some of the cost, especially as healthcare and insurance premiums increase.

Plans change from year to year. According to a survey from the Employee Benefit Research Institute, nearly one in five small employers offering health-insurance benefits had to change them in 2002. Typically, those modifications resulted in increased co-payments, deductibles or premiums, with nearly a third of employers also dropping at least some of their benefits. Many businesses reported that to cover costs, they cut out or reduced pay raises or bonuses, trimmed other benefits, or put off making investments in the company.

“Unfortunately, employers are looked at as Scrooge in this situation, but the costs are astronomical,” says Robert Kneip, president and CEO of the Oasis Group, a Florida-based employer organization that offers human-resources consulting. “All employers want to give healthcare. But with the dynamics of business and increasing costs, it’s a real tough squeeze. When companies increase the employee portion, it doesn’t mean they’re not paying more too.”

Alan Thaxter is a health-insurance professional with Gallagher Benefit Services, a division of Arthur J. Gallagher & Co., the fourth-largest insurance broker in the world. The company provides a full range of solutions for group health insurance, employee benefits, property-and-casualty insurance, bonds and risk-management services. It has received numerous awards for business excellence and is familiar with the needs of the self-storage industry. The company partners with owners and managers nationwide in creating customized insurance programs. To contact the self-storage division, call 800.568.0833; visit www.ajg.com/Fresno


From the Employee’s Perspective
Making health-insurance decisions

For most people, the top health-insurance issues are cost and healthcare providers. Some have an established family physician or ongoing medical condition, which makes changing doctors a significant concern. If not, the decision comes down to how much coverage the individual can afford and how much control he wants.

James Taglia, vice president of employee benefits for Michigan-based Presidion Solutions, tells his employees with kids to see if their pediatrician is in the network. “The last thing you want is any surprises with your children,” he says. “Then, check to see if your physicians are in there. You’ve created a history with them.”

If you’re new to an area, your benefits department won’t tell you who is a good doctor and who isn’t, Taglia says. Ask your co-workers and neighbors for recommendations. If you have college-aged children who are going to school out of state, make sure there’s a network in that community.

If you’re married and your spouse is employed, do a careful comparison of both companies’ benefits. If you regularly take medication, ask to look at the formulary, a document that details the drugs insurance will cover. Taglia strongly recommends you take advantage of flexible-spending accounts for medical expenses because they reduce your taxable income.

Alan Ziegler is also a certified employee-benefits specialist. He advises that unless you have some very special circumstances, such as a chronic illness or family history of a rare disorder, go with the lowest premium. Take a higher co-payment and deductible, and keep your costs down. It may mean you pay the first $250 or $500 in health expenses every year, but if you don’t get sick often, it could save you hundreds of dollars a month in premiums.

If your company offers more than one choice and you don’t like the one you’ve made, you can make changes during the annual open-enrollment period. You might decide to add or drop prescription-drug coverage, or take a higher deductible and reduce your costs. Another option may be to change your coverage at other times of the year if you get married or have a child and want to add your new family members.

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