How To Save On Health Insurance: 4 Affordable Options

At a time when small- and medium-sized businesses are struggling to keep their employees on the payroll, it may seem like providing health insurance is the last thing on owners' minds. But the reality is the pandemic has emphasized how critical it is to keep employees safe and healthy right now.

"COVID has reminded us of the value of health insurance," says Alan Silver, senior director, health benefits at Willis Towers Watson. He's seeing a continued commitment from small and mid-sized employers to provide medical coverage, even as businesses struggle to overcome revenue losses and increased costs associated with COVID-19. A Harris Poll study of small businesses conducted in May for the insurers Cigna and Oscar found 70% of respondents reported lost revenue and more than half had to lay off or furlough employees. But 66% of respondents maintained that health insurance was still a high priority in their budgets.

These same employers, however, have far less tolerance for the financial volatility that's involved in purchasing and administrating such benefits. Health insurance already takes an enormous portion of company budgets. Small businesses paid an average of $5,658 for an individual employee's health plan premium and $14,035 for a family plan, according to the 2019 Kaiser Family Foundation Employer Health Benefits Survey. As the COVID-19 pandemic continues, enforcing shutdowns and dampening sales, businesses simply may not have the cash flow or cushion to deal with the large premium increases so common in the past--and that may well be in store next year.

Some firms, such as actuary Pricewaterhouse Coopers, predict a 4% to 10% rise in medical costs in 2021."With the uncertainty of the impact of Covid-19 on healthcare premiums, we're seeing a drastic increase in organizations looking for alternatives to reduce their health care spend," says Michael Bux, principal at Mercer, a human resources consulting firm.

The following is a rundown of the various types of health insurance SMBs may purchase and the cost-saving potential of each. Some are especially geared towards very small--one-to-50-employee firms--who are not required by law to offer medical coverage for their workforce, but who want to do so, for reasons altruistic, competitive--or a combination of both.

Cooperation from Carriers

Grappling for years with high premium costs and volatile yearly premium increases that often come with small group coverage, employers often find themselves changing plan offerings or carriers year to year in an effort to control costs. Many have embraced high-deductible health plans with health savings accounts to reduce premium costs. Others embrace plans with lower-cost but limited provider networks. All of this will likely continue, says Silver, as employers wait to see what effect COVID-19 has on their premiums.

However, Silver has noticed another phenomenon with small group health plans in the time of COVID. Some insurers are benefiting from fewer claims payments as people have put off routine or elective health care procedures during the pandemic. As a result, some business owners find themselves in a position to negotiate with their carriers, asking them to pass on that savings or at least limit premium increases. "This is the first time I've seen this kind of cooperative mid-year working together among carriers and businesses," says Silver.

On another positive note: Some insurers are offering extra benefits to help small businesses during the COVID crisis, something business owners will want to look out for. One example: Oscar and Cigna have teamed up to offer plans in a handful of areas designed for small businesses with less than 50 employees. The plans will include tele-health visits at no extra cost and some low-cost prescription drug coverage.

Level Funded Insurance

Another option for the smallest of firms: Level funded insurance plans, also called partially funded coverage. These plans offer the flexibility of self-funded insurance (in which businesses owners pay claims out of pocket, and so get to customize the coverage), but with some of the risk protection that conventional group insurance plans offer.

As with a group plan, with level funded insurance employers pay an insurance company each month. A portion of that payment, which is based on an estimate of incurred health costs, is set aside to pay employees' medical claims. If claims exceed the amount contributed, the insurance carrier covers the shortfall. If claims fall short of the amount contributed, employers get a refund.

Level funded usually works best covering a work force that's young and healthy. Businesses that find they have lots of unexpected claims or one or two expensive claims one year will have those costs covered. Of course, there's always a risk that, as a result, their insurance carriers will demand higher payments the following year.

For 2020, many employers may find they benefit from existing level funded plans if they have a workforce that was largely unscathed by Covid-19 and that postponed seeking other medical treatment.

Association Health Plans

In the most general sense, association health plans (AHPs) allow small companies to band together and access health insurance savings traditionally associated with large group coverage. Basically, the group of small employers is treated as if it's one big company with a large employee base. So they're basically treated as one big company, right? The Trump administration loosened rules in 2018 to allow broader use of association health plans.

Some of those changes were repealed after a federal court ruling, but the headlines spurred a renewed interest in traditional association plans, explains Bux. He says 50% of businesses can save upwards of 10% with association plans. These programs can also offer employees at small firms more plan choices than an employer would be able to provide alone.

The challenge is finding an AHP you're comfortable with and works best for your employees. First stop, check with any trade or professional associations your firm is already affiliated with or local chambers of commerce to see if they offer AHPs. A health insurance broker or benefits consultant can also help. Just be sure you're paying any third party you hire a flat fee and not a commission.

Health Reimbursement Arrangements

Health Reimbursement Arrangements (HRAs) allow small businesses to contribute tax-free to the cost of employees purchasing their own individual health insurance policies. Employers don't need to take on the administrative costs and headaches associated with providing group plans and can more easily control health care costs. What's more, recent rule changes have given birth to the Individual Coverage Health Reimbursement Arrangement (ICHRA), a more flexible version of the HRAs of the past.

The program evolved from Qualified Small Business Health Reimbursement Arrangements or QSEHRA (often pronounced Q-Sarah) that were created in 2017 and still in use today. QSEHRAs allow businesses with less than 50 employees to reimburse workers for health insurance premiums and medical expenses tax free.

ICHRAs, which became active this past January, allow employers of all sizes to provide tax free health care reimbursements. Unlike QSEHRAs, there are no limits on contributions and administration rules can be more flexible. Most important: With ICHRAs business owners have control over health costs because they determine the amount they contribute to employee health care each year.

Though "it's a great concept," Bux notes, setting up an ICHRA can be "complicated," because you have to ensure compliance with government and tax rules. Working with a health benefits consultant well-versed in HRAs can help smooth the process.

The Small Business Health Options Program (SHOP)

SHOP is a health-care coverage option, specifically geared (as the name implies) to small businesses, that's offered on the ACA federal marketplace. States that run their own health exchanges may also SHOP plans or similar small business alternatives.

Here's how it works. Employers with 50 or fewer employees (more in some states) can choose among four levels of insurance coverage for their employees purchased through the exchange. In most cases business owners have the flexibility to choose how much they will pay toward employee premiums and whether or not they will offer coverage for dependents.

Companies with fewer than 25 full-time equivalent employees making an average of about $50,000 or less may qualify for the Small Business Health Care Tax Credit, which can be worth as much as 50% of the cost of employee health care premiums. Healthcare.gov offers more information on the Shop Program and the Small Business Health Care Tax Credit, as well as locators for SHOP-registered insurance brokers or agents.