Health Insurance: Big Decisions for a Small Business - Part One

For most small business owners, being able to afford quality medical care for themselves, their families, and in some cases, their employees, is one of their most important financial priorities and largest financial liabilities. Determining whether or not to even start a business can hinge on this one decision, and for good reason. Today, medical insurance is not an option, it’s a necessity. Unexpected or uninsured medical costs could easily cripple a business or bankrupt a family. It can also mean a big difference in the quality of the treatment you
receive.

The costs of going it alone

Employer funded plans have always been considered the gold standard for health insurance. However, with a little work and a sensible plan of attack, there’s no reason why small business owners need to settle for anything less as long as they are willing and able to pay for it.

While the specific cost will depend upon the scope of the plan’s coverage, a family plan with a reasonable deductible can easily exceed $15,000 or $20,000 when premiums and other out-of-pocket costs are factored in. Furthermore, premiums have been increasing by over 10% per year for the last decade and will likely continue on that trajectory for the foreseeable future.

The options

The two basic categories of health insurance plans from which small business owners can choose are individual/family plans, typically used by the self-employed with no employees, and small business/group plans for business owners with employees. The flexibility to choose either option will depend on the number of employees, the options available through various trade associations or state-provided plans and the state regulations in effect at the time you make your decision. The National Association of Insurance Commissioners or your state’s Division of Insurance websites provide good sources of information about health insurance programs and issues in your state.   

Most people will choose between an HMO (Health Maintenance Organization), a PPO (Preferred Provider Organization), or a high deductible plan that is eligible for an HSA (Health Savings Account). HMOs provide broad coverage at a low cost, however your choices of health care providers is limited to those within the HMO’s network. In addition, your designated primary care physician may need to determine the level of care you require and when you need to see a specialist. Services provided outside of the network are generally not covered
except for emergencies. A PPO is similar to an HMO except you usually have a
wider selection of health care providers to choose from and you typically do
not need permission from your primary care doctor before seeing a specialist.

The roles of HMOs and PPOs are shifting and the lines between the two are becoming blurred, reducing the distinctions between the two. However because PPOs offer greater flexibility the cost is usually higher. An HSA eligible plan is usually a PPO with a high deductible that is linked to a special bank account into which you contribute pre-tax dollars to be used specifically to pay for future medical expenses. By using a high-deductible health insurance plan you can lower your monthly premium costs and earn a tax deduction on your HSA contributions.

In the next blog entry we’ll discuss the implications of health care reform and how to go about choosing the right plan.