How Employee Compensation Works

Health Insurance

Insurance premiums will probably cost you about 8% to 10% of your payroll amount. The majority of this will be your health insurance premiums. So what are your options and how do you find the best deal? There are currently three main types of health coverage you can offer to your employees: traditional coverage (fee-for-service), HMO (health maintenance organization), or PPO (preferred provider organization).

With a traditional health coverage plan, your employees will have the most flexibility. They can see the doctors they want to see, go to hospitals all over the country, and change doctors whenever they want to. These plans are, however, more expensive and usually don't cover preventive health care like physicals, immunizations, and well-child care. There are three variations of traditional fee-for-service coverage: basic, major medical, and comprehensive. Basic covers some of the costs of a hospital room and care, but not everything. Major Medical begins where Basic leaves off, and Comprehensive is a combination of the two.

With traditional health coverage, employees will have to pay a deductible (usually $250 to $500 per year) before the insurance begins paying anything. At that point, the insurance company begins paying 80% and the employee is responsible for the remaining 20% of all medical bills. They do usually have a "cap," which is a limit on the amount the employee will have to pay in one year. Once the cap is reached, the insurance company pays the excess.

There may also be limitations on how much the plan will pay for particular services. These are called "customary fees." If an employee's doctor charges more than the average amount for a particular procedure, then that employee is responsible for the remainder of the bill.

One of the most loved and hated types of plans is the health maintenance organization (HMO). HMOs are basically prepaid health plans. With an HMO, employees can only go to specific groups of doctors that are either owned by or have contracted with the health maintenance organization.

Small co-payments of $5 to $25 dollars are made by employees for office or emergency room visits, and the services are sometimes limited. Usually employees are required to select a primary care physician (PCP) who will monitor their health and make any necessary referrals to specialists. They typically can't see a specialist unless the PCP approves and makes the referral (unless they want to pay for it themselves).

HMOs operate on the premise that if they keep you healthy and take care of small problems before they become large ones, then they'll make more money over time and people will be healthier. Because of this, they usually do cover preventive care like physicals, well-child check-ups, etc. They also usually have less paperwork for patients to fill out.

The last health insurance option is the preferred provider organization (PPO). PPOs combine the best of both the traditional insurance and HMO worlds. Like the HMO, there is a list of providers that your employees have to choose from (a network) and they must select a primary care physician. They don't have to fill out much paperwork when they go for a visit, just pay a small co-pay, and most preventive care is covered. The difference is that they can also go outside of the list of approved physicians to any doctor they want. They just have to pay more and fill out claims forms.

Most employers also include dental coverage and vision coverage. Typically, dental coverage pays 100% of preventive services, 80% of procedures such as fillings, and 50% of major procedures such as crowns. Vision coverage will usually pay for one vision exam per year and one pair of glasses.

It pays to find a good broker when looking for health insurance policies. The broker may represent plans from up to 15 different insurers, allowing you to get a better feel for what is available and do more comparison shopping. Be aware, though, that most insurer's will only prepare a quote for your company once, so be sure you have selected a good broker before you have them get quotes.

When you're evaluating the plans, check the deductibles and co-insurance rates. If a policy requires a co-payment that is more than 25% of the procedure amount, then look elsewhere. Make sure there is a good range of services offered and that long-term illnesses and pre-existing conditions are covered. There should also be at least $1 million in coverage. Also check on typical charges from local doctors to make sure the maximum reimbursement for a particular procedure is not too low.

Next, you'll need to check out the insurers. You can find out about their financial health at Standard and Poor's. In addition to their financial health, you'll also need to investigate their claim payment history. You don't want an insurer who doesn't want to pay claims. Your broker should be able to help you in this area.

Compare their pricing, their services, their service areas and lists of physicians (if HMOs or PPOs), and remember, your employees (and you) will have to live with your choice -- so do your homework! You can get a list of registered health underwriter brokers in your area by contacting the National Association of Health Underwriters.

If yours is a small business, you can call your state department of insurance to find small business group health providers in your area, or else look into a health purchasing alliance or association plan. These plans allow small businesses to purchase insurance as part of a larger group.

Health purchasing alliances provide a needed service for small businesses by providing a way for them to purchase group insurance at lower fees than they normally could. The alliance purchases the health plan for its members (small businesses) and has a third-party administrator manage the plan. Be prepared for the underwriting process with this type of group coverage. It will often involve all employees filling out a questionnaire regarding their health as well as their family's health. Also, check into the operations of the alliance to ensure that all of the funds are managed correctly.

You can also check with trade, professional and other associations to see if they offer group health coverage.

Read on to learn about other types of insurance.