Many startup entrepreneurs feel daunted by the task of taking full responsibility for health insurance for themselves and their employees. The costs itself can be daunting, with average annual premiums of $5,884 for individual coverage and $16,351 for family coverage. Startups with limited capital may be tempted to forgo health insurance and pay the individual mandate fine. But, entrepreneurs are often more risk adverse than people think. After all, most entrepreneurs are invested personally in the startup. A trip to the ER or an expensive medical procedure, without insurance, can mean lights out for the business.
The good news is there are more health insurance options for startups than there used to be. Here are five tips for startups on finding affordable health insurance options.
1. Work with a Health Insurance Broker
An insurance broker is a great resource for finding a health insurance solution that suits your health needs and your startup's budget. Purchasing a policy through a broker doesn't cost any more than purchasing it on your own, as most health insurance brokers are compensated by the insurance carriers. Ask around for a health insurance broker who specializes in small group policies, individual/family policies, and defined contribution to help you asses a variety of options for your startup.
2. Don't Elect COBRA from Your Last Job, Unless You Really Have To
If you've left a corporate career to build your startup, you may have been offered COBRA to continue your health insurance. COBRA provides certain former employees the right to temporarily continue their health insurance. Companies with more than 20 employees are required to offer COBRA to participants that meet certain qualifying events.
Conventional wisdom says that if you change jobs, you should go on COBRA right away. But, be aware that COBRA is temporary and usually much more expensive than other options (such as purchasing an individual/family plan). In order to participate in COBRA, you'll probably pay the full cost of the premium plus up to a 2% administration fee. The maximum COBRA coverage time frame is 18 months.
However, until 2014 when individual and family plans become guaranteed-issue, COBRA may still be a cheaper option for those with a pre-existing medical condition. But starting in 2014, most will find less expensive, long-term, guaranteed-issue coverage through an individual health plan.
3. Consider Group Health Insurance vs. Individual/Family Health Insurance
In the sea of health insurance options, they all essentially boil down to two types of health insurance: group health insurance and individual/family health insurance.
Individual health insurance is a type of health policy that you purchase for yourself, or that employees purchase for themsleves directly - just like car insurance. Until 2014, applicants for individual health insurance may need to complete a medical history questionnaire when applying for coverage. However for plans starting in 2014, no medical questions are asked and you can't be charged more or denied coverage because of health reasons. With an individual health insurance plan, you'll pay the carrier directly for coverage. Many startups will set up a health insurance allowance to help cover the costs of the insurance for employees (and get a tax break on individual health insurance for themselves).
Group health insurance is a type of health policy that is purchased by an employer and is offered to eligible employees of the company, and to eligible dependents of employees. With group health insurance, the employer selects the plan (or plans) to offer to employees. The premium cost is often split between the employer and employee, and there is a minimum percentage rate the employer must contribute.
See this comparison for more details: Comparison of Individual Health Insurance vs. Group Health Insurance.
4. Evaluate a Health Insurance Allowance Approach
With this option, the startup provides a health insurance allowance to employees to spend on qualified individual/family health insurance plans. The startup doesn't offer a traditional group health insurance plan, rather they would use defined contribution software to give each employee a fixed health insurance allowance. Employees enroll in individual health insurance through the health insurance exchanges, and receive a discount via a health insurance subsidy (if eligible). Employees can also enroll in health insurance "off" the marketplace through a broker, online, or a private exchange. The startup simply reimburses employees on payroll, after employees submit proof of their health insurance premium expense.
5. Check Out Options on the New Health Insurance Exchanges
As part of the Affordable Care Act (ACA), new health insurance options will become available through new state health insurance exchanges (also called "health insurance marketplaces"). Most importantly, the key tax credits (e.g. the small business healthcare tax credits) and tax subsidies (e.g. individual health insurance tax subsidies) will only be available for coverage purchased through a state health insurance exchange.
It's worth checking out the exchanges to see if you and your employees would qualify for the individual health insurance subsidies, or if a plan through the small business exchange ('SHOP') would be an affordable option. However, because the SHOP doesn't solve many of the affordability barriers that exist now with group health insurance, many startups and small businesses are opting to purchase plans through the individual health insurance exchange and using a health insurance allowance as the health insurance solution.
What tips for startup health insurance do you have? What's your experience been finding affordable health insurance solutions for startups? Leave a comment below.