Knowing the various health insurance policy types will prepare you to evaluate your options when open enrollment period rolls around. The more familiar you are with the different insurance plan types and their alternatives, the better equipped you'll be to pick one to fit your organization's budget and needs.
This article will review the most common types of health plans available and a few alternatives to help you decide which is right for you, your family, or your organization.
What types of health insurance plans are available?
Your first step in deciding what health insurance plan to offer at your organization is knowing the different types that are out there.
The types of health insurance plans you should know are:
- Preferred provider organization (PPO) plan
- Health maintenance organization (HMO) plan
- Point of service (POS) plan
- Exclusive provider organization (EPO)
- Health savings account (HSA)-qualified plan
- Indemnity plans
The type of health plan that’s best for you depends on what you and/or your employees want, how much you're willing to spend, and what medical expenses you want to be covered. In the following sections, we'll briefly cover each type of plan.
Preferred provider organization (PPO) plans
The preferred provider organization (PPO) plan is the most common insurance coverage plan offered by employers. According to the Kaiser Family Foundation (KFF)1, 49% of surveyed individuals with an employer-sponsored plan have a PPO.
With a PPO plan, employees are encouraged to use a network of preferred doctors and hospitals to care for their medical needs at a negotiated or discounted rate. Employees generally aren't required to select a primary care provider (PCP) and have the choice to see any doctors within their network.
Employees have an annual deductible they must meet before the health insurance company begins covering their medical bills. They may also have a copayment for particular services or a co-insurance where they're responsible for a percentage of the total charges. Services outside of the network typically result in higher out-of-pocket costs.
A PPO plan is best for your organization if your employees:
- Want the freedom to choose any primary care doctor and healthcare facility within your insurance company's network of doctors
- Want the option to have some out-of-network costs covered
- Want to be able to see a specialist without a referral from a PCP
Some disadvantages of a PPO plan are:
- You and your employees will pay higher monthly premiums
- According to KFF2, the average annual premium in 2022 for organizations with fewer than 200 employees is $8,409 for a single PPO plan and $23,147 for a family plan.
- The average annual premium for larger organizations is $8,227 for single coverage and $23,516 for family coverage.
- Your employees will have a deductible cost, which represents the money they’ll have to pay out of pocket before their insurance will cover anything beyond preventative care.
- The Society for Human Resource Management3 (SHRM) found that the average deductible for single coverage with a PPO plan is $1,204, while the average deductible for a family plan is $2,716.
Health maintenance organization (HMO) plans
Next up is the health maintenance organization (HMO) plan. These medical plans offer a wide range of healthcare services through a network of providers that contract exclusively with the HMO, which then agrees to provide services to members.
An HMO usually requires employees to choose a primary care doctor as part of their plan, and employees need to obtain a referral from their PCP to see a specialist.
One advantage of HMOs is that they generally have lower out-of-pocket costs for covered services. Employees may not even have a deductible before their coverage starts and usually have a low copayment.
Remember that most HMO plans won't cover employees that go outside their network of doctors without proper authorization from their PCP unless they need certain emergency services.
An HMO plan is best for your organization if your employees:
- Want a plan without a deductible (or a low one) and a lower premium
- According to the KFF2, for small businesses, the average annual premium for a single coverage HMO plan is $7,391 and $21,136 for a family plan.
- That amount increases to $8,154 for single coverage and $23,503 for family coverage for large organizations.
- Want to lower out-of-pocket costs for prescription drugs
- Want a primary care physician to advocate for their medical needs and set up referrals for them
Some disadvantages of an HMO plan are:
- Employees have less flexibility in the doctor and care facilities they see for care
- Employees won't be able to go out-of-network for non-emergency care
- For specialist visits, your employees will need a referral from their primary care physician
Point of service (POS) plans
A POS group health plan combines the features of an HMO and a PPO plan. Like an HMO, POS plans may require employees to choose a primary care doctor from the plan's network providers. Generally, services rendered by the PCP, like routine care or preventive services, aren't subject to the policy's deductible.
If an employee uses services rendered or referred by their PCP, they may receive a higher level of medical coverage. If they utilize services by a non-network provider, they may be subject to a deductible, a lower level of medical coverage, and have to pay up-front and submit a claim for reimbursement.
A POS may be a good option for your small business if your employees:
- Need flexibility when choosing physicians and other network providers
- Desire primary care physicians to coordinate care
- Prefer the balance of greater provider choice versus lower health insurance premiums
Exclusive provider organization (EPO) plans
EPO plans are similar to HMOs because they have network doctors their members must use except in emergencies. Members have a PCP who provides referrals to in-network specialists, and members are also responsible for small copayments and potentially a deductible.
An EPO may be a good option for your organization if you:
- Like the balance of fewer provider choices in exchange for lower rates
- Have employees who can find value in a smaller panel of medical providers
- Have employees who are comfortable shouldering higher medical costs for unplanned events
Health savings account (HSA)-qualified plans
A health savings account (HSA) is a tax-advantaged savings account used in conjunction with an HSA-compatible high deductible health plan (HDHP) to pay for qualifying medical expenses. PPOs, HMOs, POSs, and EPOs can be considered HDHPs as long as they have a deductible that meets the threshold set by the IRS.
Though HSAs can be attached to group health insurance coverage, employers can contribute to an account whether they offer a group policy or not, as long as their employee has an HDHP. Once an employee leaves a company, the account goes with the employee.
HSA contributions may be made pre-tax, up to certain limits set annually by the IRS. Any unused funds in an HSA account roll over each year and accrue interest tax-free. Your workers may also withdraw funds for other non-medical expenses, but this will incur penalties and interest if they’re under 65 years old.
An HSA-qualified plan is best for your organization if:
- You offer an HDHP and want to help employees cover out-of-pocket expenses
- According to the KFF4, the average annual premiums for workers in HSA-qualified HDHPs are $7,170 for single coverage and $21,079 for family coverage.
- You want to give employees more control when and how to save or spend money on medical expenses
- You want to make tax-free contributions to an account that will roll over year to year
Some disadvantages of an HSA-qualified plan are:
- Your employees will have a deductible cost, which represents the money they’ll have to pay out of pocket before their insurance will cover anything
- The KFF5 finds that the average annual deductible for single coverage is $2,458 for HSA-qualified HDHPs, while the average for family coverage is $4,533.
- If our employees are under 65 years old and withdraw HSA funds to pay for items other than medical expenses, they’ll pay a penalty.
Indemnity plans are known as fee-for-service plans. With indemnity plans, the insurance company pays a predetermined percentage of the reasonable and customary charges, or the average fee within a geographic area, for a given service, and the insured pays the rest.
With an indemnity plan, there are no limitations around provider network care, so patients can choose their own doctors and hospitals. The fees for medical services are defined by the providers and vary from physician to physician, leaving the insured on the hook for potentially large and possibly unexpected medical bills, depending on how much the provider charges for the service.
An indemnity plan is best for your employees if:
- They don't want to have to commit to one specific primary care physician or facility
- They want the greatest amount of flexibility possible when it comes to choosing which doctors and healthcare centers to visit
- They want to be able to see a specialist without a referral from a primary care physician
Some disadvantages of an indemnity plan are:
- These types of plans are generally the most expensive, with medical costs ranging widely depending on where your employees live, their age, and what benefits you want to include
Alternative health insurance options
As an employer, you aren't limited to offering your employees one of the aforementioned group health insurance plans. There are alternative options for providing healthcare benefits, such as HRAs and health stipends.
HRAs are IRS-approved, employer-funded health benefits that allow you to reimburse your employees for their qualifying medical expenses—including individual health insurance premiums and out-of-pocket costs—tax-free.
With an HRA, you have complete budget control by setting allowance amounts for your employees while your employees enjoy the freedom of choosing the health plans and services that work best for them.
Your employees can purchase their own health insurance coverage from the federal marketplace or their state-based exchange and choose the type of health plan that works for them instead of being forced into a one-size-fits-all group plan.
Three of the most popular types of HRAs are:
- Qualified small employer HRA (QSEHRA)
- A type of HRA specifically designed for organizations with fewer than 50 full-time equivalent employees (FTEs)
- Individual coverage HRA (ICHRA)
- An HRA that works for organizations of all sizes. With an ICHRA, there are no annual contribution limits. This allows you to fully customize the amounts you can reimburse your employees for each month. You can also establish employee classes to vary eligibility and allowance amounts.
- An ICHRA allows you to satisfy the ACA's employer mandate as long as your employees have an individual plan that meets MEC.
- Group coverage HRA (GCHRA), also known as an integrated HRA
- With an integrated HRA, you can supplement your existing group health insurance plan
Health stipends are a flexible choice for organizations that don't offer a healthcare benefit. With a stipend, you can offer your employees a taxable monthly allowance or reimbursement for their medical expenses, including those costs not normally covered under an HRA or insurance.
You can also offer a stipend to more employees than you can with health insurance for HRAs, such as 1099 contractors and international employees. They're also an excellent option for employees who receive advance premium tax credits (APTC), as they allow your employees to take advantage of the stipend while still receiving APTC.
However, unlike HRAs, stipends are taxable for both the employer and employee, meaning you'll need to report this amount as taxable income on your employees' W-2s.
A health stipend may be a good option for your organization if you:
- Can't afford a group health plan
- Want greater control over which expenses are eligible for reimbursement
- Have fewer than 50 FTEs
No matter where your employees work, what type of organization you run, or what your employees’ health needs are, there's an option for everyone to get the coverage they need. Reviewing the various health insurance plans available will help you make the most informed decision for your organization.
If you're an employer looking to provide personalized employee benefits, PeopleKeep can help. Our personalized benefit administration software makes it easy to set up and manage HRAs and employee stipends in just minutes each month.
This blog article was originally published on July 29, 2013. It was last updated on February 9, 2023.