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Small Business Employee Benefits and HR Blog

Everything You Know About Small Business Health Insurance Is Wrong

August 11, 2014
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The health insurance industry is undergoing a dramatic transformation from an employer-driven group health insurance model to an employee-driven individual health insurance model. Many of these changes are starting in the small business sector. 

As the industry changes, norms about small business health insurance are no longer accurate. Here are five myths about small business health insurance that we hear from health insurance brokers and employers, alike.Change

Myth 1: Small Group Plans Will Be Around in 20 Years

Many industry experts and economists predict a massive shift away from group health insurance in the coming years. While small group plans may not go totally extinct, they will not be the predominant way for employers to offer health insurance.

For example, Dr. Ezekiel J. Emanuel, in his recently published book, “Reinventing American Health Care,” predicts that by 2025, “fewer than 20% of workers in the private sector will receive traditional employer-sponsored health insurance."

S&P Capital IQ, a division of McGraw Hill Financial, came to a similar conclusion. S&P Capital IQ predicts that by 2020, 90% of American employees who currently receive health insurance through their employers could be shifted to individual health insurance and government Exchanges.

In a recent Whitepaper we discuss how the shift will first start with small businesses, predicting that 60% of small businesses will eliminate traditional employer-sponsored health insurance in favor of an employer contribution to individual health plans by 2017.  

Myth 2: Group Health Insurance is Less Expensive Than Individual Health Insurance

The second myth is that group health insurance costs less than individual health insurance. In fact, on average, individual health insurance costs up to 60% less (see this state by state comparison).

This was true before the Affordable Care Act came into effect in 2014, and continues to be true now, even as individual health insurance plan rates are adjusted to be guaranteed-issue and cover essential health benefits. In fact, cost is a major reason why small businesses are transitioning employees to individual health insurance. 

Myth 3: Group Health Insurance is Better for Employees

Prior to 2014 and the Affordable Care Act, individual health insurance plans and group health insurance plans were different. Individual health insurance plans could deny coverage or charge more for coverage based on health conditions. One reason employers offered group health insurance (despite the higher price tag) was because they worried about sick employees not being able to find coverage with an individual health plan. With group health insurance, everyone is covered – no questions asked.

But now, the playing field is leveled. Individual health insurance plans are guaranteed-issue so all employees can find coverage regardless of health. In fact, many of the new health care reform provisions greatly favor individual health insurance. Individual health insurance is now just as good (and in most cases better) than group health insurance.

Additionally, individual health insurance provides employees greater choice. Employees pick the carrier, network of doctors, and level of coverage that best fits their health needs and budget. 

Myth 4: Small Businesses Cannot Contribute to Employees' Individual Health Insurance Costs

Another big myth we hear is that businesses cannot contribute to employees' individual health insurance costs. When in fact, there are three main ways an employer can do just that:

  1. Taxable Stipend: Employer provides a taxable stipend employees can use on health insurance.

  2. Taxable Health Insurance Allowance: Employer reimburses employees for their substantiated individual health insurance costs on a post-tax basis up to a healthcare allowance specified by the company. 

  3. Tax-free Healthcare Reimbursement Plan: Employer utilizes Section 105 of the IRC to establish a formal self-insured medical reimbursement plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis.

Read more about how to contribute to employees' individual health insurance cost.

Myth 5: There's No Role for Brokers in the Individual Health Insurance Market

Many health insurance agents and brokers have established their business in the group health insurance market. With these market changes, they feel uncertain about how to structure their business to thrive.

As employer clients transition from group health insurance to individual health insurance, there are ways to retain their business such as increasing non-group policy sales (individual health insurance, voluntary, etc.), incorporating consultation fees, and receiving revenue sharing from the software solutions employers use to reimburse employees' individual health insurance.

See also: How to Help a Company Cancel Group Health Coverage in 2014 (...and Retain their Business)

What misconceptions or myths do you see in the small business health insurance business? Join the discussion with a comment below.

 

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