Companies evaluating employee health benefits often start with a few basic questions: Can the company afford health benefits? Which type of benefit should the company offer? How can we provide the best employee health benefits?
Understanding national trends can be a helpful first step to understanding how to build the best small business employee benefits. This article outlines two main health benefit approaches and what they mean for a small business budget.
Note: The data from this article is from our recent publication, “The Employer-Funded Individual Health Insurance Annual Report 2016.” To download the complete resource, click here.
Two Main Health Benefit Approaches
There are a plethora of small business health benefit options to choose from, but when it comes down to it they all boil down to two main approaches.
- Group Health Insurance: The company purchases a group health insurance policy and employees reimburse the company for a portion of the premium. The policy is selected and managed by the company.
- Defined Contribution: Each employee purchases an individual health insurance policy and the company reimburses employees for a portion of the premium. The policy is selected and managed by individual employees.
An Attractive Benefits Package
As companies consider which health benefits approach to take, take a step back and consider what attributes make a health benefits package great. These reasons will vary company to company, however employers and employees alike tend to value these features:
- Quality coverage
- Access to preferred doctors and clinics
With both group health insurance and individual health insurance, employees have access to quality coverage. However with individual health insurance, employees have two main advantages - they can select any health plan that fits their healthcare preferences and they own the policy. This means employees receive additional stability knowing they can keep their coverage when they change jobs.
So, what about affordability and value?
Let’s look at the national data.
With group health insurance:
Kaiser Family Foundation (2015) reports the average employer contributes 83 percent of the premium (single coverage) - contributing $5,179 per year, per employee.
Employees pay the remaining 17 percent of the premium (for single coverage) - contributing $1,071 per year.
With individual health insurance and defined contribution:
The average employer-provided allowance (single employee) is $3,480 per year, per employee.
With defined contribution, any unused allowance amounts stay with the company at the end of the year. This creates a utilization rate.
In 2015, the average utilization rate among employees was 89 percent. Based on the utilization rate, the average employer annual cost is $3,097 per employee - nearly $1,700 less than average group coverage.
It may also be helpful to point out if an employee has a utilization rate of less than 100 percent - for example 80 or 90 percent - it is a strong indicator the company is fully paying the employee's premium.
For employees, having their healthcare premiums paid in full is a sign of offering the best health benefits. With group health insurance, employers pay annually - on average - $5,179 per employee to cover 83 percent of the premium. With individual health insurance and defined contributions, employers pay annually - on average - $3,097 per employee which in many cases fully covers the employee’s policy.
For a detailed look at utilization by state and industry, download the full report here.
According to the annual report, employers using a defined contribution health benefits solution are realizing cost savings of 57 percent, on average, compared to average group health insurance costs. And as this article discusses, these cost savings can be realized while also providing the best small business employee health benefits.
What approach do you think creates the best small business employee benefits? What questions do you have? Leave a comment below!