Group health insurance is a well-known, popular health benefit option. Most full-time workers have heard of group health insurance if not having been directly enrolled in a policy. Because of its popularity, employers often ask us about the upsides and the downsides of group health insurance. In this post, we’ll discuss what group insurance is, how it works, and it’s pros and cons.
What is group health insurance?
A group insurance plan is an insurance policy offered by a company to its employees. The company purchases the policy from an insurance provider and offers employees the option to enroll. Enrolled employees have a monthly premium cost to maintain coverage, a deductible to meet before their coinsurance is applied, and an out of pocket maximum before the insurance will cover full costs. The employees typically split the cost of the premium with the employer. Premium payments are generally made as a pre-tax deduction from the employee's paycheck. The plan may include dental and vision coverage or may only offer medical coverage.
The most common types of group insurance policies are:
- Health Maintenance Organization (HMO): A type of policy that generally restricts care to doctors that work for or contract with the HMO. Out of network care is usually not covered except in cases of emergencies. To be eligible for an HMO, an enrollee may be required to live or work in its service area.
- PPO Preferred Provider Organization (PPO): A type of policy that has a network of contracted medical providers like doctor offices and hospitals. An enrollee pays less for using providers within the plan’s network, and the enrollee can use out of network providers, but they’ll pay more as a result.
- EPO: Exclusive Provider Organization (EPO): A type of policy where there is a specific network of medical providers and only in-network costs are covered.
What does it look like?
Hypothetical Example 1:
Tahoe Boat and Tackle company offers its employees a group insurance plan. Its employee, Daniel, enrolls in insurance for himself. Daniel’s premium is $800 month. The company pays $250 towards the premium each pay period. Daniel has a $150 pre-tax deduction on his paycheck twice a month for a total of $300.
- Daniel's per person deductible is $8,500. This means they must pay $5,700 out of pocket before they begin sharing the cost of health care services with the insurance company.
- His annual coinsurance is 20%. Once that deductible is met, the coinsurance kicks-in. The insurance company will pay 80% of covered costs and the employee will pay 20%.
- His annual per person out-of-pocket maximum is $10,150. If the employee or a dependent pays more than $10,150 in the year, the insurance will begin paying 100% for eligible services.
- His co-pay for doctor visits is $40. This means when the employee or a dependent goes to the doctor, they’ll only pay $25.
Daniel’s insurance policy is an HMO plan. This is Daniel’s first time being insured, so the network is new to him. He’s able to find a new primary care physician that’s close to him. If he needs to get out-of-network care, he’ll have to pay for that himself, except in the case of an emergency.
Hypothetical Example 2:
Terracotta Art company offers employees a group insurance plan. The owner, Helen, enrolls in insurance for herself and her dependents. Her dependents include one spouse and two children. The premium for Helen and her family is $1400 a month. The company pays $550 towards the premium each pay period. Helen has a $150.00 pre-tax deduction on her paycheck twice a month. Helen’s total monthly responsibility for her insurance is $300.
- The annual families' per-person deductible is $5,700. This means they must pay $5,700 out of pocket before they begin sharing the cost of health care services with the insurance company.
- Their annual coinsurance is 20%. Once that deductible is met, the coinsurance kicks in. The insurance company will pay 80% of covered costs and the employee will pay 20%.
- Their annual per person out -of -pocket maximum is $8,150. If the employee or a dependent pays more than $8,150 in the year, the insurance will begin paying 100% for covered services.
- The co-pay for doctor visits is $25. This means that when the employee or a dependent goes to the doctor, they’ll only pay $25.
Since Helen’s insurance policy is a PPO plan, It provides coverage over a wide range of doctors and hospitals that Helen and her family prefer. She’s able to get out-of-network coverage if needed but will be billed a higher rate.
What’s good about it?
Most companies have an easy time finding an insurance broker willing to help them purchase a group insurance policy. Brokers are generally knowledgeable about insurance and can answer questions and assist with completing enrollment documents.
Group insurance is also pretty common, so there’s a good chance that employees have heard of it before. This familiarity can make it easier to offer the employees a benefit they recognize as valuable.
The company paying for a portion of the insurance can help employees feel taken care of and reduces the overall cost paid by either party. Another benefit of group insurance is that the larger the pool of employees that are enrolled on a plan the lower the premiums and deductibles will be. This is because of pooled risk, meaning a larger group of people have a lower total risk than a smaller group.
Offering a traditional, employer-sponsored group plan can help employers with more than 50 employees meet the employer mandate.
Group Health Insurance Pros:
- Easy to find
- Brokers provide a good resource
- Familiar to employees
- Shared cost
What’s bad about it?
Because group insurance is chosen by the employer, employees don’t have a say in what network they’ll have available, the deductible they’ll need to meet, or the premium they’ll have to pay.
Employees on a group plan are generally grateful for a health benefit but may feel like they didn’t have many choices. The chosen plan might be an excellent fit for one employee but could offer limited resources for another.
Another issue is the cost of group insurance. The average cost of group insurance has increased in recent years. Businesses and their employees have seen an increase in both premiums and deductibles.
Group Health Insurance Cons:
- Not Individualized
- Can be expensive
Who is it best for?
Group insurance is generally best for companies that can afford to share the cost of premiums with employees and that have a larger staff. Employers looking to meet the employer mandate are often drawn to group insurance for its familiarity and structure.
Some small businesses are also able to comfortably offer a group insurance plan. Those companies usually have a generous budget for health benefits.
Alternatives to group health insurance
Health reimbursement arrangements (HRAs)
An HRA is an IRS-approved, employer-funded, health benefit used by employers to reimburse employees for out-of-pocket medical expenses and personal health insurance premiums. Many small- to medium-sized businesses use HRAs instead of group health insurance or health stipends because of the tax advantages and budget control.
Taxable health stipends
Because of the cost and complexity of establishing formal legal plan documents, some small businesses implement an informal wage increase, or taxable stipend. This isn’t an official health benefit, but businesses that take this path hope it helps employees with their health care costs while avoiding paperwork and costly premiums.
There are some downsides to taxable health stipends:
- The funds given to employees are taxed for both the employees and the business.
- The business has no ability to ensure employees are using the wage increase as intended.
- Employees may not see the funds as an actual health benefit. This could undermine the business’s intent in giving the wage increase in the first place.