The Truth About Self Employed Health Insurance

The news media would have the small business owner believe that health insurance premiums are on the rise and out of reach for companies with less than ten people.   First of all, the facts are very different.   Secondly, the statistics quoted are erroneous and applicable only when referring to “group” premiums.  Allow me to set the record straight.

Having been in the small business and individual health insurance market for some time, I can attest to the following.  Health insurance is a supply and demand business and no different than commodities or gas prices or retail for that matter.  Meaning that if premiums exceeded the price a small business person was willing to pay; the market would adjust the prices accordingly to obtain the business.  This is true in the market place today.

Premiums in the small business and individual markets have declined by 30% across the country in approximately 23 states.  The problem is in the “group” market when the small to mid-size companies file for group insurance. Not all companies should considerer group insurance but should consider the “list bill” scenario.

 Here are the differences:

 Group Insurance:   Employer Funded

This type of health insurance creates several problems because the risks are divided among a small number of participants, all pre-existing conditions must be covered and the plan is not portable if the employee moves on voluntarily or non-voluntarily.   Naturally, the premiums will increase proportionately by the number of “high risk” participants in the plan.  The small business has a participant quota to fill (generally 70% of all employees must be in the plan) and is mandated to administer C.O.B.R.A.  This is an administrative mandated duty.  Consider the cost to insure two people of ten with hypertension, build issues or a diabetic verses spreading that risk over a much larger pool of people.  The companies seeking small group    coverage have declined by 40% year after year since 2005 and heading toward a 60% decline. 

 Individual Insurance:  Employer Sponsored

This type of program is offered by the employer that allows for individual coverage, designed by the employee and may or may not be subsidized by the company with a flat dollar amount or a percentage of the premium.  Meaning, the company may offer a menu of plan designs including choice of deductibles, co-pays, RX options and so on.  The employee selects the coverage and options they desire and are willing to pay for or simply opt out of the program and seek their own coverage elsewhere.

 The employer can subsidize the cost by offering a flat $100 per month for example or a percentage of premium say 20%.    A “list bill” may be sent to the employer so that the premiums are collected via payroll deduction.  The plan is portable and no C.O.B.R.A fillings are mandated and premiums are spread over a large section of the population.  This plan favors the healthy because there are no pre-existing conditions required by law.   Lower premiums result for the participants.

 The Self Employed mistaking every plan as a “major medical plan"

 This mistake can result in thousands or hundreds of thousands of dollars at claim time if your plan does not contain certain STOP LOSS provisions.  A quick definition of MAJOR MEDICAL, “A health insurance plan that at some point pays 100% of the claim and your financial risk ends and the carrier takes over.”  This plan provision is referred to as a STOP LOSS.”  

Let us assume you selected a plan for you or your employee that was an 80/20 plan with a STOP LOSS of $5,000 with a deductible of $2500 (this plan design accounts for 70% + of plans sold in 2008).  In the event of a claim that exceeds $20,000 what is our financial risk?  

YOUR STOP LOSS is $5,000 but YOU have an 80/ 20 plan.  Therefore, YOU pay 20% of $5,000 or $1,000 (.20x $5,000 = $1,000) plus your deductible of $2,500 or $3500 total out of pocket expense ($1,000 + $2,500 = $3,500).  In the big scheme of things,   YOU assume a realistic financial risk. Think about what happens in a $100,000 claim.  The carrier pays $96,500 we pay $3,500. 

 Keep in mind that our premium is in direct relationship to our financial risk. The more risk we assume the lower the premium. You would expect your premium to be lower if you select a $10,000 STOP LOSS verse the $5,000 STOP LOSS in the above example.  In this example, you would pay 20% of $10,000 =$2,000 plus the $2,500 deductible or $4,500.

REMEMBER, YOU ALWAYS PAY THE DEDUCTIBLE PLUS THE CO-INSURANCE STOP LOSS

However, not all plans are MAJOR MEDICAL plans. The market place also offers a LIMITED BENEFIT plan and a DISCOUNT plan.  Neither of these plans ever gets to a point where your liability ends and the carries begins at 100%. These plans have limits on the dollar amount the carrier is willing to pay and do not have a STOP LOSS.

The benefits of a LIMITED BENEFIT plan can be on a scheduled dollar amount basis per procedure or a room and board rate schedule that limits the CARRIERS exposure not the consumers by never employing a STOP LOSS.  In the event of a catastrophic accident or sickness, your exposure for chemotherapy, anesthesiology, surgeons, assistant surgeons and intensive care costs and the like may be subject to a limited dollar amount resulting in a financial disaster.  In some cases, outpatient procedures have a separate deductible and limits as well.  Caveat Emptor!!!

*** A DISCOUNT plan is the lowest risk to the carrier and the highest to the consumer.  This plan simply offers a discount to the provider on a percentage (percentage) basis and offers no limit to financial exposure for catastrophic claims.  This plan is not INSURANCE and has been banned in many states from being presented over the phone based on fraud complaints to state insurance commissioners.  Their claim that local providers will accept the plan is not always the case so check before you consider the plan.  If the low premium seems too good to be true, the chances are it is.

 A POS OR PPO PLAN DOES NOT BENEFIT THE SELF EMPLOYED

The HIGH DEDUCTIBLE PLAN (HSA.) is not the only solution for self-employed health insurance .  Although a great option, sometimes the need for unlimited doctor visits for young families is a necessary feature in the health insurance plan.  Moreover, statistics tell us only a small percentage of the self employed actually fund the HSA administrative account to satisfy the deductible and enjoy the IRS tax deduction at year end.  This defeats the purpose of the plan in the first place.  Socking away $ 5,000 or &10,000 in this economy may be a hardship to small businesses.

Remember, one day in the emergency ward or one day of outpatient surgery will wipe that account out but fast.  Inpatient surgery is the least likely occurrence, while OP surgery is an 83% likelihood of most claims.  Today 23 states offer an alternative to HD plans.

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