Basic Guide to Understanding Employer Paid Health Insurance
Real life use case explanations of your coverage and offerings and a quick and dirty guide to reviewing plan options
This article will focus on medical coverage only. In my experience dental and vision are pretty standard across the board, there aren’t a ton of variances in plans and you should just opt for the “best” plans you can afford for your team. I usually just tell the broker or PEO to show me the two or three best plans they have available.
My intent is not to provide the textbook definitions of these terms, as I’m sure you’re here because you have already Googled them and have still not found a true understanding of what they mean.
This is more of a layman’s guide to understanding the actual use and application of your coverage options. It’s important that you understand how medical benefits work in order to be able to make a fully informed decision when you’re deciding between coverage options and to be able to help your employees make informed decisions when selecting their individual plan option if you are able to offer more than one.
When you get your medical quote or proposal back from your broker, PEO or online request, you’ll likely be presented with some form of this chart, among many other bits of info but the side-by-side plan options and pricing chart is where you’ll want to start your review.
Here’s my quick and dirty guide to reviewing these plan options
Deductible -Individual deductible under $2k is awesome, $3-4k is standard.
Out of Pocket Max - Under $6k is good, if you have lots of employees with children/spouses and you know they’re going to opt for family coverage, be mindful of not selecting a plan that has a high out of pocket max.
Doctor Visit (aka a Copay) - $25-$30 is great but make sure it says deductible waived and not after deductible.
Prescription Drugs - this has become slightly less important with the emergence of GoodRx and Mark Cuban’s CostPlus Drug Company anything in the neighborhood of $10-20 generic copay is a lovely option.
Coinsurance - if you can afford a plan with 0% great. You’ll see 20% often and if a plan does include coinsurance this is a fairly standard level.
ER - a flat rate under $1k with deductible waved is awesome, 20% after deductible is…not great, I’ll explain in more detail below.
Urgent Care - you’ll want to look for plans that have a flat rate, again with deductible waived. $75-100 deductible waived is a common and solid option.
Now what do each of these mean IRL? Please note that all costs listed for medical services are estimates and not vetted for actual cost.
Let’s look at an example with a single person on a plan alone, with a $1500 individual Deductible, $0 Coinsurance, $25 Doctor Visit,
Deductibles are what the person or persons insured on the plan must pay “out of pocket” (a term you hear a lot) themselves before insurance will pay for medical services. Your annual wellness visit should be no cost, but let’s say your basic wellness annual bloodwork reveals an issue and your doctor wants you to get an ultrasound done. Your deductible is $1500 and you have $0 Coinsurance and the ultrasound costs $390. You will pay the $390 in full and your deductible for the year is then reduced to $1110. You go back to your doctor for a follow up to review the results and determine next steps, for this next visit you’ll pay a Doctor Visit fee of $25, which does not reduce your deductible. The Doctor recommends a minor outpatient procedure to address your issue and that procedure will cost $5000. Your cost of that procedure would be $1110 (the remainder of your deductible) and insurance would pay the difference between that $1110 and the $2000 procedure cost, so insurance covers $3890 of the $5000. For this entire medical scenario you will have paid $1525 out of pocket.
This same exact medical scenario with a $3000 deductible and 20% Coinsurance:
You pay the $390 ultrasound cost, your deductible is reduced to $2610. You pay your Doctor Visit fee of $25. You pay $2610 of the $5000 procedure cost but coinsurance then comes into effect, so you’ll pay another $478, for a total of $3,088 for a $5000 procedure. For this scenario you will have paid $3,503 out of pocket.
Let’s say after you’ve met your deductible you have to have a second procedure that costs $2000, you’ll pay $400 (the 20% Coinsurance cost) on the second procedure.
Here are some additional descriptions of the plan components that may be helpful to you as well.
Some additional factors to consider when selecting coverage
Some brokers will try to talk you into level-funded or self-funded medical plans. I would do a lot of research before deciding to go with one of these options. If you have anyone over 30 on your team, I’d actively advise against them. The plans are designed to not be used, so if you think there’s even a minimal chance someone might have a baby, get cancer, get in an accident, or any other catastrophic level claims might occur, you could find yourself in a very tough position after your rates skyrocket. These types of plans are 100% a gamble, and while your first year premiums look amazing, it could cause you a lot of heartache and financial woes down the line should your claims be high one year.
Some brokers will push you toward age-banded rates instead of comprehensive rates, and you’ll want to weigh the pros and cons of both options. For me, with larger staffs I like to stick with comprehensive rates (everyone costs the same amount regardless of their age) as that is much easier to budget for. Age banded is great if you’re a very small company with a younger staff and know you’re not going to experience a ton of growth in the next few years.
If you are in a position to offer multiple plan options, please take it. Ask your broker or benefits specialist if this is possible for you. I recommend one high level (read: expensive but low deductibles and no coinsurance) offering, one medium level, and one high-deductible plan with an HSA or FSA account. We’ll get into FSA and HSAs in another post.
How to help your team find the plan that is right for them
In offering three or more plans, when I am helping employees make informed decisions on which plan is right for them, I always start with the question “how often do you and/or your family go to the doctor?”
I’m usually met with 3 different types of answers. There are the folks who will say “never” or “hardly ever” and for them I recommend a High-Deductible HSA plan because especially if the employer is contributing to the HSA, that’s like a savings account for them and if something does happen the HSA will likely cover it for them.
If they say “sometimes” or “often” my next questions are always around two things - are you on any medications and do you have any doctors you see regularly (like monthly or weekly). If they say no and no then they could decide between the HSA and middle level offering. In those cases I usually ask them if they’d rather pay a little more each month to have peace of mind just in case they do need better coverage, or do they think they can handle paying the total out of pocket cost should something catastrophic happen to them. If they are on medications and see any doctors regularly or have any chronic conditions, I recommend they go with the lowest deductible plan you have, especially if they are someone who is likely to meet their out of pocket requirements before the end of the year, or if they know they might have to have any procedures done this year.