Health care 101

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Prescribing the right coverage plan for your company

Collette McKenna Parker

October 10, 2007

Consider the true story of Mark, a computer wiz who decided to work independently and forego health insurance for a few months. As a slightly overweight, sedentary 38-year-old who enjoyed a few beers after 5 p.m., it may not have been the wisest of decisions, but he rolled the dice anyway. And he promptly had a heart attack, which cost him $80,000.

For entrepreneurs and small business owners, writing that check for health insurance every month may be a tough pill to swallow, but it’s necessary. You have to attract good employees with benefits, and you have to protect yourself and your employees from that $80,000 catastrophe.

And it doesn’t help that our health care system is complicated, expensive and maybe even a little unfriendly. “The market is most dysfunctional at the independent and small group level,” says James Galasso, president of Actuary Modeling, a health insurance consulting firm in Atlanta, and himself the patron of an independent insurance policy.

But a little information and a good broker can help navigate the myriad health care options to offer your employees to ensure they – and you – get the best care at the best price.


The Basics

Health insurance options exist on a spectrum. On the far left you have indemnity programs – doctors not tied to any insurance company’s network. Here, people have more flexibility and more control, but these are much more expensive. These tend to be more prevalent in rural areas where there’s no competition for doctors, says Andre Demetrius, a principal in Atlanta with Buck Consultants, a national benefits consulting firm.

Then you have managed care programs, which are HMOs, POSs and PPOs. On the far right of the spectrum are HMOs, and in-between you have PPOs, and then POSs.

Here’s the run-down on managed care:

1. Health Maintenance Organization (HMO) – This is the most heavily managed of all programs. Patients must visit the doctors and hospitals in their network, otherwise the insurance company will pay nothing. Staff model HMOs actually employ all the doctors in their network. (Kaiser Permanente is an example of a staff model. All the doctors in its network are Kaiser employees, and in Kaiser, Calif., they own the hospitals as well.) Independent practice association (IPA) model HMOs do not employ doctors, but will still not cover any care given out-of-network. Usually customers have greater selection in an IPA, because it’s easier for the insurance company to contract with thousands of doctors than hire thousands of doctors.

2. Point of Service (POS) – The insurance company says, “Here’s a list of doctors in our network; pick one and it will be cheaper for you.” Patients also must pick a primary care physician. POS gives patients a chance to opt out of network, but the percentage covered by the insurance company will be less, usually significantly so.

3. Preferred Provider Organization (PPO) – Doctors and hospitals are in a network, but patients do not need a primary care doctor. As long as the doctor, which can be a specialist, is within that network the insurance company will cover the visit according to the specific policy. Also, PPO customers can see an out-of-network doctor, but they will pay more.

The Shopping

If you think you’re done once you’ve selected a plan, think again. Premiums increase every year, so it pays to shop around at renewal time. “There’s always an insurance company who’s best at any point in time,” says Galasso, “but it never stays best – that changes from company to company,” based on which insurance company had the healthiest members that particular year.

Another important question to ask every year is for the medical loss ratio; this is the incurred claims (money spent by the insurance company on employees' claims) divided by the premiums the employees and employer were paying.

For example, in a company with 100 employees, the medical loss ratio may be 90 percent. That means 90 percent of the premium costs are going toward paying claims, not administrative costs or insurance profits.

“If a company has a very low loss ratio, say less than 50 percent, it may be able to get a nice price from another insurer,” says Galasso. “Conversely, the same company could have a 110 percent loss ratio the following year and be charged a substantially higher premium. The smaller the company, the more any health changes for some of its employees will likely cause the medical loss ratio to vary from year-to-year. While insurers attempt to mitigate year-to-year premium changes due to changes in the medical loss ratio for smaller companies, it is not unusual to see large swings. For larger companies, with 1,000 or so employees, it is also appropriate to ask the insurer what it charges for administrative expenses since that becomes a key component of the premium rate and may be negotiable.”

A good insurance broker will research all of this information for a business owner, and prescribe the best health plan every year for the company. Their fees are paid by the insurance company, but make sure to ask if this is passed along to you through higher rates.

After all, even the smartest among us – including a computer wiz – must be reminded that one ill-prepared-for health care incident can bankrupt you for life.

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