Health Coverage Alternatives for Small and Medium Sized Businesses (SMBs)
Small and medium sized businesses (SMBs) are facing a trend of rising health plan costs. Medical benefits are an important employee benefits offering and a key tool for employee recruitment and retention. Additionally, for large employers subject to the Patient Protection and Affordable Care Act (ACA), offering a major medical plan is required to avoid potential ACA penalties. As the cost of medical insurance coverage increases, employers seek creative solutions to lower costs without eliminating benefits for their employees.
In the last few years, a wide variety of alternative health plan solutions have arisen for employers. In addition to the choice between traditional insured plans and self-funded plans, employers now have options between several different types of self-funded plan structures such as level-funded plans and captive insurance programs. Some employers are choosing to use a professional employer organization, an association health plan, or a multiple employer welfare arrangement to provide benefits. The industry is also seeing a rise in account-based plans, such as individual coverage health reimbursement arrangements (ICHRAs).
Within an insured plan or self-funded plan, employers may also consider specific plan designs to help address plan costs. This includes things like reference-based pricing, a no network plan, a copay only (no deductible) plan, virtual first approach, cash pay model, a narrow network plan design, a high-performance network tier, or a Health Maintenance Organization (HMO) “light” gatekeeping feature.
Employers are increasingly considering carve out point solutions options, where vendors operate programs for specific types of benefits outside of the base medical plan, such as a center of excellence for Musculoskeletal (MSK) benefits or a fertility benefits program. Weight loss solutions programs addressing GLP-1s are increasingly popular. Some employers are using unique pharmacy benefits solutions to help connect employees to lower cost prescriptions outside of their plan. Use of health reimbursement arrangements (HRA) for specific benefits coverage are also increasing in popularity, such as the use of a GLP-1 specific HRA. Direct primary care arrangements are on the rise as well.
The pharmacy solutions in the industry have significantly evolved, including specialty carve out, copay maximizers, patient assistance programs, National Average Drug Acquisition Cost (NADAC) pricing, international mail, direct to manufacturer, cash pay networks, leveraging 340B pricing, incentive programs to choose the lowest cost drug, and others.
In the table below, we have summarized different medical plan options, plan designs, and key considerations related to each plan type, as well as alternative solutions to reduce plan costs. Choosing the right medical plan structure and plan design depends on your organization’s size, risk tolerance, and budget. If you have any questions about these different solutions, or the compliance implications of implementing a new medical plan, Foley & Lardner LLP can help.
| Medical Plan Option | Key Considerations |
| Insured Plans | |
| Traditional insured plan | With a traditional insured plan, an employer purchases a health insurance policy from a licensed insurance company. The insurance company generally bears the risk of employee claims costs under the policy, while the employer’s risk is limited to the cost of premiums. Many compliance requirements are handled by the insurance company, though the employer retains some obligations under the Employee Retirement Income Security Act of 1974 (ERISA), the ACA, and other laws. |
| Self-Funded Plans | |
| Standard self-funded plan | With a self-funded plan, the employer generally bears the risk of employee claims costs under the plan. The employer usually contracts with a third-party administrator (TPA) to administer the day-to-day operations of the plan. The employer may choose to purchase a stop-loss insurance policy to help cover claims costs above a certain threshold. All compliance requirements fall on the employer with a self-funded plan, though the TPA may provide some assistance. |
| Level-funded plan | A level-funded plan is a unique type of self-funded plan where the TPA structures the arrangement so that the monthly amount the employer pays for claims costs and administrative fees is fixed in a similar manner to an insurance policy premium. Generally, level-funded plans are paired with a stop-loss policy that has low attachment points. As with other types of self-funded plans, all compliance requirements will legally fall on the employer. |
| Captive programs | Some self-funded programs (either standard self-funded or level-funded) involve participation in a captive insurance program. A captive insurer is a limited type of insurance company. The captive insurer will either issue stop-loss coverage to the captive program members or will reinsure stop-loss coverage issued to captive program members by a regular insurance company. Participation in a captive program generally involves certain capital contribution obligations, a commitment to participate for a specified time period, and execution of participation agreements. |
| Account-Based Plans | |
| ICHRA | An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an account based plan that allows employers to provide tax-free reimbursement of certain health care expenses, including premiums, to employees who maintain individual major medical insurance coverage or Medicare. Employees pay for individual insurance premiums and other health care costs out of pocket and then submit proof of payment to be reimbursed by the ICHRA (some vendors can set up automatic premium payments). An ICHRA is technically a type of self-funded plan, and the employer has several compliance obligations related to the ICHRA. Note that the U.S. Department of Health and Human Services (HHS) recently announced an intention to rebrand ICHRAs as CHOICE Arrangements, though regulations have not yet been published. |
| QSEHRA | A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is another type of account based plan that allows employers to provide tax-free reimbursement of certain health care expenses, including premiums, to employees who maintain minimum essential health insurance coverage. Employees pay for individual insurance premiums and other health care costs out of pocket and then submit proof of payment to be reimbursed by the QSEHRA. Unlike an ICHRA, a QSEHRA is available only to employers with fewer than 50 employees and is subject to annual reimbursement limits. Compliance obligations for a QSEHRA are more limited than with an ICHRA or other types of medical plan. |
| Other Plan Design Solutions to Lower Costs | |
| Alternative plan designs | An employer with an existing insured plan or self-funded plan can speak with its TPA or insurer to explore cost saving options. These could include shifting to a narrower network of providers, adjusting employee cost-sharing amounts (e.g., increasing copays), or adopting a high-deductible health plan. An employer could also explore alternative structures like a no network plan, reference-based pricing, or a no deductible plan. |
| Point solutions | An employer with an existing insured plan or self-funded plan can also explore adding point solutions benefits programs. These types of programs typically carve out or incentivize employees under the health plan who are receiving high-cost care to utilize more efficient providers and services. |
| Compensation increase | As an alternative to offering a medical plan altogether, an employer that is not subject to the ACA but that wants to assist its employees could always consider increasing the taxable compensation paid to employees. |
