As medical costs continue to rise, it should come as no surprise that health insurance is one of the benefits most valued by employees. Medical insurance protects them from big bills and unexpected charges, and is an important component of their total compensation package. It also benefits you as the employer, because when your people are covered, they will be more likely to take advantage of wellness programs and screenings. And as we all know, a healthy employee is a more productive employee!
There are three major types of employer-sponsored health insurance—indemnity, managed-care and mini-med plans. There is also the wild card of new health care reforms.
Indemnity (Fee-for-Service) insurance
The most traditional form of medical insurance is the indemnity plan, otherwise known as fee-for-service.
Under indemnity plans, the cost of medical care is shared by the insured and the insurance company. However, before the insurance company pays its portion, a deductible must be met. The remaining costs are then divided.
There is usually a ceiling on the out-of-pocket expenses an insured employee must cover. The insurance company then pays the full amount in excess of this out-of-pocket maximum.
A term associated with indemnity plans that you should know is UCR—usual, customary and reasonable. These are the costs of services that are typical in the region where they are performed. It’s significant to note because if a doctor charges more than what is deemed UCR, the patient has to pay the difference.
In the example (below, right), the insured would pay a total of $345 ($200 deductible plus $145 co-insurance) and the insurance company would pay $580.
As significant improvements in diagnostic technology led to corresponding increases in insurance claims, the health insurance industry responded with a model designed to help control costs—and the managed-care plan was born.
Under these programs, the insurance company contracts with health care providers in exchange for a guaranteed customer base. Plan participants are generally required to select a primary care physician who functions as a “gatekeeper” for all medical care. This is designed to ensure that the appropriate doctor or procedure is employed, which would in turn help control costs and quality of care.
Other cost-saving initiatives include using the most cost-effective diagnostic procedures, prescribing generics in place of brand-name prescription drugs and limiting the types and number of tests that are performed.
Managed-care plans fall into these categories:
Health Maintenance Organization (HMO)
HMOs emphasize preventative care based on the theory that people who see their doctors regularly will have fewer long-term illnesses and disabilities. In an HMO, the health care provider agrees to adhere to guidelines that include established reimbursement fees from the insurance company as well as other restrictions regarding services rendered. Except in the case of a medical emergency, the patient must obtain a referral from his or her primary care physician.
Preferred Provider Organization (PPO)
PPOs represent a network of health care providers that may include physicians, hospitals, dentists and other specialists. The PPO offers volume discounts to employers sponsoring group health benefit plans. In turn, employers usually extend financial incentives for employees to use participating medical care providers in order to ensure a desired number
of participants. Patients do not need referrals to see specialists.
Point of Service Plan (POS)
A POS is a cross between an HMO and the indemnity model. It allows patients to choose between in-network and out-of-network care each time they see a health care provider. POS plans offer individuals more freedom and flexibility than other managed-care programs and the level of benefits employees receive depends on where they choose to obtain care (their “point of medical service”). Not surprisingly, in-network care is substantially cheaper than out-of-network care.
For restaurants and businesses that have a high employee turnover or a substantial number of part-time or hourly employees, mini-med plans have been a viable and affordable option. Mini-med programs have historically kept premiums affordable by imposing low annual benefit limits and limited coverage. In general, no medical underwriting is necessary and there are no pre-existing provisions associated with these plans. The biggest criticism: there would not be coverage for catastrophic illnesses or medical expenses. Regardless, employers who offered mini-med plans felt it was better to provide limited coverage than no coverage at all.
Indemnity up close
Here is an example of how indemnity plans work, for a medical visit or procedure that costs $925. Coverage consists of a $200 deductible with an 80 percent/20 percent co-insurance split.
Amount to be split for co-insurance............................$725
Insurance company pays............................................$580
Health-care reform: The Affordable Health Care for America Act (ACA)
The Affordable Health Care for America Act (ACA) mandates that by 2014 most citizens and legal residents must purchase minimal essential coverage for themselves and their dependents. They can get this insurance through their employers or “exchanges,” which are a marketplace to shop for health insurance at competitive rates.
Although the bulk of the ACA will not take effect until 2014, the step-up provisions have caused anxiety for chain restaurants and small business owners who have previously offered mini-med plans. The majority of these employers have part-time employees and high turnover rates resulting in large administrative fees for enrollment, maintenance and termination of coverage. Under the ACA, employers are required to meet medical loss ratio where 80 to 85 percent of premiums need to be spent on benefits instead of overhead and administrative costs. This is virtually impossible with mini-med plans.
In addition, a factor that has ensured that mini-med plans were affordable is the low cap on benefit limits, often ranging from $2,000 to $10,000. Under ACA, there is a minimum cap of $750,000 on annual health care benefits. Higher caps mean higher premiums and associated costs.
Recently, the government has granted a substantial amount of waivers to employers who offer mini-med plans. These waivers revolve around the medical loss ratio and the minimum benefit limits. Until 2014, businesses will have to continue to file for the waivers or be stuck with the choice of expanding their coverage and increasing their expense, or, possibly dropping coverage altogether.
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