Selecting employer-sponsored health insurance

Claire Baker
Jun 27, 2023
7 min read

Updated: Jan 31, 2024

With so many different variables, it’s hard to know where to start when evaluating your employer-sponsored health plans. In this post we’ll discuss how to determine your budget and priorities, what information to look for in plan options, and how to structure a benefits package to meet your unique situation and goals.

Determining goals and budget

Health insurance is among the top employee-related expenses at most companies, and one of the first things that many candidates look at when deciding whether to accept an offer. With such a high cost and the potential to significantly (if indirectly) affect productivity, employers should be strategic when selecting their health insurance options.

Discussing the following topics with your leadership team will help clarify the best strategy for your goals:

Does our benefits package have the potential to significantly impact our recruiting and retention? Companies with high turnover, few eligible employees, or whose employees tend to come from a population that doesn’t prioritize benefits in their career decisions may prefer low-cost plans. On the other hand, businesses in competitive labor markets or who prioritize retention may wish to invest in a richer benefit package to attract and retain the best talent.
What types of coverage are most important to our team (and others like them)? Conduct an anonymous poll of your team to find out what coverage is most important to them. The answers may surprise you. For example, I once designed a new benefits package for a team where the primary complaint was that many people couldn’t find in-network mental healthcare. Additional investigation revealed that most people already had an out-of-network provider, but that our out-of-network deductible was so high as to make out-of-network coverage practically nonexistent. Since the plan's core mental health coverage was unlikely to solve the team's problems, we prioritized plans with generous out-of-network coverage instead.
Consider dependent coverage. While there are regulations that limit how much an employee should pay for their own premiums, there are no requirements for how much of a dependent’s premium the employer must pay. As a result, parents and heads of household often wind up spending exorbitant amounts to cover their family on their plan. Unless the majority of your employees come from a group that rarely has dependents (i.e. young people, especially those from advantaged backgrounds), consider covering a larger proportion of dependent premiums when creating your budget. This is especially true if diversity is an important priority.
Are alternative health plans like HSA-eligible plans or QSEHRAs appropriate for your situation? HSAs are an excellent tool for employees to save for the future and for everyone to save money on premiums, but they are only cost-effective for plan members who have little to no medical expenses. Teams with many young, healthy participants may wish to offer this option. Some companies find it more cost effective to offer an inexpensive HDHP plan and fund employees’ HSA with an amount equal to the annual deductible than to offer a traditional group plan with comparable coverage. If your small business has a wide variety of healthcare needs, you may wish to offer a QSEHRA. QSEHRAs allow employees to choose their own plan on the public healthcare marketplace and have employers reimburse the premiums. In this situation, employers set the budget while employees choose whatever plan best fits their needs. If the employer's QSEHRA budget doesn't cover the full premium of the employee's ideal plan, the employee need only pay the difference.
How can supplemental benefits like FSAs, HRAs, HSAs, and dedicated mental health benefits bolster your core coverage and/or reduce employer costs? By strategically combining benefits, employers can often offer better coverage at a significantly lower price. For example, a HDHP plan may cost $300 less per month than a comparable traditional plan. An employer contribution of $125/month will cover the minimum deductible required to be eligible for the plan, essentially saving the company $175/employee/month while sparing the employee from paying their deductible out-of-pocket. FSAs can be used in a similar way to reduce the burden of non-HDHP plans, and in the case of FSAs the employer can keep unused funds. We'll take a closer look at using FSAs to lower both employee and company costs below.

Setting your budget

There is no set formula for determining your benefits budget, but the combination of salaries + payroll taxes + benefits usually falls between 120% to 140% of base payroll at most companies.

Example:

Number of employees: 100

Combined base salary for all employees: $10M

Average payroll taxes for all employees: 10%, or $1M

Benefits budget per employee = [([1.2 to 1.4] * Combined base salary) - (Combined base salary + Average payroll taxes)] / (number of employees * 12 months)

High end: [(1.4 * $10M) - ($10M + $1M)]/(100 * 12) = $2500 / employee / mo

Low end: $833 / employee / mo

Keep in mind that the above numbers refer to all employee benefits (not just healthcare), and that they represent the average cost per employee. Since dependents’ premiums significantly add to the overall cost of benefits, self-only plans should fall below the average to offset the costs of family plans. The company in the example above may target plans whose individual coverage premiums fall between $500 and $1,200 per month to account for these fluctuations and the cost of other benefits.

What to look for in a plan

When considering plan options, optimize for plans that provide the best coverage in the following situations:

🪙 Lowest cost for people who rarely go to the doctor and are unlikely to meet their deductible. Look at: copays, cost of preventative care, employee portion of premium
🩻 Lowest out-of-pocket cost for people with chronic conditions requiring frequent visits or treatments. People with children also fall into this category. Look at: deductible and what applies to it, how quickly copays and coinsurance will add up, cost of specialist visits.
🤕 Annual out-of-pocket maximum that won't be financially devastating if the plan member has a catastrophic health event. Look at: out-of-pocket maximum, out-of-network deductible.

To best serve those with few healthcare costs, consider a plan whose premiums are affordable and that provide low-cost coverage for preventative care and/or before the deductible is met. The deductible should not be so high that employees will avoid going to the doctor if they need it.

To best serve those with frequent medical visits, look at the copay and coinsurance coverage. A copay is a flat amount per visit and does not depend on the deductible. Coinsurance is the percentage of the bill that the patient pays (sometimes after the deductible is met). If someone has 2-5 appointments per month, would the resulting copay or coinsurance be affordable with your team’s average salary?

To protect those who have catastrophic health events, the annual out-of-pocket max should not be financially devastating. For example, although a $10,000 out-of-pocket maximum may take several years to recover from, many people can absorb that amount in a few years without going into bankruptcy. However, a $50,000 OOPM could wipe out many Americans if they were unfortunate enough to have a health event that reached the limit.

Once you have identified a plan structure in the sweet spot for these 3 profiles, here are a few more variables to find the best plan to fit your budget:

HMO, PPO, EPO

HMOs, PPOs, and EPOs are types of plans that prioritize flexibility or price.

HMOs tend to have the lowest premiums for comparable coverage. The drawback of HMOs is that they make it more difficult to seek out-of-network coverage, and require a referral from a primary care doctor for most services, making them less flexible.
PPOs tend to have the highest premiums at a given level of coverage, but also give the patient maximum flexibility to see the provider of their choice without a referral. PPOs also tend to have better out-of-network coverage.
EPOs fall somewhere in between HMOs and PPOs in price and flexibility. EPOs aren’t as rigid as HMOs about requiring a primary care provider’s referral in all situations, and have lower premiums than PPOs. However, they tend to have weaker out-of-network coverage than a PPO and premiums are generally higher than an equivalent HMO.

Cost-conscious companies whose team members are willing to jump through a few hoops for more robust coverage may opt for an HMO plan. Companies whose benefits plans are a key factor in their recruitment and retention strategy may opt for a PPO plan. Your insurance agent or broker can help advise you on what plans are best for your company’s circumstances and strategy.

Evaluate how supplementary plans can help you achieve comparable out-of-pocket costs with lower-premium plans.

Higher premiums correlate to lower deductibles, copays, and coinsurance. However employers can fund employees’ FSA, HSA, or HRA accounts to offset the out-of-pocket cost for lower-premium plans.

Example:

Assume 2 plans are identical except that the Bronze plan has a $2000 deductible and $500/month individual premium, and the Gold plan has a $1000 deductible and a $750/mo individual premium.

If the employer selected the Bronze plan, and funded each employee’s FSA with $1000 per year, employees would have the same out-of-pocket net cost as the Gold plan ($1000 of the deductible from their own pocket), and the company would save $2000 per employee per year on premiums, even after factoring in the FSA funding.

Furthermore, since many employees won’t max out their FSA, the unused balance will go back to the employer, further increasing the savings.

Determine your cost-sharing plan

Finally, decide what proportion of the premiums will be paid by the company and what will be paid by the employer. You can set different cost-sharing rates for employees and dependents. The only requirement is that the employee’s portion of the premium can’t exceed 9.12% of their base salary in 2023.

Most cost-sharing structures are either percentage-based or base buy-ups.

In percentage-based plans, the employer covers a fixed percent of whatever the total premium is, for example “Employer pays 75% of employee premiums, and 50% of dependants’ premiums.”
In base buy-up plans, the employer pays some fixed portion of a “base” plan (e.g. Bronze level), and the employee has the option to upgrade to higher level plans (e.g. Silver or Gold) by paying the difference out of pocket. If your company has a limited budget, consider offering a higher-level plan option under a base buy-up strategy so that employees with chronic conditions have access to richer plans, even if they have to foot more of the bill to get it.