The Facts About PPOs, HMOs, FFS and POS Plans

The most common form of health insurance today is known as managed care. Within the managed care umbrella, you’ll find three types of plans — health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans.

HMOs and PPOs are the most popular type of plans, but before the advent of managed care, fee-for-service plans (FFSs) were the standard form of health care coverage.

Preferred Provider Organizations
Typically, PPOs offer flexibility comparable to that of an FFS. A PPO has arrangements with doctors, hospitals and other healthcare providers that have agreed to accept lower fees from the insurer for their services. As a result, cost sharing is lower for plan members within a PPO network. Network healthcare providers make referrals, but plan members can self-refer to doctors and specialists, including those outside the plan.

Participants who visit network doctors pay co-payments, or set amounts for certain services; individuals who venture outside the network pay higher fees in the form of deductibles and co-payments. PPO members also are required to make up the difference between what their personal provider charges and what the healthcare plan pays.

Health Maintenance Organizations
HMOs are the oldest form of managed care plans and typically the least expensive way to receive medical care. HMOs offer a range of health benefits, including preventive care, for a set monthly fee.

In exchange for low rates, HMO members give up the freedom to choose their own doctors and must use doctors within the HMO network. Primary care physicians typically refer patients to doctors and specialists within the HMO network for different healthcare needs.

Point-of-Service Plans
Many HMOs offer an indemnity-type option known as a POS plan. Primary care doctors in POS plans usually refer patients to other providers in the plan, but members can refer themselves outside the plan and still get some coverage. If the doctor refers out of the network, the plan pays all or most of the bill. If POS member self-refer to doctors or specialists outside the network, they will have to pay a predetermined amount of coinsurance.

Fee-for-Service Plans
Fee-for-service plans (also known as indemnity plans) are the oldest form of health insurance coverage. These plans are the most expensive, but for those who can afford them, FFSs offer the most freedom and flexibility.  Participants choose their own doctors and hospitals, and can refer themselves to specialists with little interference from insurance companies.

 These plans require large out-of-pocket expenses. Patients pay medical fees up front and then submit bills for reimbursement. Deductibles of up to $200 are typical. And preventive services such as annual checkups and pelvic examinations generally aren’t covered.

Health Insurance Plans as a Competitive Advantage

Clearly, health plans fully funded by the employer are ideal for employees, but rising healthcare costs make these plans prohibitively expensive for some small business owners. Fortunately, there are some ways for even the smallest businesses to offer health benefits without breaking the bank.

Tax Deduction. One item that often goes unrecognized is the tax deductibility of a group insurance plan.  The premiums that the employer contributes on behalf of the employee are 100% tax deductible. Check with your accountant to see what % of the dollar will be recovered on your taxes, so when budgeting for this expense you remember to take that into account. 

Allow the Employees to Use Pre-Tax Dollars to Pay their Shares. A Section 125 Premium Only Plan (POP) saves you and your employees money by reducing payroll taxes. It works by making one simple adjustment in your payroll process: employees pay theirs and their dependents portion of insurance premiums on a pre-tax basis rather than on an after-tax basis. This savings can be as much as 1/3 of the total cost of the premium, based on withholding allowances etc. 

The Premium Only Plans vary in cost to set up and oversee the plan documents, prices range from $90 – $150 per year for small businesses with minimal accounting issues, it is usually a cost-effective addition as it reduces your taxable payroll is reduced along with your employee's taxable income. So, both you and your employees pay less in taxes.  Contact your payroll service company, us, or search the Internet for a Section 125 administration company and get one started right away.

Work with your Employees to Share Insurance Costs. Most employees who work for a small business realize that some expenses are unrealistic for an employer to shoulder 100%.  In most cases an employee will gladly assist in the cost sharing vs. the concept of having no healthcare at all.  It can actually be an effective tool that helps employees value their healthcare plans.  It is suggested to assign dollar amounts to the shared amounts instead of a percentage, as most insurance companies age rate their products. An Example of a Basic Share Concept:

Employee Shared Amount $75

Employee & Spouse Shared Amount $250

Employee and Child/Children $250

Employee and Family Shared Amount Family Cost $350

Manage Costs Through a Phased Approach. Another consideration is a phased approach, in which employees share the cost of their benefits on a decreasing basis as seniority builds with the company.  An Example of a Seniority Share Concept:

Year 1 Employee Share is 75 per month Dependent Cost 100%

Year 2 Employee Share is 25 per month Dependent Cost 50%

Year 3 Employee Share is   0 per month Dependent Cost 0                                                                                                           

Mix and Match Plan Designs and Shared Amounts. Some California health carriers allow multiple plan choices within the same company. Take advantage of this if possible, it is a great way to make everyone happy and complaints are virtually eliminated because you are offering choice, not to mention the fact that your expenses can be lowered even further.  This is also a great asset in recruiting to be able to have the choice option available.  Some employees can have a 100% HMO plan, another can have a $10 Dr. Visit 90% PPO, while another can have a $30 Dr. Visit 70% PPO. An Example of a Mix and Match Basic Share Concept:

The advantage of a strategy such as this is the less rich benefit plans reduce the employers and the employee expenses dramatically.

The Summarization of Cost Containment. The bottom line is with a good strategy and a little planning, by combining the 2 or 3 of the concepts just outlined, Employee Cost Sharing, Pre-Tax Deductions and Employer Tax Deductibility you can implement a quality benefit plan and contain your costs much better than imagined. Studies show that the number one benefit requested by employees nationally is health insurance; this benefit increases employee retention, reliability, recruiting, and it fosters a sense of security. In a tight labor market, the quality of your benefits package can make the difference between attracting star candidates and average performers. We recommend working closely with a reliable benefit broker, as the concept of cost containment can be as important as the benefit itself.    

Do Most Employees Prefer a PPO or an HMO?

In general, employees who want a health insurance plan with no deductibles and low out-of-pocket costs prefer health maintenance organizations (HMO).   Some of the more popular Northern California HMO’s plans are Pacific Care, Blue Cross’ California Care, Healthnet, Pac Advantage and Kaiser Permanente, there are many others to choose from as well. 

Employees who don’t mind paying deductibles and slightly higher premiums for greater physician choices and flexibility usually enroll in preferred provider organizations (PPOs). PPOs cover visits to designated healthcare providers, but they also pay for services rendered by healthcare providers that aren’t part of the PPO network.  ).   Some of the more popular Northern California PPO plans are offered by  Aetna, Blue Cross, Blue Shield, Cigna and Pacific Care, there are others to choose from as well. 

How Many Health Insurance Options Do Employees Really Need?

Two health insurance options are usually sufficient for most start-up organizations. Give employees a choice between a health maintenance organization (HMO) and a preferred provider organization (PPO).

Although HMO and PPO monthly premiums are roughly the same, each plan has fundamental differences that can influence an employee's choice. HMOs have lower out-of-pocket costs and no deductibles as long as you use providers in the HMO network. PPOs have deductibles but offer more flexibility than HMOs, allowing you to choose from a wider selection of doctors and specialists outside of the PPO network.

Allowing employees to choose between an HMO and a PPO gives them the freedom to pick the plan that best suits their needs. It also shows them that you care enough about their individual situations to provide them with two different health insurance options.

How Much Can I Ask Employees to Pay for Insurance?

On average, small businesses pay 75 percent to 100 percent of the total insurance cost for their employees and zero to 50 percent of the cost for an employee's dependents. You can ask employees to pay more than 25 percent, but think carefully before you do.   In addition, one of the things that will reduce the fiscal impact to your employees is the installation of a section 125 Premium Only Plan.  This allows the reduction of the premiums from the employees’ checks to be done with pre-tax dollars.  This can amount to savings between 25- 35%.

First, you need to make sure that you comply with regulations in your state. Each state has different laws limiting the amount an employee pays for an employer-provided insurance plan. In California, for example, employers are required to pay 50 percent of their employees' insurance rates for the lowest-cost plan. A local insurance provider or broker can help you with rates and regulations.

It's also important to offer employees a good, inexpensive health insurance plan that's an attractive benefit to their employment with your company.