Health Insurance Alternatives To Avoid High Healthcare Costs
- Employee Benefits
6 min. Read
Last Updated: 10/20/2023
Table of Contents
Today’s employers know that to hire and retain quality employees, they need to offer health insurance. But inflation, skyrocketing premiums, and large deductibles are making traditional health insurance plans a challenge to afford for both businesses and employees. The good news is that changing economic trends are creating a growing market for affordable alternatives to health insurance. In fact, employers have more health benefits options than ever before.
Why Consider Health Insurance Alternatives?
The number one reason is cost.
Employers pay as much as 67% of the cost of their employees’ traditional health insurance—sometimes more.1 Traditional health insurance can include managed care plans from Health Maintenance Organizations (HMO) or Preferred Provider Organizations (PPO). These plans offer comprehensive care and require participants to use providers within their network. Depending on the plan, participants can pay insurance premiums, co-pays, and a range of deductibles. Preferred Provider Organizations (PPOs) and point-of-service (POS) plans are also traditional models, but they allow non-network providers for an additional cost.
Alternatives to traditional health insurance are low-cost options that cover some healthcare needs but don’t fit the traditional managed-care model. They include health savings accounts (HSAs), non-traditional group health plans, medical cost-sharing programs, limited medical (or catastrophic care) plans, and more. Depending on the plan, they can:
- Control costs and reduce overall benefits spend.
- Provide more affordable healthcare coverage to small and mid-sized businesses.
- Allow employers to offer coverage to non-traditional, low-income, and younger employees.
- Have more flexibility and customization, especially in the choice of providers.
- Supplement other benefits to attract and retain employees.
7 Types of Alternative Health Insurance
The most common affordable health insurance alternatives are cost-sharing and pre-tax programs where both employer and employee can contribute to the plan. The goal of alternative healthcare plans is to give employers more control over costs, and employees more flexibility in levels of care.
1. Qualified High Deductible Health Plan (HDHP) With Health Savings Account (HSA)
Just like it sounds, an HSA is combined with a qualified high-deductible plan. If they have an HSA-eligible plan, employees can contribute to the HSA and use pre-tax funds to pay for copays, deductibles, and other eligible medical expenses.
Employees use the HSA’s pre-tax funds to offset the high cost of the deductible. An HSA also has a triple tax advantage for employees:
- Contributions are tax-deductible.
- Account growth is tax-deferred.
- Eligible medical spending is tax-free.
Employers can also contribute to the HSA, which allows them to save on FICA taxes. This strategy is an effective recruiting and retention tool because it offers employees a medical insurance plan with tax benefits.
The qualified HDHP with HSA:
- Allows the HSA to offset the high deductible cost.
- Gives employees a triple tax advantage.
- Can give employees more healthcare spend because funds are pre-taxed.
- Has an option for a tax-saving employer contribution.
- May have lower premiums.
2. Health Reimbursement Arrangement (HRA)
An HRA is fully funded by employers. It reimburses employees for the cost of individual insurance or medical expenses. It can supplement a traditional health insurance plan or work in place of a group health plan. The biggest advantage is flexibility.
- Employers can choose whether they want to contribute and how much. They can also adjust the amount each year.
- Some HRAs allow employees to choose their own insurance plan.
HRA plans are tax-deductible for the employer, and reimbursements are tax-free when an employee files an eligible claim. If the HRA funds aren’t used, they stay with the employer and can be rolled over. This is a huge benefit for businesses since they can re-allocate leftover funds to the next year’s budget.
Because employers have discretion as to how much they want to contribute, they are better able to control costs. They can also choose to reward non-traditional employees, such as part-time or contract workers with specific types of HRA plan benefits.
For employers with fewer than 50 full-time employees who don’t offer a group health plan, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) may be a good option.
Advantages of the HRA/QSEHRA:
- The plan reimburses employees for qualified medical expenses.
- Employer contributions are tax-deductible.
- Businesses choose their contribution amount, which can be adjusted each year.
- Unused funds stay with the business, not the employee.
- Employers can use the HRA to reward non-traditional employees.
- A QSEHRA is ideal for smaller businesses who don’t have a group health plan.
3. Level-Funded Plan
This is a relatively new model that gives companies an innovative way to finance employer-sponsored health insurance plans. These plans offer comprehensive coverage and use the traditional model of an HMO or PPO, but they’re funded differently. Typically, there are three ways an employer can fund a plan:
Traditional. Plans are fully insured. The business pays premiums to an insurance carrier who assumes the risk.
Self-funded. The employer pays fixed administration fees to a carrier or third-party administrator (TPA). Claims costs vary and are paid for by the employer. (This model works better for larger companies because a bigger participant pool can reduce claim costs.)
Level-funded. A hybrid of the other two, level funding has some benefits of self-funding but less risk. It guarantees a monthly premium at a fixed cost that may be lower than a fully insured plan. If the plan performs better than expected and has fewer claims, the employer can potentially get a refund at the end of the year.
Level-funded plans may offer:
- Fixed fees that are lower than fully insured plans.
- A potential refund to the employer if there are fewer claims than expected.
- An affordable alternative for insurance carriers and employers.
4. Professional Employer Organization (PEO) Plan:
Companies may outsource certain HR administrative functions to PEOs to save time and money. With a PEO master plan, the company joins the PEO’s health insurance plan along with other businesses.
With more businesses participating, the PEO can negotiate low-cost health insurance rates and get gold-standard benefits typical of larger companies. This levels the playing field for smaller businesses and helps them compete for quality talent.
A PEO master plan provides businesses with:
- Access to a wider array of healthcare benefits at a lower cost.
- Benefits administration managed by the PEO.
- The same gold-standard benefits as larger companies.
- High-quality benefits packages that help recruit and retain employees.
5. Limited Medical
This supplemental insurance plan provides basic coverage for employees who don’t have major medical insurance. It covers urgent care and routine doctor visits.
Limited medical plans tend to have lower insurance premiums. They are ideal for low-income, hourly, and part-time employees who may not be able to afford a comprehensive health insurance plan. They may also appeal to relatively healthy younger employees who don’t have chronic conditions but need coverage in case of urgent care.
Limited medical insurance plans feature:
- Low premiums.
- Coverage limits for doctor visits, lab work, urgent care, accident emergency care, and sometimes telemedicine, but not preventive care.
- Basic limited health insurance for employees who can’t afford a major medical plan.
Telemedicine is not an insurance plan, but a supplemental program that provides routine healthcare at a low monthly cost. It enables healthcare professionals to diagnose and treat common, non-emergency conditions remotely via video chat and online consultation. Since it’s offered at a low monthly fee with no deductibles, it can be an affordable perk to offer employees.
Telemedicine programs feature:
- Remote diagnosis for common ailments
- Low monthly fees
- No deductibles
- Licensed professionals available 24/7
- Mental or behavioral health services
7. Association Health Plans (AHPs)
As we have seen with group health and PEO plans, there is strength—and savings—in numbers. This is also true of Association Health Plans where multiple small employers band together to form a larger group health plan. They must be associated by a “commonality of interest,” such as belonging to the same professional group or community organization.
Because a larger pool of plan participants can reduce insurance risk and gives the plan more negotiating power, these plans may have lower premiums. While they must conform to certain Affordable Care Act (ACA) requirements, AHPs are not sold through the government exchange, which saves on marketplace user fees.
These plans can also be sold across state lines, which means businesses can provide coverage for employees working out of state. They can be powerful recruiting tools for employers who want to attract quality employees in other parts of the country.
Association Health Plans have unique advantages:
- Lower premiums
- More negotiating power
- No government marketplace fees
- Can cover out-of-state employees
Find the Right Benefits for Your Employees
The right health and benefits strategy can attract and retain employees and support your business success. But with so many different types of insurance on the market, how do you know which one will fit your employees and your budget? Is a traditional health insurance plan right for you, or should you look at alternative health insurance? Paychex has experienced insurance professionals who can help you find the right benefits strategy for your business.
Insurance sold and serviced by Paychex Insurance Agency, Inc., 225 Kenneth Drive, Rochester, NY 14623. CA License #0C28207.