Health Insurance Alternatives To Avoid High Healthcare Costs

Health insurance is not as straightforward — or as affordable — as it used to be. Rising premiums, high deductibles, and mounting out-of-pocket costs are squeezing budgets for both employers and employees. But traditional health insurance is not the only way to provide healthcare benefits to your team. Thanks to a growing market of affordable health insurance alternatives, you can give your employees options that cost less and often work better for everyone involved.

7 Types of Alternative Health Insurance

The most common affordable health insurance alternatives are cost-sharing and pre-tax programs, where both the employer and employee can contribute to the plan. The goal of alternative healthcare plans is to give employers more control over costs while providing more flexible care options for employees.

Let's look at seven common alternatives to traditional health insurance and how they work.

1. Qualified High Deductible Health Plan (HDHP) With Health Savings Account (HSA)

This approach starts with a qualified high deductible health plan (HDHP) that pairs higher deductibles with lower premiums and then adds a tax-advantaged health savings account (HSA) to help cover those deductibles. Employees contribute pre-tax dollars to their HSA and use those funds to offset the high cost of the deductible, pay for copays, and cover other eligible medical expenses.

The HSA creates 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 helps them save on FICA taxes, because such contributions are not considered "wages" under the FICA tax framework, thereby reducing the taxable wage base on which FICA taxes are calculated. This strategy works as a recruiting and retention tool because it offers employees medical insurance with significant tax benefits.

The qualified HDHP with HSA:

• Allows the HSA to offset the high-deductible cost
• Gives employees a triple tax advantage
• Gives employees more healthcare spending power because funds are pre-taxed
• Has an option for a tax-saving employer contribution
• May have lower premiums

Employer Value of an HDHP With HSA: Offers predictable premium savings and potential tax advantages via employer HSA contributions.

Employee Value of an HDHP With HSA: Appeals to employees who want to take control of their healthcare spending and value tax-free savings options.

2. Health Reimbursement Arrangement (HRA)/ Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Think of an HRA as giving employees a flexible healthcare spending account controlled by the employer. Employers set aside money to reimburse employees for their individual insurance premiums or medical expenses. It is important to note that individual premiums are only eligible for QSEHRA, one must be on a group plan to be eligible for a traditional HRA. An HRA can supplement a traditional health insurance plan or serve as an alternative to health insurance. It's like having a flexible healthcare budget that adapts to your business needs:

• Employers can choose whether they want to contribute and how much as well as adjust the amount each year
• Some HRAs allow employees to choose their own insurance plans

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 if allowed by the employer. This is a huge benefit for businesses since they can re-allocate leftover funds to the next year's budget.

Because employers have discretion over contribution amounts, they can control costs more effectively. 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 a 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

Employer Value of a QSEHRA: Provides complete cost control with the ability to adjust contributions annually and keep unused funds, plus tax-deductible contributions.

Employee Value of a QSEHRA: Gives employees the freedom to choose their own insurance plans while receiving tax-free reimbursements for medical expenses.

3. Level-Funded Plan

Level-funded plans offer the cost predictability of traditional insurance with the flexibility and savings potential of self-funding. Employers pay a fixed monthly amount that covers claims, administrative costs, and stop-loss insurance to protect against high-cost claims. These plans offer greater transparency through claims reporting and can be attractive to small and mid-sized businesses looking for more control over their healthcare spending without taking on excessive risk. They provide comprehensive coverage like an HMO or PPO health plan, but they are funded differently.

Here's a quick look at the differences:

• 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 of the benefits of self-funding but with 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

Employer Value of Level-Funded Plans: Offers predictable monthly costs with the added benefit of potentially returning unused claims funds to the employer if the plan performs better than expected. Employers receive detailed reporting on claims, helping them understand healthcare usage and make informed decisions.

Employee Value of Level-Funded Plans: Delivers the same comprehensive HMO or PPO coverage with the same provider network.

4. Professional Employer Organization (PEO) Plan

With a PEO, companies may outsource certain HR administrative functions, including health insurance, to save time and money. A PEO's master health insurance plan works by pooling your employees with workers from other small businesses to create one large group that has the buying power of a major corporation. With more businesses participating, the PEO can negotiate low-cost health insurance rates and offer competitive benefits that attract quality talent.

A PEO master plan provides:

• 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

Employer Value of a PEO: Delivers enterprise-level health benefits at small business prices and transfers benefits administration to the PEO.

Employee Value of a PEO: Provides access to premium health insurance plans and comprehensive benefits typically only available at large corporations.

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 for unexpected urgent care situations.

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 cannot afford a major medical plan

Employer Value of Limited Medical Insurance: Provides affordable health benefits to part-time and hourly workers without the cost of comprehensive coverage.

Employee Value of Limited Medical Insurance: Gives workers access to essential healthcare services like urgent care and doctor visits at a price they can afford.

6. Telemedicine

Telemedicine is not an alternative health insurance plan, but rather 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 is offered at a low monthly fee with no deductibles, it can be an affordable employee perk.

Telemedicine programs feature:

• Remote diagnosis for common ailments
• Low monthly fees
• No deductibles
• Licensed professionals available 24/7
• Mental or behavioral health services

Employer Value of Telemedicine: Delivers a high-impact employee benefit at minimal cost while potentially reducing sick days by improving access to care.

Employee Value of Telemedicine: Provides convenient access to healthcare professionals for common conditions without the hassle of scheduling in-person appointments.

7. Association Health Plans (AHPs)

As we have seen with group health and PEO plans, there is strength — and savings — in numbers. Association Health Plans tap into that same power by letting small businesses join forces with other companies in their industry or community to buy health insurance as one large group. To join, the businesses 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.

As a health insurance alternative for small businesses, Association Health Plans offer unique advantages:

• Lower premiums
• More negotiating power
• No government marketplace fees
• Can cover out-of-state employees

Employer Value of Association Health Plans: Provides access to lower-cost group insurance rates and enables businesses to offer coverage for remote employees across state lines.

Employee Value of Association Health Plans: Delivers comprehensive health insurance coverage at reduced costs through the collective buying power of multiple employers.

Compare Your Healthcare Alternatives

With so many health insurance alternatives available, choosing the right one for your business requires careful evaluation of your specific needs and circumstances. The best option depends on factors like your company size, budget, employee demographics, and long-term goals.

Use the following questions to ask yourself as a checklist to compare alternatives to employer health insurance and find the best fit.

Company Size & Structure

• How many full-time employees do you have?
• Do you have part-time, seasonal, or contract workers who need coverage?
• Are your employees located in multiple states?

Budget & Cost Control

• What's your current healthcare budget?
• Do you prefer predictable monthly costs or variable expenses?
• Are you interested in potential year-end refunds or savings?
• Can you handle higher upfront costs for long-term savings?

Tax Benefits

• Are tax deductions important for your business strategy?
• Would your employees benefit from pre-tax contribution options?
• Do you want to reduce FICA tax obligations?

Flexibility & Control

• How much control do you want over benefit design and contributions?
• Do you prefer to manage benefits in-house or outsource administration?
• Is it important for employees to choose their own insurance plans?

Coverage & Employee Needs

• What level of coverage do your employees actually need?
• Are your employees generally young and healthy or do they have ongoing medical needs?
• Is access to comprehensive networks and specialists important?
• Do your employees value convenience features like telemedicine?

Administrative Burden

• How much time can you dedicate to benefits administration?
• Do you have HR staff to manage claims and employee questions?
• Would you prefer a hands-off approach to benefits management?

Why Consider Health Insurance Alternatives?

The number one reason is cost.

Traditional health insurance is expensive, and costs keep climbing year after year. Employers typically pay 80% or more of healthcare premiums for single coverage and approximately 70% for family coverage.

Traditional plans like Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) offer comprehensive coverage through network providers, but they come with high premiums, copays, and deductibles that strain budgets on both sides. PPOs and Point-of-Service (POS) plans give employees more provider flexibility, but at an even higher cost.

For many small businesses, these traditional models are becoming cost prohibitive without sacrificing other important benefits or business investments.

Health insurance alternatives offer a different approach. These options cover essential healthcare needs without the high costs of traditional managed-care models. They include health savings accounts, non-traditional group plans, medical cost-sharing programs, and limited medical coverage.

Depending on the plan you choose, medical insurance alternatives can:

• Control costs and reduce overall benefits spending
• Provide more affordable healthcare coverage for small and mid-sized businesses
• Allow employers to offer coverage to non-traditional, low-income, and younger employees
• Offer more flexibility and customization in provider choices
• Supplement existing benefits to help attract and retain employees

The key is finding the right balance between cost savings and the coverage your employees actually need.