How to evaluate the cost of employee health plans

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Once you’ve decided to offer employee health benefits, it’s time to choose the best plan for you, your company and your employees.

Selection often starts with cost. The cost of group health insurance is comprised of several moving parts that work together to contribute to the bottom line. To evaluate the cost (especially when you’re comparing plans) consider the premium—the amount paid to the insurance company each month for coverage—against other costs, such as co-payments, deductibles and coinsurance.

Here’s some guidance to help you weigh the numbers:

Understand how the pieces fit together.

A higher premium will generally mean a lower deductible, or the amount an employee must pay toward medical costs before the insurance plan kicks in. Conversely, smaller premiums will usually lead to a higher deductible, which means employees will pay more if they need medical care. The two variables work a bit like car insurance; if you raise your accident deductible to $2,000, your monthly payments will go down—but if you're in a crash, you'll owe $2,000 before your insurance pays for any damage.

Don’t forget out-of-pocket costs.

The right health plan for your small business is the one you can afford, and employees can afford to use. Copayments and coinsurance, the payments that go along with medical visits, can add up if employees see a doctor frequently, and co-payments often don't count toward a deductible.

A copay is a fixed dollar amount paid by employees when they use medical services. For example, a doctor visit may have $35 copay, whereas an ER visit may be $200.
Coinsurance is the percentage of cost an employee pays for medical services, after she’s met her deductible. Consider a $100 doctor visit with a 20% coinsurance. If the employee has met her deductible, she would pay $20 and the insurance company would pay the remaining $80.

Find out what’s important to your employees.

Employees may care more about catastrophic coverage than regular checkups with a low co-payment. Understand employees' financial preferences, too. People with chronic health conditions or with small children—who tend to require frequent trips to the doctor—may lean toward higher premiums with lower co-pays, while a young, healthy workforce may favor a smaller up-front cost.

Also take a look at the plan's network – this determines which doctors you and your employees can see. When you're comparing plans that share the same base price, take a closer look at the network to make sure the doctors and hospitals employees desire most are in the plan’s network.

A well-placed survey,PDF opens new window or quick poll can help you determine how the bulk of your employees feel.

And regardless of which plan you’re considering, talk to your accountant. An employer’s contributions to healthcare costs are typically tax deductible. Your accountant can explain how deductions help offset the cost, potentially making benefits more affordable than you may think.