Big Decisions for Small Business

by Catherine Weatherford

Providing health insurance for employees is one of the greatest challenges facing small businesses and by far the single most expensive benefit offered by employers.

Business owners know that health insurance is extremely important to most employees and is, therefore, a powerful benefit in recruiting and retaining the best workers.

In fact, small business owners have several options when it comes to health insurance for their employees. Major medical plans like HMOs, PPOs, point of service plans and indemnity plans are the most established types of coverage, each offering a different coverage equation.

In more recent years, professional employer organizations (PEOs) have been marketing themselves as a cost-effective means of providing health benefits for small businesses. Several PEOs have made news recently when they became insolvent, leaving hardworking Americans, and their families, without coverage.

Before you make the decision to contract a PEO to offer insurance coverage to your employees, consider the following:

•     Read the contract carefully! Make sure you understand, and are comfortable with, all of the financial arrangements. PEOs can and do file for bankruptcy and there have been fraudulent schemes associated with some PEOs.

•     Take great care to understand your, and your employees’, exposure to unpaid health claims if the PEO becomes insolvent. The PEO should offer only health insurance coverage fully insured by a health insurance company licensed in your state. This is the best and, in most states, the only legal way for a PEO to offer health insurance coverage.

In a few states, a PEO may be licensed to offer “self-insured” health coverage. Check with your state insurance department to determine if the PEO is licensed and if this is legal under your state’s laws. There have been many fraudulent PEO “self-insured” health insurance schemes. To contact the Kansas Department of Insurance, call 800.432.2484. To speak with someone at the Missouri Department of Insurance, call 800.726.7390.

Even if your insurance department confirms that a PEO may legally self-insure health benefits, consider carefully whether it is preferable to find a PEO that offers fully insured health insurance coverage issued by a licensed health insurance company. Health insurance companies are subject to stringent financial requirements and are backed by state guaranty funds.

•     Ask the PEO and your state insurance de-partment whether you are giving up health insurance rate regulation protection by obtaining health insurance coverage through the PEO. In most states, insurance law has unique rate protection for small employers. Typically, state law restricts how much the health insurance company may increase rates annually and sets a maximum

on rate increases due to employee health status. 

•     A PEO may also offer your small business workers’ compensation coverage. Take great care to understand your exposure to workers’ compensation claims. A PEO should offer you only workers’ compensation coverage fully insured by a workers’ compensation insurance company licensed in your state. You should ask the PEO to explain how you will be protected from involuntary and unknown (and potentially retroactive) cancellation of your coverage. In some states, the PEO controls the workers’ compensation policy. The PEO can cancel the coverage or allow the coverage to lapse. There have been instances where a PEO continued to collect, but failed to remit, workers’ compensation premiums, resulting in a substantial period with-out workers’ compensation coverage. 

As a small business owner, your employees probably feel more like family. When it comes to making choices about how to provide insurance coverage for them, knowledge is your best weapon against fraud. Don't take unnecessary risks with the financial and physical health of you and your staff. Arm yourself to make the best insurance decisions for you and your employees. 

Catherine J. Weatherford is Executive Vice President and CEO, National Association of Insurance Commissioners. 
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