Understanding employee benefits terminology is crucial for employers when managing their benefit programs. These terms provide the foundation for effectively communicating and making informed decisions about employee benefits.
With the average employer-sponsored healthcare rates increasing by about 3% to 5% each year, it's more pressing than ever for employers to comprehend these terms.
Real-world examples abound that illustrate the importance of this knowledge: for instance, a small business owner who didn't understand the nuances of "out-of-pocket maximum" ended up selecting a plan that wasn't cost-effective for their employees, leading to dissatisfaction and lower staff retention. This literally happens all of the time.
In this article, we will delve into the essential terms in the realm of employee benefits, helping employers navigate the complex landscape of healthcare, retirement plans, and other benefits.
If you're interested in learning more about terms that would be important to employees, please follow this link to another article I wrote on the subject:
Key Terms Employers Need to Know in Health Insurance
Fully-Insured Plan: A fully-insured plan is a traditional health insurance plan where the employer pays a premium to an insurance company. The insurer then assumes all the financial risk of providing coverage for employees and their dependents.
Self-Funded Plan: A self-funded plan is an arrangement in which the employer assumes the financial risk for providing healthcare benefits to its employees. This means that the employer pays for claims out of its own pocket as they are incurred, instead of paying a fixed premium to an insurance carrier.
Managed Care Pharmacy: This involves strategies and practices designed to control the cost and improve the quality of medications provided to employees through their health plan.
PBM: A pharmacy benefit manager (PBM) is a third-party administrator of prescription drug programs for employers, health insurance companies, and other organizations. PBMs help negotiate discounts and rebates with drug manufacturers and process prescription claims.
Self-Insuring: An option where employers take on the financial risk of providing health insurance benefits to their employees. They pay for health care costs out-of-pocket instead of paying premiums to an insurance carrier.
Captive Insurance: A private insurer set up by a small group of people or companies. Self-insured employers may investigate whether to form or join a captive as an alternate way to manage risk. By joining a captive, employers can share in the cost of insuring themselves against losses and have more control over their health plans.
Minimum Essential Coverage (MEC): This refers to the type of insurance coverage that meets the Affordable Care Act's minimum standards for individual or employer-sponsored health coverage.
Premium: A premium is a monthly payment made by an employee for their health insurance coverage. It is typically deducted from an employee's paycheck.
Health Insurance Tax (HIT): The Health Insurance Tax is a fee imposed on health insurers to help fund the Affordable Care Act. This tax can impact premiums for fully insured plans, as it is often passed down to employers and employees through their premiums.
Alternative Funding: Options like captives, level funding, or other self-funding benefits strategies, can provide more flexibility and potential cost savings for employers.
Level Funding: A program that combines the cost savings of self-funding with the financial protection of stop-loss insurance. Employers pay a fixed monthly rate to cover expected claims and any unused funds are returned at the end of each year.
Reference-Based Pricing: A payment model where employers set the maximum amount they will pay for specific healthcare services. This allows them to negotiate directly with providers and potentially save on costs.
Pharmacy Benefit: A pharmacy benefit is a component of a health plan that covers prescription medications. This can include coverage for both brand-name and generic drugs.
Formulary: A list of prescription drugs covered by a specific health plan, typically organized into tiers based on cost.
Open Enrollment Period (OEP): The period during which individuals can enroll in or make changes to their health insurance coverage. Typically occurs once a year and allows employees to choose the best plan for their
Stop Loss Insurance: A form of reinsurance for self-insured employers that protects them from high claims. It can cover both medical and pharmacy claims.
Types of Stop Loss Insurance
Stop-loss insurance comes in two main forms, each serving a different purpose:
Individual Stop Loss (ISL) or Specific Stop Loss: This type of stop loss insurance provides protection against a high claim on any single individual. With ISL, a specific threshold is set, and if an individual's claims exceed this limit, the stop loss policy covers the excess amount. This is particularly beneficial for employers to mitigate the risk associated with catastrophic health events of an individual employee.
Aggregate Stop Loss: Unlike ISL which focuses on individual claims, Aggregate Stop Loss provides a ceiling on the entire claim amount of the group. This means that if the total claims paid by the employer for the entire workforce exceed the predetermined threshold, the stop loss insurance covers the excess amount. This type of stop loss provides a safeguard against unexpectedly high overall claims in a given year.
Telemedicine: The remote diagnosis and treatment of patients by means of telecommunications technology. This can be a cost-effective option for both employers and employees, reducing the need for in-person doctor visits.
Wellness Benefits: Programs or incentives aimed at keeping employees healthy, which can include things like gym memberships, stress management programs, and preventative health screenings.
Gene Therapy: A type of medical treatment that alters a person's genes to prevent or treat disease. These therapies can be very expensive, and employers need to consider how they will be covered under their health plan.
Essential Health Benefits: A set of 10 categories of services health insurance plans must cover under the Affordable Care Act. These include doctors’ services, inpatient and outpatient hospital care, prescription drug coverage, pregnancy and childbirth, mental health services, and more.
Group Health Plan: A health plan that provides coverage to members of a group, usually employees of a company. The employer may contribute towards the cost of coverage.
Conclusion
As an employer, CFO, or HR leader, understanding these key terms and how they impact your company's health insurance plan is crucial. This knowledge can help you make informed decisions when selecting a health insurance provider, evaluating alternative funding options, and planning for your best outcomes.
Remember, it is always important to consult with a licensed insurance professional for personalized guidance on selecting the best health insurance plan for your company's needs.
