What are the common healthcare reimbursement models for small businesses?

If you're worried about the cost of care for your employees, you're not alone. For small employers, in particular, it's hard to find affordable health insurance. According to KFF¹, in 2023, the average annual cost of employer-sponsored health insurance premiums per employee was $23,968 for family coverage and $8,435 for single coverage.

If a group health plan is out of your budget, a healthcare reimbursement model may be the solution to your problem. This allows you to reimburse your employees for their healthcare expenses instead of buying healthcare coverage for them. However, with so many models to choose from, you need to understand the pros and cons of each one.

In this article, we'll explore the common healthcare reimbursement models for small businesses.

Takeaways from this blog post:

• Group health insurance is becoming outdated for small businesses, leading to the rise of healthcare reimbursement models that offer more flexibility and cost control.
• HRAs, stipends, and FSAs are common healthcare reimbursement models for small businesses. These models provide employees with options for covering medical expenses and insurance premiums.
• Small businesses that partner with PeopleKeep can seamlessly transition to an alternative reimbursement model through an HRA, ensuring compliance, cost-effectiveness, and ease of administration.

What is a healthcare reimbursement model for small businesses?

Group health insurance is becoming a thing of the past for small businesses. Its rigid, one-size-fits-all approach doesn't work for most employers or employees. With a group health insurance plan, employees have no individuality. Group plans don’t take their unique and diverse needs into account. Plus, the steep annual rate hikes and high participation requirements make it nearly impossible for small businesses to obtain coverage.

Healthcare reimbursement models alleviate these pain points. They allow small employers to provide quality coverage at a price they can afford. Instead of paying for a group health plan, employers adopting a reimbursement model offer their employees a monthly allowance for their healthcare needs. When employees incur an eligible healthcare expense, they submit the receipt to their employer for reimbursement. Their employer then reimburses them for the expense up to their set allowance amount. This provides valuable cost control to small employers who need to spend their dollars wisely.

Common types of healthcare reimbursement models for small businesses

If you're interested in a reimbursement model for employee health benefits, you have several options to choose from. Here are some common models that small businesses can consider:

Health reimbursement arrangements

A health reimbursement arrangement (HRA) is a type of employer-funded benefit plan that reimburses employees tax-free for more than 200 eligible medical costs.

Some HRA-eligible expenses include:

• Individual health insurance premiums
• Primary care physician visits
• Preventive care
• Emergency care
• Prescription drugs
• Over-the-counter medication

Employers contribute a specific amount to the HRA, and employees can use those funds to pay for qualified healthcare expenses. HRAs are flexible and customizable, allowing you to set limits on reimbursements. Plus, unused funds stay with you if any employee leaves your organization.

With this alternative payment model, your employees have more of a say in the quality of care they receive. An HRA gives your employees the freedom to choose the health plans that work best for them. That way, they can pick their own healthcare providers and medical networks that fit their needs.

Here are three of the most common HRAs:

• Qualified small employer HRA (QSEHRA): The QSEHRA is for small businesses with fewer than 50 full-time equivalent employees (FTEs). It allows you to reimburse employees for out-of-pocket expenses and insurance premiums. Employees need health plans that provide minimum essential coverage (MEC) to participate in the QSEHRA. There are also annual limits on employer contributions.
• Individual coverage HRA (ICHRA): The ICHRA works for employers of all sizes, but employees need qualifying individual health insurance coverage to participate. Like the QSEHRA, the ICRHA allows you to reimburse employees for out-of-pocket expenses and individual health insurance premiums. You can also offer different allowance amounts to different employees using employee classes. For example, you can offer $300 a month to part-time employees and $600 a month to full-time employees. But unlike a QSEHRA, ICHRAs have no maximum contribution limits.
• Group coverage HRA (GCHRA): Unlike the QSEHRA or ICHRA, the GCHRA works alongside a group health insurance plan. So if you're set on offering a group health plan, you can purchase a more affordable option, such as a high deductible health plan (HDHP). Then, you can use a GCHRA to reduce employee out-of-pocket costs. They can use their monthly GCHRA allowance for expenses your group plan doesn’t cover or fully pay for. Employees can't use a GCHRA on monthly insurance premiums.

HRA comparison chart

HRAs may seem confusing, but the chart below clarifies their differences.

Health savings accounts

While a health savings account (HSA) isn’t a reimbursement model, it’s another popular way to control healthcare costs. These are tax-advantaged savings accounts that employees can use to pay for qualified medical expenses. You and your employee can contribute pre-tax dollars to the HSA as long as your combined contributions don’t exceed the annual contribution limit. Your employees who are 55 or older can also make an additional contribution of $1,000 each year.

HSAs are portable, meaning employees can take the account with them if they change jobs. HSAs only work alongside HDHPs to help employees cover their out-of-pocket healthcare costs.

Flexible spending accounts

A flexible spending account (FSA), also called a flexible spending arrangement, is another type of payment model that allows your employees to use tax-advantaged money for various eligible expenses. Like HSAs, employees fund their FSAs through payroll deductions. Employers have the option to make contributions as well.

Health stipends

You can also offer your employees a taxable health stipend. With a health stipend, you provide your employees with extra compensation for their out-of-pocket medical expenses and health insurance premiums. However, you can’t ask your employees for proof of what they spent their stipend on.

Healthcare payment models for hospitals and healthcare providers

The insurance and hospital industries utilize healthcare reimbursement models as well. Let's quickly explain how this looks on their side.

Hospitals, health systems, and healthcare providers receive payment for patient care from various sources, including government insurance programs like Medicare and Medicaid, private insurance companies, or individuals paying out-of-pocket.

Here are some of the common payment models in healthcare:

• Fee-for-service²: Fee-for-service models are one of the most traditional models in healthcare. With this payment model, each medical service and procedure is paid for separately. This model can result in high out-of-pocket costs for individuals since they're responsible for paying a portion of the fees for each service. It can also incentivize providers to perform a higher quantity of services, even if those services don’t impact patient outcomes.
• Pay-for-performance³: As part of a recent national strategy to reduce healthcare costs, insurance providers are shifting to pay-for-performance models, which rely on overall agency performance and patient outcomes. Pay-for-performance, value-based reimbursement, value-based model, or value-based care models use financial incentives to improve patient care. They reward providers based on the efficiency of care and quality of care provided.
• Capitation⁴: In a capitation model, patients pay providers a fixed amount per month, regardless of the services provided. This model incentivizes providers to deliver cost-effective care and focus on preventative services to keep patients healthy. However, providers may be at financial risk if they're unable to manage the health of their patient population effectively.
• Bundled payments: In a bundled payment or episode-based payment model, providers are reimbursed a fixed, single payment for an episode of care, such as a knee replacement surgery. This model encourages efficiency and coordinated care among providers since they share in the financial risk and reward of achieving good patient outcomes at a lower cost.

Unfortunately, individuals have little control over which payment model they’ll be billed under. However, they can do some research to understand which billing methods certain providers use when selecting an insurance carrier and network.

How PeopleKeep can help you reimburse your employees

While traditional group health insurance has been the standard for several years, it's not the best option for small employers. With that said, it may feel overwhelming to try something new. But that's no reason to miss out on a more cost-effective solution. All you need is a little help to get you started.

When you team up with PeopleKeep, you get a stress-free experience. Our HRA administration software solution and award-winning customer support are here to make your life easier. Our experts generate your legal plan documents, verify employee expenses per IRS guidelines, and automatically send required notices so you don’t have to. We take on these tedious tasks for you so you can focus on managing your business.

Plus, our software serves solely as a support system for self-administrators, so you always maintain ownership of your benefit design and decision-making process.

Conclusion

Don't get overwhelmed by the various healthcare reimbursement models available. Each model has its advantages and considerations, so it’s important to evaluate the needs of your employees and the resources available to determine which model is the best fit for your business. While it's nearly impossible to find an affordable health insurance plan, you can set your own budget with an HRA and reimburse your employees for their healthcare expenses instead of buying coverage for them.

1. https://www.kff.org/report-section/ehbs-2023-summary-of-findings/
2. https://seed.nih.gov/glossary-reimbursement
3. https://wtcs.pressbooks.pub/nursingmpc/chapter/8-4-healthcare-reimbursement-models/
4. https://www.intelycare.com/facilities/resources/how-do-the-3-healthcare-payment-models-work