If you hang out on Techmeme or Hacker News, you’ll get your expected flood of startup stories about funding events, new tech wizardry, and product launches. When we started our startup, the thing we needed was… healthcare. I (was) volunteered to be HR, and so the journey began. Here are the hard-earned drops of knowledge that would be helpful to any startup looking to offer medical insurance in California.

First things first: Why should we offer healthcare?

You’re not legally obligated to provide healthcare, so why bother? When we started, each person was on still on COBRA from our previous company, Intuit (if you don’t know, that means we were paying out of pocket for the entire health insurance premiums for same plan that we had while at Intuit) or had their own individual plan. So what’s the benefit of the company offering medical insurance?

• Cheaper premiums: Intuit basically offered only high end plans (no deductibles, cheap prescriptions, etc.) because they use good medical benefits as a recruiting tool. So now that we were paying out of pocket, we were paying the high premiums that went with it. If your startup can choose your own health care plans, you can choose from any plans the insurance carrier offers, including the (much, much) cheaper plans.
  • But… the premiums are not necessarily cheaper than individual plans. A couple brokers told me that at a small group size, the rates are basically the same. We knew we wanted to offer a group plan at some point, so we just bit the bullet now.
• Guaranteed coverage: The main difference between an individual plan and a group plan is that a group plan has guaranteed coverage; i.e., you can’t be denied for preexisting conditions.  In fact, if you have an employee with a serious (i.e., expensive) preexisting condition, a group plan might be cheaper because your rate is (basically) determined by your age and gender, not your medical history.
• It’s the right thing to do: I was going to write something about the sad political environment we live in, blah, blah, blah, but ’nuff said. We’ll move on.

Can we offer health care insurance?

Luckily, a group plan really only requires the minimum number of people that would define a “group”: 2 people. After that, it gets a bit complicated:

• You need to have at least 2 “eligible” employees to qualify for a group plan. An “eligible” employee is one who is working full-time, which is defined as at least 30 hours/week for minimum wage ($8/hr in California).
• To prove that you’re a real company, you have to have those 2 “eligible”, paid employees on payroll for at least 6 weeks in the quarter prior to the quarter you’re starting coverage. E.g., if you want to start coverage on April 1, you need to have at least two employees on payroll February 15.
• Only people “associated” with the company can be offered health care from the group. The easiest way to associate someone with the company is to pay them for full-time (minimum 30 hrs/week, $8/hr). Basically, the insurance carriers don’t want to open up group policies to everyone so you don’t just add your Aunt Mildred with her needs-to-replaced hip even though she has nothing to do with the business.
  • But what if you’re not taking salary (which happened in our case)? Owners of a company are associated with the company, but to prove you’re an owner takes documents stamped by the state and possibly proof that the owners are making income (i.e., share of profits) from the business. The threshold of proof varies for the different carriers. If you can’t meet the threshold of documentation, that employee will have to find an individual plan, or you have to put that employee on full-time payroll. Note: unpaid employees, like owners, do not count toward your 2 “eligible” paid employees from the first bullet above.

What can we offer?

Only some insurance carriers will offer policies for really small companies. Some require a minimum of 25 or 50 employees. Some only have competitive rates at those higher numbers. Our broker gave us quotes from Anthem Blue Cross, Blue Shield, and United because those were the best options for a group our size (4 employees at the time of quote).

Each of these major carriers require a minimum percentage of a small business’ eligible employees to enroll with the carrier, and that percentage is greater than 50%. And that means… do the math… you can only offer one carrier.  So you’ll pick one.

The exception is Kaiser Permanente which does not have a similar requirement (or the minimum percentage is much lower). In the end, we’re offering one major carrier and Kaiser.

Once you’ve selected an insurance carrier, you can (basically) offer as many of their plans as you want to your employees. It doesn’t cost you any more, but it’s just a management headache offer 30 plans. We chose a decent mix of low, mid, and high end plans, in both HMO and PPO varieties.

How much does it cost?

We don’t have a lot of cash (what startup does?) and we don’t intend to use “Great Benefits!” as a major recruiting tag line (we just want to do really important stuff with really cool people). So we wanted to keep it inexpensive to the company; we can always increase our contribution the better we do financially or the more important benefits are to retention and recruiting.

The cost to the company doesn’t actually have to be that much. The minimum employer contribution is 50% of the employee’s cheapest available premium or $100/month (details of that rule vary slightly for different insurance carriers but that’s basically it).

For example, let’s say you offer three plans and Joe’s premiums for just himself on this three plans is $200, $300, and $400/month. Regardless of which plan he chooses, the company’s minimum contribution is 50% of the lowest plan, so $100.  Let’s say Joe has a family he wants to insure, so his premiums are $700, $1000, and $1300.  The company’s minimum contribution is still $100 because the minimum is based on just the employee’s portion of the premium, not the spouse or family.

Of course, you can offer to pay for more than that, based on any formula you want. We chose to pay for 100% of the employee premium.

So you can reduce the minimum employer contribution by offering the lowest package possible. But don’t be a jerk; pick a lowest package that someone would actually take.

We chose not to offer HSA-based packages or other really low end packages, but we still offer a pretty cheap plan (along with the higher end plans).  Our employee premium is ~$250/month/employee and, again, we chose to pay for 100% of it. The rates were based on the fact that we’re a group of 30-something males in the California Bay Area.

All the caveats you can think of apply when you see prices on the Internet; your mileage may vary.

What do I do?

OK, if you’re like me, you probably don’t want to talk on the phone with people more than you have to when buying something.  You want to fill out a form online, get a page of options, select some, put in a credit card or account number, and be done with it.  So if you want, you can sort of do that.  You can go to each of the insurance carriers’ sites and do it.  Or you can go to eHealthInsurance and fill one form to get multiple quotes.

Don’t bother. Get an insurance broker. Why?

• It’s no more expensive. Either the broker gets the commission or the carrier keeps the commission.
• You get to deal with one person instead of different sales contacts at different carriers.
• The health insurance is still all about forms, signatures, faxes, etc. You don’t want to deal with that.  You have a business to run!

What did I look for in a broker? Remember, regardless of the broker, your premiums will be the same, so pick someone you can work with.

• Responsiveness, responsiveness, responsiveness. Duh.
• Tech savvy enough to deal with emails, scans, pdfs, etc. Even with online fax services, who wants to deal with that?
• Experienced in small businesses in your industry in your area.  Brokers don’t make a lot of money from commissions on small group policies, so many don’t bother with them; they’re hoping to make more as your company grows. Also, I didn’t have to explain why multiple employees in the company are taking no salary and why we have no revenue or income.  They get it.

I just Googled around my area for insurance brokers, sent emails to a few, then spoke to a few on the phone. Only one called me back regularly and sent me emails to remind me to send in my forms. And we had a winner!

But wait, there’s more!

There’s a lot of I’ve learned in selecting and signing us up for medical benefits, but this post is too long already.  I’ll cover more in follow up posts, including: dental/vision/life insurance coverage, worker’s comp, health statements, etc.

(photo by Adrian Clark)