PPO? HMO? HDHP? People often think of health insurance as a confusing alphabet soup for a reason. For small businesses and startups who don’t have an HR team or in-house expertise, choosing the right options for employees can be confusing and overwhelming.
Health insurance is also getting more expensive. Employers with 50 to 499 employees expect health benefit costs to increase 9% in 2025. That puts companies in a tough spot since they must design plans that aren’t just affordable for themselves and employees, but also attractive and practical to attract and keep top contributors. In fact, health insurance is so valuable to employees that a recent study found that companies with 100 or more employees saw a 47% return on their investment in providing health coverage. This ROI factors includes increased productivity, decreased medical costs, and tax benefits.
The first step in choosing the right options for your company is understanding the basics because the type of plan determines the costs for you and employees, the type of care available, and how employees can access care. To help you get started, here’s a primer on the main health insurance options for small companies.
Traditional Health Insurance Plans
Traditional health insurance plans offer broad coverage for routine, preventive, and emergency care. They often also cover specialists and prescription drug coverage. Employers usually pay a portion of the premium and employees contribute through payroll deductions.
Traditional health plans are best for companies who can afford the premiums. Typically, these are companies with 50+ employees who can negotiate better rates. Here are the main traditional health insurance plans.
HMO (health maintenance organization)
With an HMO, employees receive care only from a network of providers, doctors, specialists, facilities, and hospitals. They choose a primary care physician who coordinates their care and refers them to specialists and services. An HMO usually has the lowest premiums and out-of-pockets costs than other plan types.
Best for: Employees who want low premiums and are focused on primary care.
PPO (preferred provider organizations)
With a PPO, employees can choose to see any provider they want, and referrals aren’t needed, but they’ll pay less in out-of-pocket costs if they stay within the network. PPOs have higher premiums and out-of-pocket costs than HMOs.
Best for: Employees who have more complex health needs, want to see a specific doctor, or who travel often.
POS (point of service plan)
A POS is hybrid of HMO and PPO plans. Employees can get care out of the network, but they’ll pay more for it. They still need referrals from their primary doctor to see specialists. Costs for employees tend to fall between HMOs and PPOs.
Best for: Employees who want flexibility like a PPO, but lower costs.
HDHP (high-deductible health plan) with HSA (health savings account)
This plan is ideal for companies who want to give employees flexibility but must tightly manage costs. An HDHP has lower premiums, but high deductibles (how much one must pay before insurance kicks in), so employees have an incentive to be mindful of the care they seek. This can lead to lower costs for both employers and employees.
An HDHP usually comes with an HSA, an employee-funded savings account. With an HSA, employees can set aside money for current or future health expenses. Interest and withdrawals are tax-free. They’re also portable, so the amount belongs to an employee whether they change plans, leave the company, or retire.
Best for: Younger, healthier employees who don’t visit the doctor often.
EPO (exclusive provider organizations)
EPOs are like PPOs in that employees don’t require referrals from their primary care doctor. However, employees must receive care from within a network.
Best for: Employees who don’t mind staying within a network, but don’t want to deal with referrals.
Alternatives to Traditional Group Health Insurance Plans
If you find that a traditional health insurance plan isn’t the best fit, here are alternatives that can be more flexible and affordable for your company.
HRA (health reimbursement account)
An HRA is an employer-funded account that reimburses employees for qualified health expenses or premiums for individual plans. For smaller companies, they can take the place of a group health insurance plan or are available to those with an HDHP. Unlike an HSA, funds aren’t portable. For employers, HRAs can be complex to administer.
Self-funded plans
With self-funded (also called self-insured) plans, employers pay claims directly to employees, instead of paying premiums to a traditional health insurance company. They are complex to administer so companies typically work with a third-party administrator. Companies usually have stop-loss insurance to protect them from extremely high claims.
Best for: Larger companies or fast-growing startups with a healthy cash flow who want cash savings and can manage the risk.
PEO (professional employer organization)
A PEO is a good option for startups who are too small to get competitive rates on their own. A PEO pools employees of multiple companies together so they have more buying power and can offer benefits that rival those of much larger companies. PEOs can also take on the administrative burden and tax liabilities on behalf of companies.
Best for: Growing startups that want to offer cost-effective Fortune-100 benefits.
Individual Health Insurance Marketplace
Another option is to guide employees to states’ individual health insurance marketplaces established under the Affordable Care Act (ACA). Employers often provide a stipend or subsidy for premiums through a type of HRA called an ICHRA (individual coverage HRA).
By going through a marketplace, employees have the freedom to choose their plan and may even qualify for tax credits. But without a group plan, they may face higher premiums.
Best for: Employers who can’t afford a group plan or don’t want to manage health benefits directly, especially if they have a distributed workforce.
Considerations for Choosing a Health Insurance Plan for Small Businesses and Startups
Once you understand the key health plan options, you’ll be better able to see how they’ll affect your business and your employees. Some key things to keep in mind:
- Cost: What can you afford and how much are employees willing to contribute?
- Employee preferences: What type of coverage do your employees want?
- Employee demographics: What kind of care will your employees need?
- Regulations: What kind of coverage are you legally required to offer?
- Scalability: Can your health insurance plan grow with your company?
Working with a Benefits Consultant
Investing in the right insurance can directly affect a company’s success because it affects finances, employee health, productivity, and morale. Partnering with an experienced consultant can take the burden of choice off your shoulders and even handle complex administration. To find out how Sequoia or our PEO, Sequoia One, can help, reach out to an experienced advisor.
