HMO vs. HSA: Choosing the Right Health Benefits for Your Business

As an entrepreneur and an employer, you have several exciting milestones to look forward to.

One of them is the ability to start offering more comprehensive benefits to your employees. Health benefits, in particular, can improve the employee experience and help you attract top talent to your growing startup. 

The way you design your health benefits can impact how much value your employees receive and how much your benefits cost you as an employer. 

There are several cost-effective ways to create a health coverage plan, including HMOs and HSAs. While the two acronyms sound similar, they work in different ways.

How do you know which is right for you? 

Let’s explore the differences between an HMO and an HSA and how they can work together to create an effective benefits plan.

Here’s what we’ll cover:

• What is a Health Maintenance Organization (HMO)?
• What is a Health Savings Account (HSA)?
• The Difference Between an HMO and an HSA 
• Using an HMO with an HSA 

Final Thoughts on HMO vs. HSA and Creating a Health Plan for Your Business

What Is a Health Maintenance Organization (HMO)?

HMO stands for health maintenance organization. It’s a type of health insurance plan that you can purchase for your business where your employees’ care is managed by their primary care physician (PCP).

In addition to their PCP, employees have access to a network of doctors, specialists, and other healthcare providers in the plan. In essence, the HMO network is a list of covered providers.

The HMO plan helps pay for doctor visits, covered procedures, and drug prescriptions, as long as they were performed or ordered by a provider in the network. If employees want to see a specialist, they need to go through their PCP to get a referral to another provider in the plan’s network.

One of the most popular alternatives to an HMO plan is known as a PPO (Preferred Provider Organization) plan. 

Compared to HMOs, PPO plans tend to have higher monthly premiums and out-of-pocket costs. The main benefit of a PPO is that they offer partial coverage for out-of-network providers.

How To Set Up an HMO Plan

When employees enroll in a company health insurance plan, they pay a monthly premium for access to the plan’s services. 

Employers that offer health insurance are often required to pay for a part of their employees’ premiums. This amount is known as the employer contribution. 

Most states require a minimum contribution of 50% for the employer (but less for dependents like spouses and children). The good news is that your employer contributions are tax-deductible. 

You can purchase an HMO plan from any of the major health insurers, such as Blue Cross Blue Shield, UnitedHealthcare, or Aetna. 

Large insurance providers often sell plans specifically designed for small businesses. These small business plans have more affordable options with lower monthly health insurance premiums, which means lower employer contributions.

When shopping for health insurance for your company, you want to find the right balance between affordability and meaningful benefits for your employees. 

Pebble can help you navigate this journey and ensure that you and your team both get the most from your health benefits.

Pros of an HMO

• Centralized care managed by a PCP. 
• Offered by all the major insurance networks.
• Lower monthly premiums compared to other plans.
• Lower out-of-pocket costs compared to other plans.
• Lower employer contributions compared to other plans. 
• Affordable health insurance options for employees and employers. 

Cons of an HMO

• Some coverages are susceptible to strict requirements. 
• Employees need a referral from their PCP to see specialists.
• Employees must stay in-network to receive cost-saving benefits. 
• Employees may have to switch doctors if their PCP is not in the HMO network. 

What Is a Health Savings Account (HSA)?

HSA stands for health savings account. It is a tax-advantaged savings account that can be set up to help pay for qualified healthcare expenses, including insurance deductibles, copays, and coinsurance. (Employees cannot use an HSA to pay for monthly premiums.)

HSAs are available to individuals with high-deductible health plans (HDHPs). HDHPs are plans that have a lower premium in exchange for a higher deductible, which is the amount an employee has to spend on healthcare expenses before insurance benefits kick in. An HDHP can operate as either an HMO or a PPO. 

It’s important to note that not all HDHPs are HSA-eligible. If you’re interested in HSAs, you should make that a requirement when searching for insurance plans. 

As an employer, you can choose whether or not you want to contribute to employee HSAs. Many employers choose a matching option, which means they contribute the same amount as employees. You can also choose a fixed amount. 

Either way, your contributions are tax-deductible. The IRS limits annual HSA contributions. The amount an employee can contribute to their HSA is determined by a number of factors, such as age and the type of HDHP plan they have.

For reference, the contribution limit in 2022 for an individual HDHP plan was $3,650.

One of the nice features of an HSA is that it travels with the employee, even if they change jobs.

Finally, HSAs are also not available to individuals with Medicare coverage.

How To Set Up an HSA

HSAs are set up with banks or credit unions. If you already have an HDHP with your company, you can work with your insurance provider to find an HSA provider. 

As an employer, you manage HSA contributions (even if you decide not to contribute). Your employees will decide how much they want to put in the account. Then, you’ll deduct that amount from their payroll and deposit it into the HSA.

Here are the basic steps to setting up an HSA:

1. Make sure your HDHP is HSA-eligible.
2. Create a Section 125 cafeteria plan, which gives employees the option to set aside pre-tax income for benefits, including an HSA.
3. Notify your employees about the offer.
4. Manage contributions. 

Pros of an HSA

• Lowers taxable income. 
• Can be brought to new jobs. 
• Can be invested into retirement funds if not used for medical expenses.
• Lets employees use pre-tax income to cover medical expenses for themselves.
• Lets employees use pre-tax income to cover medical expenses for dependents. (The person must be listed as a dependent on the employee’s tax return.)

Cons of an HSA

• Some fees may be associated with HSA accounts.
• The IRS imposes penalties if an employee withdraws HSA funds for non-covered expenses.

Difference Between HMO and HSA

An HMO is a health insurance plan that employers can offer. An HSA, on the other hand, is a savings account that lets employees enrolled in a high-deductible health plan (HDHP) use pre-tax money to pay for certain medical costs.

Both an HMO and an HSA are intended to reduce the costs of healthcare, and they are both considered employee benefits. That being said, HMOs and HSAs each take a different approach, which means they are not directly competing.

HMO plans are provided by insurance companies like Blue Cross Blue Shield, UnitedHealth, and Aetna. HSAs can be provided by financial institutions, including banks and credit unions.

Using an HMO with an HSA

Since HMOs and HSAs are so different, you can use them together. Doing so provides a double benefit to employees by offering them affordable health insurance and letting them use pre-tax dollars to cover out-of-pocket costs.

If the benefits of an HSA intrigue you, make sure you choose an HDHP plan that is HSA-eligible when shopping for your HMO.

Final Thoughts: HMO vs. HSA

Finding a cost-effective health coverage plan for your business is an excellent way to start building out your employee benefits package. 

HMOs are one of the more cost-effective health plan options available. If you choose an HSA-eligible HDHP, you can lower your monthly premiums even further.

The right combination of health plan options can help you maximize your employees’ benefits and make you a competitive employer in the job market while keeping your costs reasonable. 

For help configuring health benefits for your small business or startup, get in touch with Pebble. We take the time to familiarize ourselves with your employees’ needs and to understand your business so we can recommend the right health package option for you.