For example, employers could give employees $500 a month for health benefits, and an employee could opt for a $600 health insurance plan. Both the $500 employer contribution and the $100 employee contribution would be fully tax-free.
We (Suril and Kevin) both worked at our own families' small businesses and know first-hand the pain of figuring out health benefits for employees. Today, small employers in the U.S. that can afford to offer health insurance (most cannot) must work with a broker to pre-select 1 or 2 "one-size-fits-all" health plans for their employees. These are called small group health plans, and they come with some downsides.
Employers are in the difficult position of prying into their employees' (or co-founders') medical histories if they want to do a good job, and they take on an HR/benefits role that they may not want or have time for. Additionally, small group health plans come with restrictions — over 75% of employees must participate in the plan, employers must pay at least 50% of the premiums, and the company may need to be above a certain size (typically 2-5 employees).
These downsides, along with the cost of health insurance (more on that in a bit), mean that many small businesses simply don't offer health benefits to their employees. This is bad for employees because they then must pay for health insurance themselves with after-tax income. This effectively means their health insurance, which is already a substantial expense, is 25 - 40% more expensive. This also makes it harder for small employers to attract good employees.
We are only able to launch Savvy because of new regulation that went into effect this year (on Jan 1, 2020). The vehicle we are using to offer this kind of health benefit is called the Individual Coverage Health Reimbursement Arrangement (ICHRA). Outside of the industry, this new regulation has hardly received any attention, but we think it will be big.
Our backgrounds are in HR tech and fintech. While working on a different healthcare product a year ago, we saw the ICHRA regulation get finalized and felt that there was an opportunity to package this new benefits option into a full product that simplified health benefits for small employers.
The U.S. system of employer-provided healthcare, which started when wage freezes were put in place during WW2, is an anomaly among western countries. One of the biggest issues is that the buyer of health insurance (the employer) is not the consumer (the employee). This fundamentally misaligns incentives. Many small employers we speak with don't believe employers should be making this very personal decision for their employees. We agree.
We guide employers through picking a contribution amount (we show them how their contribution compares to health plan prices in their area) and manage the corresponding paperwork, compliance, and payroll adjustments. For employees, we provide an in-app marketplace with access to every individual health plan, as well as vision and dental options. Employees can speak with licensed brokers every step of the way. Because employees control how they allocate their funds, they can even use the money to pay for existing insurance plans, including COBRA from a previous employer.
Most of our revenue comes from flat per-head administrative fees. We make a small amount of money when employees buy insurance through our in-app store, but this hasn't been a focus for us so far since broker commissions are significantly lower for non-group plans. We think this is a good thing because it better aligns incentives for us and our customers, and we are not encouraged to favor one health plan over another based on broker commissions.
Most of our customers fall into four categories (#3 was an unexpected surprise for us).
1) Startups who want to get the tax-savings of employer provided benefits for their co-founders. Sometimes a founder will even want to keep a COBRA plan but pay for it with company funds (remember the 25-40% savings we discussed earlier). 2) Companies getting ready to make their first hire and want to offer health benefits in a fast and easy way. 3) Distributed teams who have difficulty buying a company health plan for employees spread across the country. We were surprised when a European-based company approached us, looking to offer health benefits for their U.S.-based salespeople scattered across a few different states. 4) Small businesses who have deferred the health benefits decision, and have employees who are currently paying for their own health insurance with post-tax income.
We're seeing a surprising increase in signups due to coronavirus. Many startups and small businesses are scrambling to find a quick way to get their employees health coverage, and with us, their employees can get coverage even if they missed open enrollment at the beginning of the year.
Making it easier for employers to offer health benefits is a good start but, in the future, we want to help them get lower prices as well. We are looking into aggregating our users into buying groups to get big-company rates on insurance. Large employers receive discounts because they buy in volume. Buying groups are a very active legal topic right now — we're following along closely.
If you have experience managing health benefits at your own workplace or just have thoughts on how we can make the experience better for employers or employees, please reach out! We're keen to get the community's input, in the comments below or at [email protected].
by Andrey
Azimov