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State and federal law makes a distinction between "small employers" and "large employers" insurance purposes. Small employers have certain legal protections, including protections against rate increases, and different rules regarding the level of coverage a plan must provide. For health coverage purposes, a business is considered to be a small employer if it has two to 50 full-time employees, defined as employees who customarily work at least 30 hours per week and are not seasonal or contract workers.

If your business qualifies as a large employer, defined as having more than 50 full-time employees, you should refer to the Large Employer Resource Page. This webpage provides a summary of health coverage options and resources for small employers.

1. Small Employer Coverage Overview
2. Indemnity vs. Managed Care Coverage
3. Coverage Rights and Protections
4. Self-funding a Health Plan

1. Small Employer Health Coverage Overview

It is a business´ number of eligible employees - not total employees - that determines whether or not it´s considered a small employer under Texas insurance law. For example, if your business has 60 total employees, it could still qualify if six of the workers are part-time and four have coverage through some other source, such as a spouse´s plan.

A carrier may require that at least 75 percent of a small employer´s eligible employees elect for membership as a condition of offering a plan. Carriers must always "round up" when calculating the percentage. For example, a five-person business with only three employees wishing to participate satisfies a 75 percent requirement by rounding up. However, in the case of a business with only two eligible employees, the law requires 100 percent participation. A husband and wife working in a business must be counted as two separate employees. The two employees will not be eligible for coverage as a dependent of one another.

A key requirement of small employer status is that coverage must be made available to all qualifying full-time employees and their spouses and dependents under the same terms and conditions, whereas a large employer may exclude spousal and dependent coverage and impose specific eligibility criteria for plan membership. Small employer status also protects the employer by mandating some percentage limitations on annual rate increases. State law also contains many fewer provisions for specific medical conditions that are required to be covered by small employer health plans.

No Texas employer, small or large, may require employees to participate in a health plan as a condition of employment. Nor may an employer exclude any eligible employee from participation for reasons based on the individual´s age, medical condition, medical history or other health risk factors.

• For further explanations of the special laws and protections for small employer plans, refer to the TDI publication "Small Employer Health Insurance."
• For price comparisons, refer to the "Small Employer Health Benefit Plan Rate Guide."

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2. Indemnity vs. Managed Care

The two primary approaches to health care coverage are typically called known as "indemnity" and "managed care." One of the first decisions that a business providing health coverage will have to make is whether it will offer a plan that is strictly one type or the other, or a plan that incorporates various features of the two.

Each approach has its trade offs and both have their critics. In general, indemnity coverage offers greater freedom of choice in obtaining health services but costs more, whereas managed care is more restrictive but costs less. A business may elect to offer multiple types of health coverage and allow employees to decide which best meets their needs. In this situation, typically the employees who select the more expensive plan pay the difference in price.

Indemnity plans are administered by insurance companies, and are what many people think of as a traditional health insurance. An indemnity health plan will cover the services of any physician, provider or hospital the consumer chooses as long as the care is medically necessary and consistent with the terms of the policy.

Managed care is an alternative approach that has gained popularity within the last two decades as a tool to mitigate rising health care costs. Typically a managed care plan will cost significantly less than an indemnity plan covering comparable conditions and services. A primary way managed care achieves savings by contracting directly with physicians, hospitals and providers to provide services at pre-negotiated rates. A managed care plan can either be administered by an insurance companies or special network of health providers called a "health maintenance organization" (HMO).

Under the strictest form of managed care, which can only be provided by an HMO, members are limited to receiving care only from providers within the HMO network, except under rare circumstances and medical emergencies. Other types of managed care allow members to go outside the network for services, however they must typically pay up to twice as much - or more - out of pocket toward the cost of care than they would pay by remaining within the network.

HMO managed care plan members are also typically required to select a "primary care physician" (PCP) as a condition of membership. This doctor becomes the supervisor of the individual´s medical care and liaison with the other providers in the network. Approval by the PCP is typically required before the plan will cover any extensive or non-routine medical care, or consultation with any specialist physician. Supervising members´ care so that only necessary health services are provided is another way HMO plans work to control costs.

The laws and rules governing HMOs are extensive and in many instances quite complex. For more information, refer to the TDI publication Health Maintenance Organizations.

"Preferred Provider Option" (PPO) plans, which are the managed care plans that are offered by insurance companies, and "Point of Service Option" (POS) plans, which are offered by HMOs, are the two most common ´sub-types´ of health plans that combine the features of managed care and indemnity coverage. Under these plans pre-approval for services from a primary doctor is not required, and care from any provider is covered, although both types of plans are also affiliated with a managed care network that members can opt to use at a substantial discount.

Apart from a few minor differences, as far as plan members are the same PPO and POS plans essentially work in the same way. POS plans are generally somewhat less expensive. The key difference between the plans is in how they are financed internally. In a PPO plan, the insurance company typically pays providers some discount percentage of their normal fee from services. In a POS plan, providers are typically paid a flat fee per patient, regardless of the expense of the care administered.

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3. Coverage Rights and Protections

State and federal law contains numerous protections for both consumers and employer health plan sponsors. Three of the most important are the rights to:

Continuity of coverage. A health carrier may not refuse to renew an employers existing health plan while it continues to offer the plan to other employers in the same market, except for reasons of fraud, nonpayment, or violation of certain health plan terms. However, a carrier may discontinue offering a plan in the market altogether. In this case, the carrier must allow the district to enroll in any other plan it offers in that market. If a company decides to withdraw from the market altogether, it must provide the district and the Commissioner of Insurance 180 days notice before non-renewal of coverage. Carriers that withdraw completely are prohibited from doing business in that market for five years.

Portability of coverage. The federal Health Insurance Plan Portability and Accountability Act (HIPAA) and other laws require health carriers to provide employees who new plan members with credit toward any "preexisting condition" waiting period for time the new member spent previously covered by another creditable health plan during the year prior. A preexisting condition is defined as any condition for which an individual has received "medical advice, care or treatment" during the six months prior to joining a health plan. By law, employee health plan carriers may impose a waiting period of up to 12 months before extending coverage for such conditions to new members, even though the conditions are normally covered by the policy. Preexisting condition rules protect carriers from the possibility of individuals purchasing health coverage only because they are already sick or ill and know they need serious treatment.

Under HIPAA, If a new health plan member was previously enrolled in another health plan during the year prior, a carrier is required to apply the time spent under the old coverage toward any waiting period of the new coverage on a month by month basis. For example, an individual with no prior coverage who has a pre-existing condition who joins a plan with a 12-month waiting period would have to wait 12-months before any treatment for the condition will be covered. However, had the same individual been previously enrolled in another health plan in the eight months prior to joining the new plan, that time would apply to the new plan´s waiting limit. He or she would therefore only be required to undergo a four month waiting period (12 - 8 = 4). An individual with previous coverage during the full twelve months of the year prior would have no waiting period at all.

HIPAA regulations can be one of the most complex areas of health coverage law. HIPAA.org is a federally administered website created to assist health plan providers with legal compliance.

Preexisting condition limitations. State and federal law prohibits employer health plans from treating pregnancy or genetic information as preexisting conditions. In plans that pay for prenatal care and childbirth, this means these services are covered even if a woman is pregnant when she joins a plan.

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4. Self-funding a Health Plan

Employers with significant financial resources may elect to "self-fund" their employee benefit plan. In effect, the employer becomes its own insurance company, accepting the full financial risk of coverage and paying claims using its own funds.

It is important for a self-funding employer to make certain that it has sufficient resources to pay its employees' health claims to prevent a potential budget shortfall, or even bankruptcy. Self-funding requires an employer to accept many legal responsibilities that would otherwise be handled by the carrier. Employers considering self-funding a health plan should consult legal counsel to be sure they understand the risk and responsibilities involved. Employers who decide to self-fund their health plan may want to consider purchasing Stop-Loss coverage to minimize their financial risk.

Self-funded plans are governed by the federal Employee Retirement Income Security Act (ERISA). Therefore, these plans are often called "ERISA plans." The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor is the primary regulating agency.

Many self-funding employers contract with "third-party administrators" (TPAs) to administer the day-to-day operations of their health plans. A TPA may either be an insurance company or a separate company that administers self-funded plans exclusively. The TPA manages administrative functions, such as claim processing, collecting employee premiums, and managing enrollment. The TPA assumes no risk of coverage, however. In Texas, TPAs must maintain a valid TPA license to legally operate in the state.