This post is a companion to the Software Social episode on Health Insurance for Bootstrappers.
There’s no getting around it: health insurance is a huge hassle and expense in the US.
The number #1 thing that kept us back from going full-time on our then-side project, Geocodio, was the scary part about dealing with health insurance. I had previous experience buying health insurance on behalf of an employer, and I still found it complicated and a hassle.
My goal with this guide is to demystify it for other entrepreneurs in the US and try to help others who might be making the jump to full time.
I write this from the perspective of a bootstrapped software entrepreneur because that’s my perspective, but this guide might be able to help you even if you’re coming from a different angle. I’ve made my best effort to see that the information here is accurate, but I am not a licensed health insurance agent.
Tip for wrapping your head around the costs: One of the biggest hurdles we faced with going full time was wrapping our heads around the astronomical cost. Health insurance is expensive, especially good health insurance. What helped us was realizing that if we were full-time on the business, it would grow more and our revenue would increase, covering the additional cost of health insurance (which is a tax write-off, by the way). This is one of the big benefits of starting with a side project and only going full-time once your business is established. You can consider pulling cash forward in the form of offering or incentivizing paid-in-advance annual subscriptions to give you some cushion during the transition.
Part 1: How to figure out which path might work for you
I present this flowchart to help you decode the landscape, but with a HUGE caveat that health insurance is highly state-specific and situation-specific.
NOTE: Always read the plan benefits carefully as you or your family’s health situation will determine what makes the most sense (and cents). Depending on how much you and your family consume health care, options that may not seem like good options on the surface (whether that’s a high deductible plan or a PPO) may make the most financial sense. Remember to add premiums, deductibles, expected co-pays, and medicine costs to your estimates. Since it’s health care, you should also think through expensive scenarios, like having a baby, surgeries, current and family history of chronic conditions, or contracting COVID and having a protracted hospital stay. (That probably gave you a headache just thinking about the spreadsheet needed to determine that.)
Anyway… in general, the best balance of benefits and cost is found in employer-sponsored group health insurance. Individual plans usually much higher premiums and deductibles, so the goal is to somehow find a way to an employer-sponsored plan. That doesn’t mean employer plans are smooth sailing, but they’re…better. Whether that’s through your former employer (COBRA), your own company (if your state permits it), a PEO or professional association (if you have employees), or university (if you qualify) will depend on your specific situation.
There may be other options that you could qualify for, like Medicare, Medicaid, CHIP, or state-level programs. You don’t necessarily need to be low-income to qualify for these options. For example, in Massachusetts, a family of 4 can qualify for MassHealth if they make up to 400% of the federal poverty line, which is $104,808. I say this to flag that it’s worth looking into these options even if you are well above the poverty line.
Putting that aside, here are some questions to help you determine which of the options below might work for you:
- Do you have a spouse?
- If yes:
- Do they have a job that offers health insurance?
- If yes: If your spouse is employed, the easiest route might be to get on their health insurance. All plans have different pros and cons, so it might be worth weighing it against other options (like COBRA from quitting your own job, or getting group coverage if your state permits it).
- If no: Seeing if your state will allow you to be a “group of one” is the best option. The marketplace can be insanely expensive for families. This is where I’ve seen people choose health shares (strongly caveated as not for everyone, see more below). If you or your spouse has wanted to go back to school, it’s also worth looking into whether your local public university will let you get on their plan for students taking one class a week.
- Do they have a job that offers health insurance?
- If no: The marketplace may have affordable options for you, especially if you’re willing to switch doctors or use Kaiser. If you’re healthy, a combination of direct primary care plus a high-deductible catastrophic plan could make sense. Depending on your state, you may qualify as a “group of one” and be able to buy group (business) coverage and avoid the Marketplace.
- If yes:
- Do you, or did you, recently have a full-time job with health insurance?
- If yes:
- Does the company employ at least 20 people?
- If yes: You can stay on your company’s coverage and pay the full premiums for up to 18 months via COBRA. This option is worth looking into.
- If no: The company is not required to offer COBRA coverage, and you will need to find a new plan.
- Does the company employ at least 20 people?
- If yes:
- Do you have employees, even part-time ones, that are not your spouse?
- If yes: If you have at least one full-time equivalent employee (a complicated way of saying “one person who is employed 40 hours a week or 2+ people who work part-time and would be on the plan”), you will have a much easier time buying health insurance. Crucially, they will need to be on the company health insurance. You can go straight to a broker, PEO, SHOP, or professional association’s plan without issues. It may still be expensive and your rates may skyrocket every year, but it’s better than being on an individual plan.
- If no: You’ll need to figure out if your state allows groups of one or spousal-only groups of one.
Part 2: Options
This section goes through some of the most common options and the general pros and cons of each.
Buying Group Health Insurance
I initially thought we wouldn’t be able to buy group insurance (aka employer-sponsored coverage) since we don’t have any employees.
I first tried buying insurance through our payroll provider, Gusto. But they told us that carriers wouldn’t work with us since we didn’t have any non-founder employees.
But, after a lot (A LOT) of Googling, I discovered a key term to: “self-employed group of one.” (Or “spousal-only group of one” if your spouse is also an employee of the company.) Many states require companies to have at least one employee in order to qualify for group health insurance, but it turns out that several states have passed laws specifically enabling groups of one, founder-only groups, and spousal-only groups of one to qualify for group health insurance.
Here is a somewhat outdated list from Kaiser Family Foundation on the different definitions for different states. Be aware that this post is out-of-date and you should double check your state’s laws, especially if it says your state’s minimum group size is 2. At least one state (Virginia) has changed their laws to be in favor of spousal-only groups in recent years.
Since we lived in Virginia, I can go into slightly more detail there.
“Effective July 1st, 2018, SB 672 , introduced by Senator Creigh Deeds, changed the definition of a group for the purposes of purchasing health insurance to allow a one-person single business owner (sole proprietor, single member and single shareholder corporation) to access group plans and purchase coverage for qualified dependents.”From Dulles Area Realtors
TIP: Realtor’s associations, I learned, have been strongly in favor of these laws as most realtors are independent contractors. Their websites have had some good hits on wording to use for research and whether there is any progress in your state.
However, this law specifically exempted “mom-and-pop” spousal-only groups from buying health insurance. I then reached out to the Virginia Bureau of Insurance, wondering if we re-organized the company so that only one of us was the owner it would help. They ended up pointing me to a law change in 2019 that changed the definition to include spousal-only groups. See my correspondence with the Virginia Bureau of Insurance here, which includes context and links to the relevant laws.
Note: We had to provided the prior year’s K-1s as part of the enrollment process. We had to prove that we had been in business for at least a year and had real revenue. (This is part of the reason it may make sense to go with COBRA for your first year or so working full-time, so you can have a year of full-time-on-the-business tax returns.)
TIP: If you’re also in Virginia, I highly recommend Katz Insurance Group as a broker. They were awesome to work with.
I later went back to Gusto with the documentation from the state Bureau of Insurance (above), and they still told me the carriers would deny us coverage. I brought this back to the Bureau of Insurance, and they said those carriers were likely violating the law. Hmm.
Gusto doesn’t decide who their carriers cover here, so I don’t fault them. I present this more to implore you to keep researching and pushing if you get a no even though the law seems to be on your side.
Bottom line: If you have a year’s worth of business tax returns and your state allows groups of one to buy employer-sponsored insurance, this is likely your most affordable path to a robust plan.
The most straightforward, albeit temporary, path is to use COBRA for as long as you can, if you can. COBRA is “continuation coverage” of your employer’s plan, and companies with more than 20 employees are required to offer you COBRA coverage for up to 18 months. Basically, you get to stay on your employer’s plan, but foot the entire premium bill. You have 60 days after leaving your employer to elect COBRA coverage.
At the very least, using COBRA for the first few months of your self-employment can make for an easier transition and give you some breathing room to explore other options. It can also be a good fit if you’re in your first year of operation, or if you plan to hire an employee within the next 18 months and transition to employer-sponsored coverage.
With COBRA, you’re likely already familiar with the pros and cons of your employer’s plan so there aren’t any surprises. It can be expensive, though.
Our COBRA premiums were around $1,150 a month and didn’t include dental. (We purchased dental directly through Delta Dental for $100-200 a month.)
Getting set up with COBRA required some paperwork up front. We received paperwork in the mail and sent it off. The other annoying part was that the online payment system did not accept bank transfers for the first payment and we had to pay a 5% credit card payment fee on top of the payment. (Grrrr.) And whenever we went out-of-network we had to file and mail paper forms for reimbursement since our insurer’s website only supported online claims submission for non-COBRA plans. But overall, it worked fine for 18 months.
Bottom line: COBRA can make for an easier transition in the beginning, especially if you don’t have a year’s worth of business tax returns. But it can be expensive.
The Individual Marketplace
Ah, the Marketplace. The ill-fated from the get-go Marketplace. It’s worth looking at the marketplace quotes. Depending on your life situation (Kids? Spouse? Flexible with which doctor you go to?), it may make sense to get a marketplace plan.
If you’re transitioning out of your full-time job, that counts as a “qualifying event” and you can buy insurance outside of the regular open enrollment window. (Other qualifying events include birth of a child or getting married.)
The big perk of a Marketplace plan is that they’re ACA-compliant, meaning they have robust coverage. If you’re planning to have children in the next year, have a chronic condition or other costly medical needs, and don’t qualify for employer-sponsored coverage, the Marketplace might be your best bet for predictable health insurance costs. Insurance is fundamentally downside protection, and these plans give you strong downside protection (but whew! do they make you pay).
Depending on your state, you with either go to Healthcare.gov or your state’s exchange. You can see plans outside of the open enrollment period here, but be aware that prices may change during open enrollment.
For us, it didn’t make sense to choose a Marketplace plan because the cheapest one that our doctors took was $3,057/month with a $6,000 deductible. Ouch.
People who are employed by someone else are often shielded from the full cost of health insurance, so here’s a window into buying your own.— Michele Hansen (@mjwhansen) January 22, 2020
Our COBRA runs out in March, so we have to buy insurance. This is the cheapest plan our doctors take: $3k/month with a $6k deductible. pic.twitter.com/YS4NZAy0Bx
However, if you’re willing to use an HMO or, for example, switch to Kaiser, you can get more reasonable rates (sub-$1,500/month with lower deductibles).
Bottom line: The Marketplace can be reeeeaalllllly expensive, but the plans have robust, ACA-approved coverage.
Marketplace: Small Business (SHOP)
Businesses with at least one non-founder, non-founder’s-spouse employee can buy insurance through the SHOP marketplace. The exact qualifications are in depth here, but the short answer is that even if your state has passed laws that allow founder-only groups of one to buy group health insurance, you can’t buy through SHOP. (I went through rounds of inquiries with them and got a hard no on this.)
It’s a shame, because there were some great prices for plans, and they are all ACA-compliant (robust coverage!). If I recall correctly, we could get a decent plan for about $900/month with a low deductible — much better than the individual marketplace.
Bottom line: The SHOP Marketplace is basically only an option for companies with employees, but has reasonably affordable, robust plans.
PEOs: Justworks, etc
PEOs basically allow companies to outsource their HR functions: payroll, benefits administration, insurance, labor law compliance, and so forth.
Under the PEO model, your employees are co-employed by the PEO. For some things, like worker’s comp insurance, this can save you money since the PEO negotiates bulk rates.
Just like the SHOP Marketplace, however, PEOs will usually only work with companies that have at least one non-founder/non-founder’s-spouse employee… despite state laws that specifically say that these companies should qualify for group health insurance.
I asked several different PEOs, including JustWorks, whether founder-only or spousal-only groups can use their services and got the same answer every time: no. (Even if they are LLCs that file with S corps and pay out via payroll instead of owner’s draws.)
Even if a PEO will work with you, you may still face skyrocketing premiums, as Baremetrics did earlier this year:
Health insurance in the US: for our family of 5 healthy individuals, our annual premium is going up $13,000 simply to *keep the same level of coverage*.— Josh Pigford (@Shpigford) August 21, 2020
Not a lower deductible, no difference in what docs we can use. Exact same product…now $13,000 more.
Bottom line: PEOs will only work with companies with at least one-non-founder/founder’s spouse full-time equivalent employee, and could be an option if you also want to outsource your HR functions.
Professional Associations and Universities
This is highly situation-specific, and may not apply to most people, but I’m bringing it up anyway because it could be an option for you.
Some professional associations allow members to buy health insurance under their group rates. For example, I looked at the Northern Virginia Technology Council (local trade association). If they had a plan we could join for cheaper than the Marketplace, that would be well-worth the $350 annual membership fee. Unfortunately, the NVTC plan required us to have at least one employee. Some other associations may not require employees, but I didn’t come across any (that I would qualify for) in my own research.
Getting coverage through a university is also an option. Some alumni groups offer health insurance, but it is largely limited to current students. For us, I looked at Virginia Tech (since I was a part-time graduate student). Unfortunately, the Virginia Tech plan required me to be a full-time student.
TIP: Some universities only require one class per semester in order to qualify for health insurance. My neighbor, for example, was a self-employed composer and took one class a week at our local state university in order to get health insurance. That university only required people to be in one class a semester in order to qualify for insurance, and one class was roughly $1,500 a semester. Her plan was to do a second bachelor’s and then PhD so she could stay on their insurance until she qualified for Medicare.
The downside of this is that you’ll have to pay tuition on top of health insurance premiums, but if you or your spouse has thought about going back to school, it’s an option worth exploring. Most public universities have their health insurance information publicly available online. And, if you go yourself or your spouse is employed by the company and the degree is related to the business, the full tuition cost qualifies as a tax-deductible business expense.
For Virginia Tech, coverage under the University’s plan as of 2020 was $264/month ($450 deductible) for a single person and $1,057 for a family of 4 ($900 deductible) for a PPO plan, which is much, much, much more affordable than a PPO through the Marketplace.
Bottom Line: You may be able to get insurance through an association if you have an employee, or a university if you or your spouse is a student. The downside to university coverage is you can only keep the health insurance while you’re enrolled at the university, and will have to pay tuition and attend classes on top of premiums.
Direct Primary Care (+HDHIP)
Direct Primary Care is basically an extremely restricted HMO, where you can only visit doctors within the network. In exchange for a monthly fee, you might be able to visit primary care without paying a co-pay. However, they usually don’t include hospital or specialist coverage and you will likely need catastrophic coverage (aka a high-deductible health insurance plan) on top of the DPC membership.
No matter how comprehensive the covered primary care services are, medical services that go beyond primary care are not going to be covered under a direct primary care membership. Specialty care, surgery, inpatient care, emergency care (including emergency transportation), etc. are well outside the scope of a direct primary care plan. Since these are the sort of things that can very quickly become unaffordable for the average person, direct primary care programs generally recommend that their members also have major medical health insurance coverage.VeryWell Health
Depending on your medical situation, you may save money by having a high deductible health insurance plan with a DPC membership.
There are a variety of DPC options popping up, most of which are city- or state-specific. One in particular I have my eye on is Decent, which is only available in Austin, TX but will be soon expanding statewide in Texas.
As of January 2021, the IRS may consider direct primary care organizations like Decent to be tax-deductible (if premiums exceed 7.5% of your income). Depending on your state, if you only have a DPC membership, you may need to pay a penalty for not having health insurance. (Consult a tax expert.)
Bottom Line: Direct Primary Care + a high-deductible health insurance plan for catastrophic coverage could work out to be cheaper than a robust Marketplace plan, and could be a good option if you don’t qualify for group health insurance.
Part 3: The Be-Careful Category
I present the below options because they are options that some people choose, so you may come across them. But there are a lot of horror stories and you should proceed with skepticism when you come across these options.
Be Careful: Health Shares
Some friends of mine have had very good experiences with health shares. Some have had nightmare experiences and will never use them again. (Here’s one of those nightmares from The New York Times.) Since they were a part of my research and a lot of bootstrappers use them, I’m presenting it here so you can make your own determination.
Health shares are usually Christian health insurance alternatives that are technically ministries, though there is at least one Jewish health share (United Refuah) and one that belief in God but is not limited to a specific religion (Trinity HealthShare). You usually have to be a practicing member of your religion and may, for example, be asked to say where you go to church and put a priest/pastor/rabbi down as a reference to make sure you’re an active congregant. Some health shares may be limited to a specific denomination or may not include all Christian denominations. Samaritan Ministries, for example, specifically excludes Mormons, Unitarians, and Jehovah’s Witnesses.
How it works is a lot like insurance: everyone pays in premiums, and the health share pays out claims. Some health shares even have their own local networks of doctors, like a direct primary care plan. The major plus to health shares is that they can be much cheaper than health insurance (~$100-200 per person per month).
The major downside is that they are not health insurance and won’t cover everything that traditional health insurance might cover, like mental health services, addiction treatment, contraception, or other services they might find objectionable. You may have to pay for an additional catastrophic plan. And unlike insurance, you will likely need to pay the full cost out-of-pocket at the point of service, and then get reimbursed later (unless they have their own direct care network). This means you are also limited to providers who will accept self-pay patients since you would technically not have health insurance. For a flu shot or annual physical, this is probably doable for most people, but not for a major surgery.
[Health share] ministries may look like insurance to consumers—in part because of deceptive marketing and misleading plan features—but do not guarantee to reimburse members for medical expenses and do not have to meet financial or other standards that ensure they can cover members’ medical needs. As a result, at least some members end up with significant unpaid medical bills or in debt collection over even small bills that go unpaid. States typically do not regulate ministries as insurers, although many have recently taken legal action against one ministry, Aliera, for fraudulent activity.HealthAffairs.org
For example, Christian Healthshare Ministries requires members to pay for services under $1,000 immediately out-of-pocket (and request reimbursement later) and negotiate discounts, payment plans, and access to financial assistance/charitable programs for more expensive services (see pages 15-18). Since you’ll be handling all of the billing with providers directly, you should be prepared to spend a lot of time dealing with hospital billing departments and other paperwork.
Additionally, there may be tax complications. Businesses can deduct health insurance as an expense, but since a health share is a charity and not insurance, it will need to be paid individually (i.e. not by your business) and cannot be deducted as a charitable donation. However, the IRS may be changing this as of January 2021 to make it deductible, provided it exceeds 7.5% of your income.
Read their documents very carefully about what is covered and what isn’t, and seek out lots of reviews from people you trust before proceeding. People with substance use disorders (tobacco, alcohol, illegal drugs) are usually forbidden from joining, and some health shares have restrictions that prevent people with specific pre-existing conditions from joining. Some healthshares simply charge tobacco users higher fees and won’t cover pre-existing conditions.
Like direct primary care, some people pair a health share with a high-deductible health insurance plan to guard against high hospital bills. Given that we’re in a pandemic, I would strongly, strongly recommend this to anyone considering a health share.
Bottom Line: Health shares are cheap but usually require you to be a practicing member of a religion, footing some healthcare costs up-front, spending a lot of time dealing with provider billing departments to negotiate down rates, and rolling the dice with reimbursements and covered services.
Be Careful: Short-Term Health Insurance
This is an option that has come up in recent years due to the skyrocketing Marketplace premiums. These plans can generally be renewed in 12-month intervals, and are cheaper than full health insurance plans. But they also cover far fewer services and have lower reimbursements, and the stories remind me of the “US Healthscare” insurance my family had when I was a kid. There is horror story after horror story about them, so be careful.
Short-term health plans routinely refuse to pay the costs of treating beneficiaries, but have seen a surge in enrollment as a result of Trump administration policies, according to a new report released Thursday from House Democrats.
Short-term plans don’t have to comply with ObamaCare’s coverage rules. The Energy and Commerce Committee investigation found that most plans will deny coverage or charge more for people with pre-existing conditions.
The plans will also charge women more than men, and deny women basic health services, like preventive screening procedures and routine tests, including pelvic exams.The Hill
Bottom Line: Short-term health insurance plans are usually deceptive and offer skimpy coverage compared to group or individual plans.
Appendix: Key Words
Health insurance has a language unto itself. When you’re looking for a plan, the following words will come up a lot. Here’s a quick and dirty dictionary to help you figure out the true cost of a plan:
- Premium: The monthly subscription fee you pay for the insurance.
- Deductible: The amount you have to spend before the insurance will start covering the costs at the co-pay rates. You pay the insurer’s negotiated rate for the service. Let’s say your deductible is $1,000 a year, and you have a monthly doctor’s appointment that your doctor would charge your insurer $250 for. After the first four appointments, you would only pay the co-pay.
- Co-Pay: What you pay when you go to the doctor. This depends on the plan and the service. For example, your plan might have a $25 co-pay for primary care, $50 for specialists, $75 for Urgent Care, and $100 for Emergency Room.
- Co-Insurance: A cost-sharing approach that is *not* a co-pay. Co-insurance is usually quoted as percentages; for example, 10% in network, 50% out-of-network. If you go to an in-network doctor and the service is $250, you would pay $25. If that same doctor is out of network, that same visit would be $125. This can get very expensive with hospital visits and certain doctors in the hospital being in-network and certain ones out-of-network, so be careful when a plan is quoting co-insurance rates. In general, a good plan won’t have co-insurance, a decent one will have it for only specific specialty services, and a lower grade one will have it for all services. Usually these rates differ, so read the plan information carefully.
- HMO/POS/EPO/PPO: This describes the type of network. In general, a PPO (“preferred provider organization”) will be the best plan with no referral required for specialists and the most generous out-of-network care; an HMO (“health maintenance organization”) will have a more limited network, require referrals, and may not have out-of-network care except for emergencies. POS (“point of service”) is a less-restrictive HMO where referrals are still required but you may be able to go to out-of-network providers; EPO (“exclusive provider organization”) is a more-restrictive PPO without out-of-network care. In general, HMO < POS < EPO < PPO. But always read the plan benefits carefully as you or your family’s health situation will determine what makes the most sense (and cents).
Health insurance is a jumbled, unnecessary complicated and expensive mess in the US… but I hope this guide was helpful and helped you get a systems-level view of your options. My goal is to make this huge hurdle less opaque so you can plot a path to going full-time on your business.
I will reiterate that only you can decide what the best option is for you and your family, and I am in no way any sort of licensed or trained health insurance agent. This guide is merely based on my own research, so YMMV.
If you have any questions or comments you can reach me at @mjwhansen.