What does small business health insurance cost employers and employees? Health benefits can be complex, so we’ll break it down by recent numbers.
Employer-sponsored health insurance covered some 159 million non-elderly people in 2022, according to Kaiser Family Foundation’s Employer Health Benefits Survey. Annual premiums for a single individual averaged $7,911 per year. When family coverage was taken into consideration, the average cost was $23,463 per year.
When it comes to employee benefits, health insurance ranks high on the list despite the fact that small business health insurance costs have continued to rise for both the employee and the business. This is of great concern to small businesses, especially if they have limited talent recruitment budgets.
Small business health insurance cost concerns
Hiring and retaining the best employees for your business goes beyond their basic salaries. Many employees are now looking at monetary compensation along with other employer-sponsored benefits, and those include health insurance. However, many small business owners are concerned about the ongoing:
- Impact of health insurance costs on the company’s profitability.
- Premium hikes making coverage unaffordable for their employees.
- Health insurance costs restricting their ability to give bonuses and raises.
These are legitimate concerns within an unpredictable climate.
Health insurance costs for 2021-2023
Employers and employees have a reason to be concerned about health insurance costs. Over the last 5 years, the average family coverage premium has increased by 20%, according to KFF. Over the last 12 months, premiums for individual and family health insurance coverage have increased slightly. And while worker wages increased 6.7%, that didn’t offset health insurance premium increases as inflation overall rose 8%.
Annual worker and employer contributions have increased some 20% since 2017, including a 7% worker contribution increase, according to KFF. In 2022, the average annual amounts contributed by covered workers are $1,327 for single coverage and $6,106 for family coverage.
Global professional services firm Aon predicts that employer contributions to employee health costs will increase 6.5% in 2023. That’ll bring the number to more than $13,800 per employee.
If you’re a small business owner who’s been paying attention to the rates of health insurance inflation, you’ll note that this projection exceeds double the actual 3% increase in 2022. However, it’s still below the overall 2022 inflation rate. This is primarily because health insurance inflation lags behind that of food, energy, and transportation.
Primary driving factors for premium increases pertain to treatment and care costs for complex chronic conditions, according to Aon.
Of course, these 2 factors also underscore the effect of chronic conditions on employee productivity.
Farheen Dam, Aon’s North America health solutions leader, states, “The effect of chronic conditions has far-reaching implications beyond what we see with health care costs, out to the other areas of the business, like absence and productivity, disability and worker’s compensation.”
Added Debbie Ashford, Aon’s North America chief actuary for health solutions, “It is not uncommon to see 1 percent of (health insurance) membership driving 40 percent of health care spend(ing) in any given year.”
It is implied that good health insurance, early detection, new medications and therapies, and diligent management of chronic conditions may help control healthcare costs in the future.
2022 health insurance costs for small and large firms
The 2022 KFF report reveals the average amount that small firms and large firms each paid for health insurance in 2022:
Employer-sponsored health insurance costs are based on various factors, including plan type, level of coverage, and business location. Also, how much employers and employees really pay depends on cost-sharing amounts.
The vast majority of employers that offer group health insurance assume some of the costs while passing the remainder to covered employees.Typically, they’re shared in 2 ways:
- Health insurance premiums: Insurers usually require that employers pay at least half of the premium amount for enrolled employees. The employee pays their portion, or employee contribution, via payroll deduction. For example, an employer may choose to pay 80% of the monthly premium, requiring the employee to pay 20%.
- Payment for services rendered. This includes:
- Copayment: a fixed dollar amount that the employee pays at the time of service.
- Deductible: the amount the employee must cover before the insurance company pays anything.
- Coinsurance: the percentage of cost the employee pays after meeting their deductible.
For example, an office visit under the health plan costs $120. The coinsurance is 20%, and the deductible is $3,000. If the deductible is paid, the employee’s coinsurance is $24. If the deductible is not paid, the employee pays the full coinsurance of $120.
Below are some cost-sharing statistics from the 2022 KFF survey:
- The portion of employees with single-coverage plans that have a yearly deductible rose from 85% in 2021 to 88% in ’22.
- Annual deductible for single coverage increased from $1,669 in 2021 to $1,763.
- On average, small employers have larger annual deductibles for single coverage than their larger counterparts ($2,248 vs. $1,023).
As shown in the chart below, from 2006 to ‘22, small business employees have steadily faced higher deductibles for single coverage with in-network insurance providers.
The next illustration shows a mostly similar trend for family coverage in small and large firms:
The escalation in deductibles can partly be attributed to the growth of high deductible health plans (HDHPs)/SOs. They come with higher deductibles than other types of health plans. To help employees offset the high deductible, employers can pair their HDHP with a tax-advantaged HSA or HRA. Or they may contribute to the HDHP deductible. Some small employers skip HDHPs altogether by providing a more traditional plan with smaller deductibles.
Additional employee cost-sharing averages, per the 2022 KFF survey:
- Copayment for each hospital admission is $344.
- Coinsurance rate for hospital admission is 20%.
- Copayment for outpatient surgery is $179.
- Coinsurance rate for outpatient surgery is 20%.
- Copayment for in-network primary care visits is $27.
- Copayment for in-network specialty care visits is $44.
Most plans have out-of-pocket maximums that limit the amount covered employees must pay for the year. These limits vary by plan type and whether the plan is subject to the Affordable Care Act.
If you have 1-50 employees, you may be able to offer health insurance through the Small Business Health Options Program. SHOP plans are separated into tiers. Generally, the higher the tier, the greater the monthly premium and the lower the deductible. Start by visiting healthcare.gov to see if your state has a SHOP marketplace. If so, you can compare plans and pricing plus choose the level of coverage and cost-sharing amount.
Insurance cost drivers
Why does health insurance cost usually change from year to year? According to the American Hospital Association:
- Increased healthcare use.
- Increase in medical prices.
- An aging population.
- An increase in chronic conditions.
The cost of small business health insurance plans can be alarming. Especially considering how integral health insurance is to recruiting and hiring top talent. Fortunately, there are steps you can take to reduce costs and save money. Those include:
- Choosing a self-funded plan and contracting directly with hospitals and doctors.
- Exploring group health insurance plans with a third-party insurance provider.
- Switching to a high deductible health insurance plan and combining the HDHP with an HRA or HSA.
- Obtaining tax credits by offering a qualified plan through the SHOP marketplace.
- Hiring an external benefits provider to help you detect areas of financial waste in your current health plan.
Every business is unique, so it’s important to learn which healthcare services are most valuable to your employees. Then locate the right health insurance company and sign up for the policies you can afford.
fig 1.2 found at https://www.kff.org/report-section/ehbs-2022-section-1-cost-of-health-insurance/
fig 7.11 and 7.21 found at https://www.kff.org/report-section/ehbs-2022-section-7-employee-cost-sharing/