Health insurance can be costly and complex. Here’s what you need to know about health insurance as a small business owner
As health insurance remains the #1 employee benefit, small business owners are growing increasingly aware of the need to incorporate health insurance in their benefits strategies.
The reality is that recruiting and hiring the best people vastly depends on whether the employer offers health insurance. Those that don’t provide health benefits are more likely to lose their desired talent to the competition.
However, health insurance costs have been climbing for years. According to Enterprise Bank, small and midsize business owners are particularly concerned about:
- The effect of health insurance costs on their 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, as the cost of small business health insurance plans continues to soar.
Health insurance costs for 2020
The National Business Group on Health (NBGH) predicts that health insurance costs for large employers will surge 5% in 2020, rising to $15,375 per employee — increasing from $14,642 per employee in 2019.
This 5% increase applies to employers that adopt cost management strategies; those that do not make cost management adjustments can expect an increase of 6%. These costs include both premiums and out-of-pocket expenses for employees and their dependents.
The reality is that recruiting and hiring the best people vastly depends on whether the employer offers health insurance.
Small employers lacking the buying power of large employers typically pay more in plan premiums and annual cost increases. They pay around 8% to 18% more than their larger counterparts for the same health insurance plans, according to the National Conference of State Legislatures (NCSL). Based on that range plus the NBGH’s estimates, small businesses lacking bargaining power can anticipate paying between $16,605 and $18,142.50 per employee in 2020.
Based on that range plus the NBGH’s estimates, small businesses lacking bargaining power can anticipate paying between $16,605 and $18,142.50 per employee in 2020.
The Kaiser Family Foundation 2019 survey reveals the average amount that small firms and large firms each paid for health insurance in 2019:
Notably, a new survey by the consulting firm Aon forecasts that employer-based health insurance will rise 6.5% due to:
- High-cost specialty drugs
- Price increases in care delivery
- Declining healthcare usage
Ultimately, 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 health insurance assume some of the costs while passing the remainder to covered employees.
The NBGH survey found that, in 2020, employers will shoulder nearly 70% of the cost and employees will cover around 30% (or close to $4,500). This cost-sharing amount is unchanged from 2019.
Typically, health insurance costs are shared in 2 ways:
- Premiums: Insurers usually require that employers pay at least half of the premium amount for enrolled employees. The employee pays their portion of the premium 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:
- Copayments, which is a fixed dollar amount that the employee pays at the time of service
- Deductible, which is the amount the employee must cover before the insurance plan pays anything
- Coinsurance, which is 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 2019 KFF survey:
- The portion of employees with plans that have a yearly deductible rose sharply, from 63% in 2009 to 82% in 2019
- Annual deductible amounts increased from $826 in 2009 to $1,655 in 2019
- Average deductible for single coverage in 2019 is $1,396, similar to 2018
- Small employers are more likely to have an annual deductible of $1,000 or more for single coverage than their larger counterparts
As shown in the chart below, from 2006 to 2019, small-business employees have steadily faced higher deductibles for single coverage with in-network 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), which 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 statistics, per the 2019 KFF survey:
- Copayment for each hospital admission is $326
- Coinsurance rate for hospital admission is 20%
- Copayment for outpatient surgery is $180
- Coinsurance rate for outpatient surgery is 19%
- Copayment for in-network primary care visits is $25
- Copayment for in-network specialty care visits is $40
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). 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.
SHOP plans are separated into 4 metal tiers:
Generally, the higher the tier, the greater the monthly premium and the lower the deductible.
2020 cost drivers
Why does health insurance cost usually change from year to year? Research shows that there are many forces at play. For example, health insurance premiums for 2020 could vary from those in 2019 due to the following:
- The fundamental growth in healthcare costs caused by changes in provider rates, healthcare services offered, and healthcare usage
- Policy requirements and changes, such as expanding access to healthcare via HRAs, eliminating the ACA’s individual mandate penalty, and providing cost-sharing reductions via the ACA Marketplace
- Other factors, such as market competition, state actions, geographic variables, and changes in risk-pool profiles and employer benefits strategies
The cost of small business health insurance plans can be alarming, especially when you consider how integral health insurance is to recruiting and hiring top talent. Fortunately, there are steps you can take to reduce costs, such as:
- Choosing a self-funded plan and contracting directly with hospitals and doctors
- Switching to an HDHP and combining the HDHP with an HRA or HSA
- Obtaining tax credits by offering a qualified plan through the SHOP Marketplace
- Partnering with a third-party provider to boost your buying power
- Hiring an external benefits provider to help you detect areas of financial waste in your health plan
Every business is unique, so it’s important to find out which healthcare services are most valuable to your employee population. See how those preferences line up with your budget and then make the most feasible choices.