The rising cost of employee health insurance remains a challenge facing small businesses, according to a survey by Enterprise Bank & Trust.
Small Business Healthcare Statistics
Some 79% of small and midsize business owners say health insurance costs risk eating up their profitability. The healthcare industry is experiencing the biggest impact, while retail, professional and financial services report the least concern. Health insurance is a top-two expense, next to payroll that businesses generally don’t have a lot of control over.
Rising Costs of Healthcare
Employers’ healthcare costs started small in the 1950s, with health benefits amounting to only 0.50% of total compensation. By the first decade of the new millennium, healthcare costs increased 3.4 times faster than employee compensation.
The impact is felt most among new businesses who can rarely afford health insurance for their employees. Forcing them to opt out of providing health insurance benefits, leaving employees to fend for themselves. A 2018 study from the Bureau of Labor Statistics found that only 57% of workers at firms with 100 employees or less had employer-sponsored healthcare.
“We prefer to use contract workers so we can avoid the complexity and cost of benefits with full-time employees”, says Brian Finucane, President of startup Talk Points.
Opting out of providing healthcare explains one surprising finding— that small businesses are less concerned with healthcare costs than larger companies. According to the Affordable Care Act, companies with less than 50 fulltime employees don’t have to provide healthcare benefits.
Fifty-nine percent of small businesses now believe that an increase in premiums will make it difficult to provide healthcare benefits for employees. With a further 47% saying costs of health insurance are limiting their abilities to provide raises or bonuses.
Companies with 50 plus employees express the most concern about the impact of health insurance costs on profitability. While the highest responses to feeling pressures about providing better coverage came from companies with 11-50 employees.
This is because small and midsize businesses have less negotiating power due to their size. And because they are smaller, a few high-cost cases among their employee base can drive costs sky high.
Generation Shifts
The survey cites younger employees worry less about healthcare benefits because they are healthier and use insurance less often. Prompting only 6% of businesses planning to increase health insurance benefits for their employees in the coming year. Sixty-nine percent% plan to maintain their existing benefits while 29% plan to explore ways to cut costs by reducing or re-bidding contracts.
Sixty-three percent of the respondents say they do not use health insurance benefits as a means to retain staff. But there is a marked difference in responses based on the number of employees. For companies with 2-10 employees, only 22% reported using insurance benefits to attract and retain talent. While 69% of companies with 500 or more employees reported using insurance to attract and retain staff.
This is likely based on larger companies’ ability to afford a more attractive employee health insurance package. When asked whether they had changed their healthcare insurance programs to make them more attractive to candidates, 71% said no.
On the Need to Reduce Costs
To solve the conundrum over healthcare some companies pay for health claims out of pocket rather than a fixed premium to an insurer. This opens the businesses to risks such as huge bills in the event that something catastrophic happens to an employee.
Another option that businesses are looking into is a “narrow network” insurance plan. This option offers lower out-of-pocket costs and monthly premiums in exchange for a smaller provider network. This might mean employees may not be able to see a doctor they’ve gone to for many years. Many doctors too, opt-out of accepting these types of plans.
Another popular choice is to move to a High Deductible Health Plan (HDHP), which lowers premiums by increasing deductibles over a traditional plan. Businesses with young and single employees prefer HDHPs because they enjoy better health and do not seek coverage for families. HDHPs put more responsibility on employees to make smart healthcare decisions to avoid expenses associated with care.
A fourth option is Health Savings Account (HSA). HSAs are medical savings accounts whereby the money put into the account is not subject to federal income tax. An employee’s HSA can be used to pay for qualified medical expenses without federal tax liability. HSAs are the only triple-tax protected vehicle under Internal Revenue Service code. Money is deposited tax-free, grows tax-free and can be used tax-free as long as the funds are used for qualified medical expenses.
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As a solopreneur who has to take care of his own health insurance, I can see why small businesses want no part in them. My rates go up like 20% or more each year (for the past 4 years) and I don’t see that changing anytime soon.