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FAQ - How much does it cost to provide health insurance to employees?

October 7, 2020
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Health insurance renewal time is upon us, and whether you’re researching more cost-effective health plans or researching health benefits for small employers for the first time, a common question is, “How much does it cost to provide health insurance to employees?” You can learn a lot about the cost of employee health insurance by understanding national averages and basic coverage concepts. Here is a concise breakdown of the cost of providing health insurance to employees.

How much does group health insurance cost?

When an employer provides health insurance coverage to employees, the business purchases a plan (or plans) to cover all eligible employees and dependents. This type of coverage is commonly called a “group health insurance plan” or a “fully-insured plan.”

In 2019, the average cost of insurance per employee for family coverage was $20,576 with workers on average paying $6,013 towards the cost of their coverage. Although numbers vary by company and provider, the average costs continue to rise.

How much does group health insurance cost for employers?

In 2020, the cost of group health insurance averaged $14,563 annually (nearly 71 percent of the premium) to cover a family and $5,946 (almost 83 percent) of the premium for an individual.

How much does group health insurance cost for employees?

In 2020, group health insurance participation cost employees $5,689 annually (over 29% of the premium) to cover a family and $1,242 (over 17 percent) for an individual. Employee costs are typically taken through a payroll deduction.

Premium costs with a group health insurance plan typically increase every year. In fact, employers expect the average total cost of healthcare to increase 5.3% in 2021.

To minimize or reduce fluctuation in premium amounts, and to control the cost of benefits from year to year, one option is to change contribution strategies.

How you can control group health insurance costs

The cost of providing health insurance to employees depends on the following factors:

  • The insurance carrier
  • The type of plan you choose (PPO or HMO)
  • The network of providers in a plan
  • Plan features: deductibles, copays, out-of-pocket maximums
  • Your location
  • Your contribution amount (you can move more of the cost burden onto your employees)
  • The demographics of your employees (your plan rates account for the “risk pool” at your company; older workforces tend to have higher healthcare costs which might increase your rates).

Health reimbursement arrangements are another way to control costs

Instead of purchasing a group health insurance policy and paying premiums set by the insurance company, an alternative strategy is to use a health reimbursement arrangement (HRA) to reimburse employees for premiums and out-of-pocket medical expenses. With this strategy:

  • The employer sets an annual or monthly allowance they will agree to reimburse employees for medical costs.
  • Employees purchase their own health insurance plan on a private exchange or the health insurance marketplace. A key advantage is they get to choose a plan from a provider of their choice that has the features they need most.
  • As employees pay premiums and associated medical costs, the employer reimburses the employee up to their allowance balance.

For example, a young employee might opt for a higher deductible plan to eliminate or minimize out-of-pocket spending on premiums, while an older employee might choose a plan with a lower deductible and maximum out-of-pocket maximum. Learn why individual health insurance is more affordable than group health insurance.

This chart on costs of individual health insurance plans shows costs are falling in many states.

The cost savings from providing health benefits with a reimbursement strategy can be significant. First, the employer is in control of the amount they spend. The cost of the health benefit is the amount of reimbursement they choose to offer and can afford.

Second, the money goes further, as all reimbursements are free of payroll taxes for both the employer and employee and free of income taxes for the employee, as long as they purchase minimum essential coverage (MEC).

Conclusion

Employees today expect employers to offer a health benefit, but many smaller organizations find group health insurance a pricey investment. While there are a few ways to try to reduce the cost of group health insurance, an HRA gives employers a health benefit option that puts them in control of their costs. Employees also often prefer this option as they get to purchase their own insurance plan—one that meets their current life needs.

This post was originally published September 28, 2015. It was last updated October 7, 2020

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