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Small business health insurance costs: What can you expect?

Written by: Josh Miner
November 3, 2020 at 8:09 AM

Offering group health insurance is expensive—especially for small organizations.

Organizations with fewer than 50 employees typically have smaller budgets, fewer management resources at their disposal, and struggle to meet participation requirements for group health plans. All of these factors increase the total cost of offering a group health insurance policy beyond already pricey premiums. Sound familiar?

This article discusses costs small organizations can expect when offering group health. It also discusses how organizations can control their costs by offering health benefit alternatives like a health reimbursement arrangement (HRA).

Watch our webinar on how an HRA works

Average group health insurance premiums

In 2020, annual group health insurance premiums averaged $7,470 for single coverage and $21,342 according to the Kaiser Family Foundation.

67% of small organizations (defined in the Kaiser Family Foundation study as those employing under 200 workers), paid between 25% and 50% of the family coverage premiums, which comes to about $455 to $910 per month.

Premiums run higher for certain plan types, like Preferred Provider Organization (PPO) plans and Health Maintenance Organization (HMO) plans. Premiums are also more expensive in the Northeast and Midwest regions of the United States and in certain industries like transportation, communications, and utilities.

Of course, organizations can reduce their budget by implementing higher cost-sharing requirements on employees. Adding these requirements, however, increases the risk that eligible employees will decline participation in the plan. If too many employees choose not to participate, the organization may not be able to offer the policy at all. Most states require that at least 70% of employees participate in a group health plan.

Learn how much employers offered with a QSEHRA last year

Average group health administrative costs

The cost to implement a group health plan includes another, less obvious cost over the cost of premiums—the cost of time to administer the plan. For most small organizations trying to get as much done with as little staff as possible, the impact of this administration cost might even exceed the cost of the premiums

The three biggest factors that make managing a group health plan time and labor-intensive are:

  • Ongoing regulatory changes the organization must track. Typically an already busy person must become the go-to to educate staff on who is eligible for coverage, what local facilities are in- or out-of-network, and what is covered under the plan—and the rules can change.
  • Complicated communication processes. The organization becomes the “middleman” between the insurance carrier and employees, managing painful back-and-forth every time an insurance issue surfaces, spending time the administrator could invest focusing elsewhere.
  • Painful yearly renewal processes. Annual benefit renewals are complex and require a great deal of time to complete. If claims employees made to the insurance carrier were expensive the previous year—if they’ve filed a higher than usual number of health insurance claims, for example—they’ll likely face cost increases or changes in terms. The organization must consider whether it will accept the changes, negotiate with the benefits provider, or work to identify new policies and programs that better match their budget and benefits goals. To do this, they may want to meet with new benefits brokers, which takes time.

If small organizations spend just four hours a month of one employee’s time managing benefits day-to-day, and five days during benefits renewal, that’s an additional 88 hours of the employee’s time that could have been used differently and perhaps more productively.

Group health insurance options are limited for small organizations

Cost and minimum participation requirements for group health insurance plans leave most small organizations with just one or two policies to choose from for all of their employees. Invariably, this means some (or many) don’t get the policy they want. Their health needs may not be covered, or they may not be able to afford a policy that would cover them.

Employees in this situation may choose not to participate in the policy. If the problem is particularly dire, the small organization may not meet the policy’s minimum participation requirements and be unable to offer a benefit at all. Without a health benefit that’s valuable to them, employees may be more likely to leave the company.

Turnover can be a truly significant cost. Some studies predict that every time an organization replaces a salaried employee, it costs 6 to 9 months’ salary on average. To be sure, these costs typically depend on how hard it is to retrain and replace the skills. But it’s typically in the employer’s interest to offer a health benefit that is attractive to employees.

Download 11 Strategies to Employee Retention on a Small Business Budget

How can organizations control their health benefits costs?

Unsurprisingly, many small organizations decide they can’t afford these costs. Today, only 30 percent of organizations with fewer than 50 employees offer group health insurance.

But simply going without health benefits isn’t the answer, as the increase in employee turnover and associated costs are even higher.

Many small organizations are finding that health reimbursement arrangements (HRAs) are one of the most effective ways to offer a quality health benefit that fits a tight budget. With an HRA, instead of paying premiums, the organization offers employees an annual or monthly allowance the organization can afford.

Employees get reimbursed for individual insurance premiums and out-of-pocket medical expenses they pay for, up to the maximum allowance. All of these reimbursements are tax-free, the employer controls their costs, and employees typically have far more insurance plans to choose from, allowing them to purchase a plan that works best for them, increasing their satisfaction in the health benefit.

Learn which HRA is right for your organization. Download our comparison chart.

Best of all, unlike group health insurance plans that require hours of administration, HRA administration software enables the plan to be managed in minutes per month.

Conclusion

Health insurance costs for small organizations are significant and are only expected to increase. What’s more, the costs extend beyond premium prices, as they require a significant time investment.

Given this, it’s easy to see why HRAs like the qualified small employer HRA (QSEHRA) and the individual coverage HRA ICHRA) are becoming hot alternatives, as they enable employers to offer a much more flexible health benefit while keeping costs in check.

To learn more about how real-world organizations are using HRAs, check out our PeopleKeep success stories.

This post was originally published in February of 2018. It was last updated November 3, 2020.

Topics: Small Business, Qualified Small Employer HRA, Individual Coverage HRA

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