Offering group health insurance is expensive—especially for small businesses.
Businesses with fewer than 50 employees typically have smaller budgets, have fewer management resources at their disposal, and struggle to meet participation requirements. All that considered, the total cost of offering a group health insurance policy goes far beyond the pricy premiums.
In this post, we’ll go over all the costs a small business can expect when offering group health. We’ll also discuss how businesses can control their costs by offering alternatives, like a health reimbursement arrangement (HRA).
Average group health insurance premiums
In 2017, annual group health insurance premiums averaged $6,486 for single coverage and $17,615 for businesses with fewer than 200 employees.
Monthly, small businesses can expect to pay $540 for single coverage and $1,468 for family coverage.
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, businesses can reduce their budget by implementing higher cost-sharing requirements on employees. The higher these requirements, though, the greater the risk businesses run of having eligible employees decline participation in the policy. If too many employees choose not to participate, the business may not be able to offer the policy at all.
Average group health administrative costs
Time is infinitely important to small businesses, which often have small staff sizes and require one employee to fulfill many functions. Offering group health insurance is another claim on their time.
There are several reasons group health policies require significant time to administer, but the three biggest are ongoing regulatory changes businesses must keep up with, complicated communication processes between the insurance carrier and employees, and painful yearly renewal processes.
Since the advent of the Affordable Care Act, small businesses have had to spend an estimated 13 hours every month administering group health insurance. These time costs total more than $13,000 every year.
Small businesses must also act as the middleman between the insurance carrier and employees. This creates a painful back-and-forth every time an insurance issue surfaces, wasting time the administrator could spend focusing on the core business.
Finally, annual benefit renewals are complex and require a great deal of time to complete. If the small business was expensive to the insurance carrier 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 business 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 businesses spend just two hours a day of one employee’s time for 15 days on benefits renewal, that’s an additional 30 hours of the employee’s time that could have been used more productively. At a $50,000 salary, that’s nearly $1,000 in opportunity cost.
Average cost of turnover
Group health insurance comes with many difficulties. One major problem is that the policies are too one-size-fits-all.
Due to cost and minimum participation requirements, many small businesses can choose only one policy for all of their employees. Invariably, this means someone doesn’t get the policy they want. Their health needs may not be covered, or they may be unable to contribute to their health savings account (HSA) because of the policy details.
Employees in this situation may choose not to participate in the policy. If the problem is particularly dire, the small business may not meet the policy’s minimum participation requirements (typically 75 percent of eligible employees), and cannot offer a benefit at all.
Without a health benefit that’s valuable to them, employees are more likely to leave the company.
That’s a significant cost. For every employee that leaves the company, small businesses can expect costs of between six to nine months in salary to replace them. For a manager making $50,000 a year, that’s $25,000 to $37,500 in recruiting and training expenses.
Total small business health insurance costs
To illustrate how all of these costs add up, let’s look at a fictional small business: Johnson Roofing Company.
Johnson Roofing Company has five employees and pays the average $6,486 annual premium for single coverage. They require their employees to contribute 40 percent of the premium. So far, that’s a total cost of $19,458.
Because Johnson Roofing Company is small, it requires its manager—an employee making $50,000 a year—to handle policy administration. Because of ongoing regulatory changes like the ACA, the company incurs an average $13,000 in time costs that year. That brings the total up to $32,458.
This manager also spends two hours a day for three weeks negotiating renewal of the policy at the end of the year, incurring $1,000 in opportunity cost. Now, the total is $33,458.
This total assumes that every employee in Johnson Roofing Company is satisfied enough with their health benefits to stay with the company. However, if one employee leaves in November because they find a job with better benefits, it will cost an additional $25,000 to replace the employee while saving the company only $324 in premium for December.
That brings the total for the year to $58,134—all for offering group health insurance.
How can businesses control their health benefits costs?
Unsurprisingly, many small businesses decide they can’t afford these costs. Today, less than 30 percent of businesses with fewer than 50 employees offer group health insurance.
But simply going without health benefits isn’t the answer. It results in significant turnover costs, as well as lost productivity and increased hiring difficulty.
Instead, many small businesses are turning to health reimbursement arrangements (HRAs) like the qualified small employer health reimbursement arrangement (QSEHRA). With the QSEHRA, small businesses set a monthly allowance amount for each employee, and employees purchase their own health care expenses, such as a personal health insurance policy. Then, the business reimburses employees tax-free up to their allowance.
With this model, small businesses can control their health benefits costs by setting allowances that fit their budget. Administrative requirements, when a business works with HRA administration software, are also insignificant.
And because employees are free to choose the health care policies and products they value most, satisfaction in the business is high.
Small business health insurance costs are significant, difficult to bear, and expected to increase. What’s more, they extend beyond simple premium prices—time costs are high, too.
To reduce cost, including administrative and turnover costs, many small businesses are adopting personalized health benefits. Able to control budget while satisfying employees, these small businesses have found a solution to the health benefits challenge.
To learn more about how real-world businesses are using personalized health benefits, check out our PeopleKeep case studies.